business ethics and human rights

Corporate Code of Conduct and Ethics

Northern Rock regards adherence to the principles of good corporate governance to be critical. It is also important that all staff should know what standards of conduct are expected from them.

Our shareholders, customers and other stakeholders are of paramount importance to us. Adherence to the Code should ensure that we retain their hard-won trust and faith in our ability to "deliver the goods", and also to broaden and develop their relationship with us.

Our Code of Conduct and Ethics therefore forms a key element in the way we do business, and we believe that the Code is designed to benefit customers, staff and Northern Rock suppliers.

The Code clearly outlines the requirements (in letter and spirit) of Northern Rock plc by our staff, suppliers and sub-contractors in the areas of:

Customer Service.

Our Shareholders and Stakeholders.

Business Conduct Expected from Employees.

Compliance.

The Community and the Environment.

Safeguarding Northern Rock and its Assets.

Company Policy on Public Interest Disclosure.

The Code was reviewed and re-issued in 2004.

During the latter part of 2005 working parties were established under our Corporate Social Responsibility (CSR) Steering Groups to commence a further review of our Corporate Code of Conduct to incorporate where practicable, recommendations made by the Institute of Business Ethics. This includes additional Human Rights issues and, to increase our commitment to these issues we intend to produce a Supplier Code of Conduct and Ethics.

No action against staff was required to be taken during 2005 under the terms of the Code of Conduct and Ethics.

Corporate Hospitality Register
Northern Rock requires under its Code of Conduct and Ethics that staff are:

"Not to accept or offer any inducement - financial or otherwise - in connection with any work related matter, including, but not limited to, not accepting gifts or excessive hospitality from competitors or supplier companies."

All staff are required to declare any gifts or hospitality received in a register maintained and reviewed by the Company Secretary. Operational Directors are required to conduct a regular formal review within their own operational areas in order to ensure compliance with the hospitality provisions of the Code.

No action against staff was required to be taken during 2005 under the parameters of the Hospitality Register section of the Code of Conduct.

Group Treasury
The Treasury function at Northern Rock is not a trading unit and it does not invest in the equity market. Treasury performs market operations for the bank by raising wholesale funding, issuing securitised debt and covered bonds, managing liquidity and managing balance sheet risk.

As part of the process of managing liquidity, Treasury invests in the Interbank cash and global bond markets. The counterparties are predominantly sovereigns, other banks, building societies, large corporates and local authorities. The bank is required by our regulator, the Financial Services Authority, to hold a percentage of total assets in the form of highly liquid sterling stock eligible assets. These comprise UK and other European Government securities. Non-Government Bonds are also held for liquidity purposes, and these must meet strict credit criteria.

The credit rating profile of Treasury liquid assets show that approximately 60% of these were rated 'AA' or better ( 93% rated 'A' or better) by the three main credit rating agencies, Moody's, Standard & Poor's and Fitch IBCA. A key consideration in liquidity management is the credit quality of the counterparty. It is not our policy to invest in emerging markets or non-investment grade debt. The bank's liquidity, overall investment criteria and counterparty creditworthiness are regularly reviewed and monitored by Treasury Management and Executive Management in accordance with Policy Statements approved by Group Board.

With regard to wholesale funding, Group Treasury would not accept funding from entities or individuals named on the Bank of England Sanctions List.

Any treasury dealing outside the scope of the FSA regulation, such as money market deposits and foreign exchange, is covered by the Non Investment Products Code (NIPs Code). This is a voluntary code (endorsed by the FSA) that lays down what is general good market practice. As well as market practice covering dealing mechanics, it also covers other areas such as marketing and incentives, entertaining and gifts, gambling and drug & alcohol abuse.

All new staff in Northern Rock Settlements and Front Office receive a compliance briefing from the Senior Manager, Treasury Control and Compliance, which includes an introduction to NIPS, and are provided with a copy of the full code.

The Group Compliance and Treasury Control & Compliance teams conduct periodic reviews to assess how our policies, procedures and practices compare to FSA regulations and best practice in the NIPs Code. The next review is being conducted during 2006.

Socially Responsible Investment (SRI) and the Northern Rock Pension Scheme
Staff are eligible for membership of the Pension Scheme if they are permanent employees of the Company and aged not less than 16 and not more than 59. Eligible employees are automatically included in the Scheme on the 1st of the month following completion of 6 months’ employment, though they may opt in before this if they so wish.

During 2002, the Trustees reviewed the JustPensions report, (produced in conjunction with the National Association of Pension Funds (NAPF ) entitled "Do UK Pension Funds Invest Responsibly?" and the self-assessment checklist included.

The document was produced to enable Trustees to assess whether they are taking adequate action in relation to Social, Environmental and Ethical (SEE) issues, arising from their Investment Management activities.

In giving consideration to the points raised, the Trustees have borne in mind that SRI must necessarily be dealt with differently by a passive manager compared to an active manager. In addition, SRI considerations are unlikely to affect unitised property investment in the same way as for equity investment.

The Trustees have confirmed that the Northern Rock Pension Scheme has adopted an appropriate stance on SRI/SEE matters and no further changes are proposed to the previously agreed SRI policy statement included in the Statement of Investment Principles (SIP).

Socially Responsible Investment - Extract From SIP (Statement of Investment Principles)
The SIP is a written statement recording the investment policy of the pension scheme which Pensions Act 1995 requires Trustees to prepare and keep up-to-date.

The Trustees' primary duties when determining their investment policy are to maximise the financial returns of the Scheme over the long term for the benefit of beneficiaries, and to seek an appropriate benchmark, without resorting to excessively high levels of risk. This policy, which is subject to regular review, has led to an investment structure which primarily invests in pooled funds and includes small allocations to Property and Private Equity alongside a core which is indexed. In due course, it is possible that a further small allocation will be made to active equity investment.

In selecting investment managers, the Trustees have reviewed their corporate governance policies and are satisfied that they reflect the key principles of socially responsible investment. The Trustees operate a programme of regular review of such policies. The investment managers can, and do, influence the social, environmental and ethical policies of the companies in which they invest through shareholder pressure based on these corporate governance principles.

Where the investment managers have a segregated mandate, the Trustees' policy is to delegate responsibility for the selection, retention and realisation of investments to the investment managers, who are required to maximise the overall financial return from the assets under their control within an appropriate risk control framework which takes account of the possible financial impact of social, environmental and ethical issues. Where investments are made in either indexed or actively managed pooled funds, the Trustees recognise that they cannot directly influence the social, environmental and ethical policies and practices of the companies in which the pooled funds invest.

The Trustees also recognise that the Scheme will participate in private equity investments which are different in nature to traditional quoted equities and are intrinsically riskier. The role of the investor in unquoted companies and private equity funds is limited and is not the same as in quoted equities or in pooled vehicles for quoted equities. In respect of our private equity investments, therefore, we expect our managers to act in accordance with the spirit of our SRI policy when making direct investments in unquoted companies as far as practicable.

The Trustees' policy is to delegate responsibility for the exercising of rights (including voting rights) attaching to investments to the investment managers, who are expected to vote on all issues in the best financial interests of their investors, taking account of social, environmental and ethical issues. The Trustees can, however, instruct the investment managers to vote a proportion of the shares held by pooled funds (equivalent to the number of units held by the Trustees as a proportion of the total) in order that their views on a particular issue are registered.

Better Payment Practice Campaign and Supplier Payment Days
Better Payment Practice & The Late Payment of Commercial Debts (Interest) Act 1998, as Amended by the Late Payment of Debt Regulations 2002

The credit management procedures in place at Northern Rock ensure that the payment systems in place are robust in the light of the requirements of the legislation.

The Company recognises the importance of making creditor payments on time, thereby ensuring that our suppliers do not encounter unnecessary cash-flow problems as a result of late payments being made. Ensuring that the Provisions of the Act have been fully communicated and implemented also ensures that Northern Rock will not incur risks to reputation as a result of non-compliance.

All active suppliers to the Company have been contacted to establish current contact details, confirmation of address, bank details and current payment term requirements. Where necessary the revised information has been built into our payment management system.

In addition all internal Budget Managers have been notified of the existence of the legislation and its relevance to the Better Payment Practice Campaign. All Invoice queries and disputes are therefore recorded, with amended due payment dates agreed. The management method used in Northern Rock to record creditor payment dates against payment due dates has been fully updated with supplier information and the information produced by the system is robust.

A two-week look ahead on payment run parameters ensures late payments are kept to a minimum. The only invoices not meeting the agreed payment date should be those subject to query or dispute.

The Financial Services and Markets Act
The overall approach driven by the Financial Services and Marketing Act is values-based. Northern Rock conducts business in line with the overall standards and principles in the FSA Handbook. The Handbook provides the set of rules for regulated firms to follow to ensure regulatory compliance with the Financial Services and Markets Act.

Reputation
If the Company can demonstrate a good standard of ethical behaviour more loyalty can be generated internally. Developing this stance throughout Northern Rock's business dealings can raise staff awareness of ethical issues, which in turn can lead to early identification of problems with cost and reputation savings.

The reputation of the finance industry and the firms within it is important for all of us. Good ethical behaviour can also have a competitive advantage.

Some examples of how Northern Rock can build ethics into real situations are shown in the following sections.

Treating Customers Fairly
The high level outline by the Financial Service Authority require that all regulated firms treat their customers fairly. The fair treatment of customers is central to consumers having confidence in the financial services industry.

Significant progress has been made in raising standards in recent years. Work has been undertaken to improve the:

Information provided to customers;

The standards of risk management;

Transparency for customers in the industry; and

The quality of complaint handling.

Further work will be undertaken to ensure the fair treatment of customers through the product life-cycle:

Product design and governance;

Identifying target markets;

Marketing and promoting products;

Sales and advice processes;

After-sales information, and;

Complaint handling.

Anti-Money Laundering Regulations
Regulatory requirements necessitate that all Northern Rock employees must understand and comply with their obligations in respect of Money Laundering prevention and detection.

The Company has established policies, procedures and controls, which cover:

Internal control and communication policies.

Identification procedures.

Record keeping.

Recognition and reporting of suspicious transactions.

Education and training of staff.

As part of Northern Rock's on-going commitment, all staff regularly participate in appropriate training, in the recognition of laundered funds by Placement, Layering and Integration.

Our Investigations Department provides specialist assistance and liase, if necessary, with the National Criminal Intelligence Services (NCIS).

Whilst adhering to regulations to reduce the scope for the Company to be targeted by criminals, we have reviewed how the banking system can be made available for those individuals who are socially or financially disadvantaged and cannot offer documents to verify identity.

Northern Rock has had discussions with some local Prison Governors to enable individuals to open bank accounts on their release from prison. The Company has also opened accounts for asylum seekers. There are other less obvious cases where the Company has utilised the flexibility afforded by the regulations and the Financial Services Authority's Rules, and Industry Guidance. For example: elderly people often don't have passports or driving licences to verify identity so other alternative methods are used.

Northern Rock also trains staff on the social and moral impact of financial crime globally. Ongoing training provides staff with awareness of how money laundering affects society to help them combat financial crime.

The Proceeds of Crime Act 2002
This Act came into force in February 2003. The Act increases the reporting required to prevent and detect financial crime and widened the scope of the Act to include all financial crime. Such increased efforts reduce the negative impacts of crime on individuals and give these individuals more comfort in their dealings with the finance industry.

The Proceeds of Crime Act 2002 consolidated, updated, expanded and reformed the UK criminal law in relation to money laundering. Part 7 deals with money laundering offences and defences.

There is a mandatory requirement to report money-laundering arising out of any criminal conduct regardless of the amount or nature of the offence.

There is a requirement to report all fraudulent transactions relating to, amongst other things, plastic cards, cheques and loans, etc. Arrangements have already been made between main line departments and Investigations Department in Northern Rock for the reporting of fraud.

The Investigations Department must obtain and keep details of all frauds or attempted frauds they are also required to determine whether frauds should be reported to the (NCIS).

All Northern Rock staff were required to undertake training in relation to the Proceeds of Crime and Money Laundering Act in 2003, 2004 and 2005.

Specific refresher training for senior management was completed in 2004.

Data Protection
Individuals have a number of legal rights in relation to the personal information that the Company holds and processes. Northern Rock advises at the time of collecting information, the information that will be collected, why it is being collected and to whom it may be disclosed. This transparency enables customers to be fully informed about the Company's data processing practices.

Customers have a right to obtain a copy of information the Company holds about them, whether on computer or in paper files. Northern Rock provides as much information as it is reasonably practicable unless there is a reason why the Company is not obliged to disclose such information.

Managing Personal Information
A number of recent regulations have helped improve how firms protect the privacy of individuals and how they look after their legal rights:

Improvements have been made in individuals being able to 'opt out' of being contacted for marketing purposes. All types of media are now covered, including telephone, post, fax, e-mail and SMS (short messaging service).

The use of automated dialling systems is restricted. This is where customers are automatically dialled by a company and if a company operator is not immediately available to take the call the customer picks up a silent call. Customers are not aware of who has telephoned them and may think that they have received a 'nuisance' call.

In order to reduce the amount of 'spam' e-mails received by individuals, firms must now indicate in the title of the e-mail that the message is for a marketing purpose. Furthermore, individuals must be provided with a simple way to unsubscribe to further e-mails should they wish to do so.

Gender Recognition Act 2004
From July 2005, people that have lived under their acquired gender for more than 6 years may apply for a legal change of gender under the Gender Recognition Act.

Northern Rock staff have received instruction in how the Act affects individuals who acquire a new gender and how information about them should be processed.

It is an offence to disclose information during work about a person’s application for a gender recognition certificate or about the gender history of a successful applicant.

There are a number of exemptions where criminal disclosure would not be a criminal offence. For example, if the person agrees to such disclosure, or if the information is disclosed for the purpose of preventing or investigating crime, or if the law requires disclosure.

Public Interest Disclosure Act 1998
The Company has reviewed its obligations under this legislation and has agreed with the recognised trade union Amicus a policy and procedure offering protection against dismissal or other detriment when an employee discloses information which is considered to be in the public interest or "blow the whistle" on fellow employees or directors in certain defined circumstances.

For the purpose of the policy, an "employee" includes anyone contracted to work with, for, or on behalf of the Company. The policy also offers protection to the Company against frivolous, malicious or vexatious allegations and the Company may impose penalties for the making of false allegations maliciously.

Individuals may seek guidance regarding the Policy from their Manager, Personnel Department or their Trade Union and may seek independent advice.

A dedicated telephone helpline is available to staff within the Company Secretary's Department for any member of staff who wishes to speak in confidence concerning any aspect of the procedure. Employees are assured that calls are not recorded.

The policy and accompanying procedure is not intended to preclude matters of concern being raised by the recognised trade union Amicus through agreed joint consultation procedures.

The policy covers serious concerns of malpractice relating to:

A criminal offence

Failure to comply with a legal obligation

Miscarriage of justice

Endangerment of a person's health or safety

Actions against the public interest

Damaging the environment; and

A concealment of any of these practices.

No action against staff was required to be taken during 2005 under the Public Interest Disclosure Act

Financial Ombudsman Service (FOS)
The FOS complaint scheme provides a measure of protection for consumers. It provides independent arbitration where a firm's internal complaint procedures have been exhausted and a complainant is still dissatisfied.

On dealing with complaints Northern Rock follows key guidelines in relation to resolving them with speed, efficiency and effectiveness. Additionally, staff are trained to make an objective assessment of the material facts rather than spend time being completely defensive. Compensation can be paid to individuals who have suffered financial loss. Additionally, payments may be made to acknowledge failings even where individuals may not have suffered financially.

See also Customer Service

FSA Discussion Papers
Discussions are being held about how firms can strike the right balance between collecting sufficient information about their customers to help prevent terrorist funds and money related to other financial crimes entering the banking system and how to detect these proceeds if they do enter the system.

There are also discussions over how best to monitor unusual activity on bank accounts, facilitating report making to the relevant intelligence agencies. This all helps to reduce terrorist activities and financial crime, benefiting the community as a whole.

Mortgage and General Insurance Regulation
To provide additional safeguards for customers, the selling and administration of mortgages and general insurance became regulated by the Financial Services Authority (FSA) in October 2004 and January 2005 respectively.

Banking Code and Financial Difficulties
Within the Banking Code, great efforts have been made to improve how firms help customers who may find themselves in financial difficulties. The revised code has introduced a common financial statement that can be used for lenders and money advice services. It will become the industry standard for documenting a debt management plan or customers who are in financial difficulties. Customers are encouraged to contact their financial firm early to discuss their situation. By establishing this rapport between the customer and the firm, the best solution can be obtained for both parties. Northern Rock has a specialist team that deals with financial difficulties. Members of the team are specifically trained to treat customers sympathetically.

New Legislation
Northern Rock already complies with relevant financial services legislation and in the upcoming year will adhere as appropriate to additional legislation. These include:

Mortgage Conduct of Business set out by the Financial Services Authority. This is a major development for the Mortgage business and sets out a regulatory framework for mortgages and came into effect in October 2004. The purpose of this legislation is to standardise the procedures for selling, arranging and administering mortgages across the industry. This will make the whole process much easier for the customer and will protect their interests.

The Insurance Industry is also regulated in a similar way to the Mortgage business. Northern Rock will ensure it fully complies with this regulation when it comes into force and are reviewing current processes and procedures to ensure this occurs.

The Treasury Select Committee is currently reviewing Credit Card Statements in particular they are looking at the format of the information and APR calculations. Northern Rock will amend any affected statements according to their final judgement.

International Financial Reporting Standards (FRS)
From the effective date of 1 January, 2005, Northern Rock has operated in full compliance with FRS requirements.

Human Rights
As a UK based company, we will comply with all UK and international human rights legislation and guidelines applicable to our business operations.

This statement embraces the human rights of our employees, customers and other stakeholders, which we will respect and uphold.

We do not knowingly transact business with any individual business or organisation involved in any actual or potential abuse of human rights. During 2005 we continued to review our business activities and supplier relationships and did not identify any cause for action on human rights issues.

Call Centre Operations
Following recent cost cutting developments in the call centre marketplace, outsourcing operations overseas, Northern Rock has issued a statement confirming that the Company will not follow this practice and commits to providing employment at its local levels in the UK.

Employee Contribution
All Company employees are regarded as partners in the business we recognise the distinctive contribution that each person makes to the success of the business. All employee objectives are linked to the organisations Key Business Goals, which enables the Company to achieve its strategic vision. The Company endeavours to engineer a collective vision through all areas of employee life, at induction the collective vision and the employee's role in achieving this is illustrated. The key role employee's play is carried through an internal communication, which regularly provides updates on performance and achievement of Company strategies.

The Company recognises the individual skills and abilities of our staff and corporate training and development forms a fundamental part of our operations (see also Workplace).