1. Chairman's Introduction

Corporate social responsibility is at the heart of Alliance & Leicester's business activities. Whilst our primary aim is to maximise shareholder value, the way we achieve this aim places emphasis on serving the community - including our vital role in helping families and individuals to buy their homes and to save for their future. We also have an important role to play in our local communities by being a responsible employer, and through charitable giving and staff volunteering.

We believe that corporate social responsibility makes sound business sense and is central to the good relationship we enjoy with our stakeholders, and in particular with our local communities.

This is Alliance & Leicester's first Corporate Social Responsibility (CSR) report, summarising much of our work in these areas, and many others which fall under the CSR umbrella.

This report has been endorsed by our Group Board, and its production is an important step in continually improving how the Alliance & Leicester Group addresses these important matters.

We are proud to have been serving customers in our communities for over 150 years, and I am confident we will continue to grow Alliance & Leicester for the benefit of our customers, shareholders, employees and the local communities to which we owe so much.

John R Windeler
Chairman

2. Foreword by Group Chief Executive

Alliance & Leicester shares the Department of Trade & Industry's view that Corporate Social Responsibility is an issue for all businesses. We recognise that our actions can have an impact on society and the environment. We also recognise that we have interactions with a wide range of stakeholders, including employees, customers, investors, communities and suppliers. The demands of these different stakeholders may differ at times, but a successful business recognises the important role each plays in making its business a success.

Against that backdrop, Corporate Social Responsibility (CSR) issues have, rightly, been gaining more prominence in the UK in general. At Alliance & Leicester, this has been reflected in a very wide variety of actions and policies which are included in this report.

We are proud to be serving communities throughout the whole of the UK, by providing access to our range of products and services. As a major UK company, employing over 9,000 staff, and as a member of the FSE100 leading UK companies, we also provide benefits to the UK community through employment opportunities, and through the payment of dividends and taxes.

We have particularly strong links with the local communities in which our employees live and work. For example, we believe we are the largest private sector employer in Leicestershire and we also employ around 2,000 staff in Bootle, Merseyside - an area which has suffered from adverse economic consequences for a number of years. We take our consequent responsibilities to those communities very seriously.

We know that our future success depends on taking into account the interests of all stakeholders in our business: our customers, our employees, our shareholders and the wider community in which we work and live. We recognise that this is an ongoing process and I commend this first Alliance & Leicester Corporate Social Responsibility report to you as an important step in that process.

Richard A Pym
Group Chief Executive

3. Introduction

About Alliance & Leicester

Some Key facts about Alliance & Leicester

This is Alliance & Leicester's first, formal, report pulling together a number of activities under the "Corporate Social Responsibility" (CSR) banner. The production of this report has been an important step in the process by which we continue to address the importance of CSR issues to the Group, and to identify the most effective and efficient way in which we tackle those issues.

Alliance & Leicester is a member of the British Bankers Association (BBA) CSR Advisory Panel. During 2002, the BBA contributed to the publication of the FORGE (Financial Organsations Reporting Guidelines) Group guidance on CSR management and reporting in the financial services sector. That publication has been endorsed by the Department of Environment, Food and Rural Affairs (DEFRA), the Department of Trade and Industry (DTI) and the Department for International Development (DfID).

The FORGE Group guidance was published whilst we were collating this report, and we have structured the report under the headings outlined by FORGE as being those most relevant to financial services organisations. These comprise four major themes - Marketplace, Workplace, Community and the Environment - each of which contains a number of relevant sub-themes, again as identified in the FORGE guidelines.

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About Alliance & Leicester

Alliance & Leicester plc was created in 1997 when the former building society converted to a public limited company, and listed on the London Stock Exchange. Our real heritage, however, is much longer and the Group's roots go back to the creation of the Leicester Permanent Benefit Building Society, founded over 150 years ago on 15 November 1852.

Our vision is "to be the UK's most customer focused financial services organisation - bar none". To meet that vision, we have determined clearly what our brand stands for over our customers' lifetime journey with us: we attract new potential customers by providing better value products and services; we convert them into our customers by being simple and straightforward to deal with; and we keep them as customers and get them to buy more from us by offering friendly and approachable service and by appropriate management of the customer relationship.

Our retail banking strategy aims for excellence in the provision of four core products: mortgages, savings, current accounts and unsecured personal loans.

Outside of these "core 4" products, we offer other retail banking products - such as investments, life assurance, credit cards and general insurance - through partner suppliers. The most significant of these partnerships are with Legal & General for life assurance and investments, and with MBNA for credit cards. Both of these companies produce their own CSR reports.

We also offer a range of commercial banking products, including money transmission products, bill payments, small business accounts and asset finance. These are delivered by our Wholesale Banking division, which was formed from Girobank - which we purchased from the Government in 1990 - and by Sovereign Finance, which we bought in 1996.

All of our operations are in the UK, and our products are solely aimed at UK-based customers, or ex-patriates

Alliance & Leicester has thorough systems of corporate governance. Our processes of control are rigorous, as would be expected for a major UK PLC with over 9,000 staff and over 760,000 shareholders. These controls are outlined in the Group's Annual Report & Accounts and provide the backdrop for monitoring most of our CSR-related policies.

Of particular note during 2002 was the publication of a set of Business Principles for the Group, which was endorsed by the Group Board in March 2002, and communicated to all staff. This document covers Our Aims, Our Customers and Our Reputation, Our Shareholders, Our Staff, Other Business Relationships, Our Relations with the Community, The Environment, Security, Maintaining Confidentiality and Compliance with these Business Principles. A copy is in the Appendix, and the Principles are referred to elsewhere in this report.

The Appendix also contains extracts from our Annual Report & Accounts for 2002 covering CSR, Community Involvement , Environmental Policy and Charitable Donations.

The progress we have made with CSR-related matters to date has been reflected in the Group maintaining membership of the FTSE4 Good index during 2002.

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Some Key facts about Alliance & Leicester

• We have a network of 312 branches across the UK.
• We offer internet and telephone banking services.
• Personal current account, small business and commercial customers can access their accounts at more than 17,000 Post Offices.
• We have over 5.5m Personal Customers.
• We have lent a total of £23.5bn to fund the purchase of homes representing 3.5% of the UK residential mortgage market.
• We have over 1.8 million current account customers.
• Our customers have access to 1,700 Alliance & Leicester ATMs.
• An estimated £1 in every £4 cash spent in UK high street retailers is handled by Alliance & Leicester Commercial Bank.
• We process more than 200 million bill payment transactions each year.
• During 2002 our products received over 1,000 Best Buy endorsements in the national press

[All figures based on Annual Report & Accounts for 2002]

Access to products and services
Advertising, Pricing and Customer Service
Business ethics
Privacy
Terms of Trade

Access to products and services

Our distribution network covers the whole of the UK and, as reported above, includes branches, telephone and postal banking, and the internet, as well as access through Post Offices. We have a particular strength in "direct" distribution channels, ie telephone, post and internet. Indeed our subsidiary, Girobank, launched the UK's first post and telephone banking service back in 1986.

Whilst our franchise covers the whole of the UK, we have particular strengths in the Midlands, the South East, Scotland and Northern Ireland.

We recognise that some of our customers have additional needs. For customers who are deaf, hard of hearing or have speech impairments, a fully qualified sign language interpreter is available on request. Customers can also use a Typetalk operator - a national telephone relay system allowing hard of hearing or speech impaired customers with a textphone to communicate with us via our standard telephone system.

For customers with visual impairments we make our documents easier to read by printing brochures, letters and statements in larger print, or providing them in an audio or Braille format. We also can help customers fill in our forms more easily, and offer our customers a Braille or large print template to help with cheques, deposit slips and credit card payment slips. We offer customers a signature template to help signing debit, credit and cheque guarantee cards. We also aim to make it easier to order goods and services over the telephone by supplying card details in Braille.

New and refurbished branches of Alliance & Leicester are being designed, wherever possible, to make them more convenient and accessible for customers. Potential features include automatic doors, level access, low-level counters, hearing loops and new more accessible cash machines.

We review the accessibility of our services and ask our customers to let us know if they have a particular need that we do not currently cater for.

We are a supporter of the Government's Universal Banking initiative, and offer a Basic Bank Account product.

Advertising, Pricing and Customer Service

As already outlined above, our strategy aims to attract new potential customers by offering better value products and services, to convert potential customers into actual customers by being simple and straightforward to deal with, then to keep our customers and get them to buy more from us by offering friendly and approachable service and by appropriate management of the customer relationship.

This strategy is vital to our success, and provides a backdrop against which we aim to price and deliver products and services in a straightforward and fair way.

As an indicator of our success, our "core 4" products (mortgages, savings, unsecured personal loans and current accounts) received more than 1,000 mentions in the "best buy" tables of national newspapers during 2002.

We have also won a number of awards during 2002 which reflect our value and service to customers. These include "Your Mortgage" magazine's award for best online mortgage bank. "Moneywise" personal finance magazine's panel of leading mortgage experts voted Alliance & Leicester joint winner of its "Best Discount Rate Lender" award. Our on-line mortgage application service for intermediaries was named "Best Online Mortgage Provider - Business to Business" in the Online Finance annual awards. "Business Moneyfacts" magazine carried out a survey to identify the best small business bank accounts for various types of small business. Our products came top in two of the three scenarios surveyed - the best performance of any bank.

Internally, we monitor our customer service performance on a monthly basis as part of our business strategy. This includes regular sampling of our personal customers concerning what they think of our service - helping us to identify what we are doing well and where there are areas for improvement. We formally compare our service performance to that of our competitors, and we use mystery shopping to measure our performance against our own internal service standards. The results of these surveys provide vital input to our management.

Business ethics

Our statement of Business Principles, already referred to above, includes a number of items which encapsulate the Group's business ethics.

The following extracts from that document address ethical matters. The full document is in the Appendix:

• We will not risk the Group's reputation by knowingly associating with people or organisations or products or transactions which could potentially damage that reputation.
• We are positive about complying with our legal and regulatory obligations - this protects our customers, our shareholders and ourselves.
• Each member of staff has a personal responsibility to contribute to the Group's success and reputation by carrying out his or her job conscientiously, efficiently and honestly and maintaining the highest standards of integrity and personal conduct in all matters which affect the Group.
• Consistent with the highest standards of integrity we do not countenance the solicitation or acceptance of hospitality or gifts which may be mistaken for an inducement nor do we countenance use of information received in the course of our business dealings for personal gain.
• We provide the means whereby staff can report any suspicions of wrongdoing to senior management or to our Internal Audit and Compliance Departments which have access to information and receive co-operation from our staff.
• We seek business relationships which are mutually beneficial and lead to success through fair dealing and high standards of business integrity.
• We will normally seek competitive proposals from suitable suppliers.
• We do not knowingly do business with organisations or bodies which are involved in the abuse of human rights.

We are vigilant in ensuring that we lend only to respected institutions and do not deal knowingly with businesses involved in any illicit activities, such as money laundering or foreign regimes that violate human rights.

Privacy

The Group's policies comply with the Data Protection Act and has stringent policies on the protection of customer privacy, conforming to standards set by the voluntary banking codes and legislation.

Our research has shown that customers rank "privacy" as one of their major issues when dealing with their bank. Reflecting this, we regularly monitor how our customers rate the privacy they get when dealing with Alliance & Leicester, and their responses feed directly into our formally monitoring of our customer service performance.

Terms of Trade

Our products are primarily aimed at UK-based customers, and all of our operations are based in the UK (excluding our small international operation in the Isle of Man). In this context, Terms of Trade issues are not a significant issue for the Group, nor does our behaviour significantly impact on such issues as they would for a more international company.

For payments within the UK, we are a signatory of the DTI's Better Payment Practice Code. It is Group policy to:

• agree the terms of payment at the start of business with a supplier
• ensure suppliers are aware of the payment terms
• pay in accordance with any contractual and other legal obligations.

5. Our Workplace

Learning and Development
Disciplinary practices
Work/ Life Balance
Health and Safety
Diversity and Equal Opportunities
Freedom of association/ collective bargaining
Forced and child labour
Bullying and harassment

As we have already commented, our business vision commits Alliance & Leicester to becoming "the UK's most customer-focused financial services organisation - bar none." We know that we cannot achieve that without the whole-hearted commitment of our employees.

Throughout the Group, there are numerous examples of actions aimed at developing and motivating our workforce. During 2002, many of these have been brought together under the heading "Living Life Better at Alliance & Leicester".

We believe that effective communication and consultation with our employees is crucially important. We encourage our managers to engage in regular communication with their staff and provide a number of tools and training materials to help with this, including regular material provided by the Group Intranet for managers to use in their briefings with staff. Almost all of our employees have access to our Group Intranet either at their workstation or at designated Intranet points. The Intranet not only keeps employees up to date with business related information but also provides staff with the facility to ask a questions on any subject related to the Group. In addition, we also regularly consult with our trade union representatives.

All our employees have access to "HR.direct" and "HR.online", a telephone helpline and an Intranet-based service, to provide immediate responses to human resources queries.

We carry out an annual employee opinion survey which is sent to all Group staff, asking their views on the Group. Its results are communicated to all staff and discussed with employees at briefings with their senior managers. The Group results from the 2002 survey showed improvement over the 2001 survey in each of the categories surveyed - Communications, Leadership & Involvement, Morale & Commitment, and Development.

We believe in providing suitable levels of reward and recognition for our employees. In addition to basic levels of remuneration, we also provide bonus schemes, staff share schemes and a number of schemes aimed at recognising and rewarding excellent customer service.

Learning and Development

Our innovative "Valuing Individual People" (VIP) training programme aims to help our employees achieve our vision. VIP focuses on putting the internal and external customer at the centre of everything we do, and ensuring that everyone is treated as a valued and respected individual. By the time the programme is completed, all of our employees - including those at Board level - will have taken part, representing the largest single investment the Group has ever made in a single training initiative. The programme is also an integral part of the induction programme for all new members of staff.

We are proud that we have achieved Investors in People accreditation in over 70% of our business, including all of our principal customer-facing areas. We aim to increase this proportion further during 2003.

We offer IT learning packages to our employees at Flexible Learning Centres available at nine locations across the business designed to enable our employees to select from a wide range of PC based learning packages from Internet Explorer to Excel, helping them develop new skills. Certain training courses are available through the Group's Intranet.

Our Customer Service Champion Award recognises employees who have consistently delivered excellent customer service to internal or external customers. Winners are nominated by their colleagues in the Group and awarded a trip to a management course, the opportunity to progress in the career of their choice or a promotion within an existing career.

Our Going the Extra Mile (GEM) award is a recognition award, enabling employees to nominate colleagues for a small award, funded by the company, when they have delivered exceptional service to either internal or external customers.

Alliance & Leicester operates a number of development schemes aimed at high achievers, including our management trainee scheme, an accelerated leadership programme and sponsorship of further education training.

Our Management Trainee Scheme is open to recent graduates and designed to combine the benefits of structured development with the flexibility to allow individuals to develop in a way that benefits them and the business. The development programme usually consists of three to four different placements of a six-month duration that allows our trainees to gain experience in different business environments.

In 2002 we launched an Accelerated Leadership Programme, designed to identify managers who have the potential to be future leaders in the Group and provide them with suitable development opportunities.

In addition, Alliance & Leicester invests in Further Education opportunities that support the development of our employees such as CeMAP, CeFA, CIM and CIPD qualifications. We provide paid time off to enable our employees to revise for and to sit exams.

Disciplinary practices

The success of the Group depends to a large extent on the ability of its employees to achieve and maintain acceptable standards. The Group encourages employees to adopt a responsible attitude to work, encompassing self imposed discipline. The main aim of the Group's Discipline policy is to be corrective rather than punitive and it is in line with the ACAS Code of Practice on discipline at work. It sets reasonable standards of performance and behaviour and aims to ensure consistency and fairness of treatment of all employees when these standards are not met.

Work/ Life Balance

We believe it is important for all staff to be able to share the benefits of good performance by the company. This is reflected in a number of ways.

More than 90% of our employees are Alliance & Leicester shareholders and more than 90% participate in one or more of our company share schemes.

Our Flexible Holidays scheme enables employees to buy or sell up to five days' holiday each year. More than 20% of our staff take advantage of this benefit.

We offer our staff incentives to own and use Alliance & Leicester products, and we also offer our employees the chance to participate in various promotion and partnership packages including discounted health club membership, holidays and childcare.

The Group offers employees an enhanced Maternity, Paternity and Adoption Leave package which exceeds statutory obligations and is flexible to the requirements of individual employees.

We offer our employees a range of flexible working hours and location arrangements to match their individual needs wherever possible.

Health and Safety

Alliance & Leicester's Health and Safety Mission Statement commits us to ensuring that our employees are provided with a safe and healthy working environment and to achieving Health & Safety excellence through statutory compliance. A copy of the Statement is in the Appendix.

We recognise that the Health & Safety at Work Act and recent Safety Regulations allocate responsibilities to both managers and employees within the workplace. Our Health & Safety Management System outlines personal responsibilities for Health & Safety at work.

Our security policies state clearly that the safety, health and welfare of our staff must always be placed before the minimisation of financial or other loss by the Alliance & Leicester.

Diversity and Equal Opportunities

Alliance & Leicester recognises the right of every employee to be treated with dignity and respect at work. Working with our union representatives we have produced and promoted a Group policy to ensure that any problems are dealt with promptly and with sensitivity. Statements covering our policy on equal opportunities, bullying, harassment and disciplinary matters are included in the Appendix.

We take our responsibilities under the Disability Discrimination Act 1995 very seriously and ensure all reasonable measures are taken to enable customers and potential customers to access the full range of Group products and services at all our premises within the timescales as defined within the Act. Our Equal Opportunities policy commits us to removing barriers which would prevent the employment of disabled people in Group jobs and to implement all reasonable measures to ensure disabled staff can effectively carry out their jobs.

In addition we have established a Customer Disability Support Unit to provide support to management and staff on the requirements of the Act and the implementation of our policy. Alliance & Leicester consulted with a number of disability groups before starting work on drawing up and implementing our policy. We provide training for our employees to understand our policy, procedures and practices.

As an employer Alliance & Leicester recognises the potential that all people bring to the workplace regardless of sex, race, ethnic or national origin, religious belief, marital status, disability or sexual orientation. As part of that philosophy and in keeping with our values, we believe that every employee should be treated with the same respect and dignity. We are proud to actively encourage a culture that supports equality of opportunity at all levels.

During 2002 we launched a "Women in Business" programme for women managers in Alliance & Leicester, providing networking and development opportunities for them to help further their careers within the Group.

Freedom of association/ collective bargaining

Alliance & Leicester recognises the Communications Workers Union (CWU), the Public and Commercial Services Union (PCS) and Alliance & Leicester Group of Staff (ALGUS) for collective bargaining purposes.

We enjoy good relations with these recognised unions and endeavour to involve their representatives at all levels. To this end, for example, union representatives are invited to attend our regular senior management briefings.

Forced and child labour

All of our operations are based in the UK, and our products are aimed at UK-based customers or ex-patriates. We are not involved in forced or child labour.

Bullying and harassment

Alliance & Leicester's bullying and harassment policies ensure that we recognise the right of every employee to be treated with respect and dignity and are committed to providing a working environment that is free from bullying. We do not tolerate bullying in the workplace, either as a management style or between work colleagues, and we take disciplinary action against any employee who bullies others.

While legislation already exists to protect our employees from harassment on the basis of gender, race or disability, we believe that it is important that our policy extends beyond these to embrace all forms of harassment.

We produce and distribute an information booklet for all employees on bullying and harassment and provide advice and support on our Intranet.

6. Working with our local communities

Involvement with the community
Investment in our local communities
Human rights and Indigenous rights

Involvement with the community

We are proud of the links we have built up with the community, in particular with the local communities in which our employees live and work.

During 2002 Alliance & Leicester made donations for charitable purposes amounting to £560,050. This includes £150,000 donated by the Group to the NSPCC as a result of our account opening promotion run in December 2001 and January 2002.

In addition to these donations our Corporate Community Investment programme has given support to a large number of organisations nationally and locally. This support has taken various forms including gifts in kind, management secondments, organising fund raising events and the use of office space. This support in total amounted to an estimated £100,000 in 2002. During 2002 Alliance & Leicester staff organised a "fun day" at the Group's Carlton park headquarters. This event was well supported by both Group employees and the local community and raised over £9,000 for local charities and schools. A copy of our charity policy is in the Appendix.

We believe that a sustainable Cause Related Marketing programme also has an important part to play in supporting CSR activity. This can be defined as 'creating a true long term partnership with a cause, that becomes interwoven through all areas of the business, delivering increasingly greater brand and commercial value to the organisation and increased profile and donations to the cause over time.'

During 2002 we have provided a further £50,000 of sponsorship to the Leicester Tigers TAG rugby initiative design to allow young children to learn both team skills and basic rugby skills in a fun environment. A&L and the Tigers teamed up over two years ago after finding that less than 10 per cent of all primary schools in Leicester, Leicestershire and Rutland actively participate in the sport.

Our key Cause Related Marketing activity at a national level is our involvement supporting the NSPCC. 2002 saw Alliance & Leicester support the NSPCC's "Change for Kids" campaign. The campaign which called on the public to hand in spare European currencies at Alliance & Leicester branches before the introduction of the Euro resulted in over £1m being raised for the NSPCC. Further detail on our involvement with the NSPCC is provided in one of the case studies in this report.

Investment in our local communities

We actively support local communities through charitable donations, gifts in kind and through the involvement of our staff in volunteering initiatives. Our charitable donations policy particularly emphasises support for the communities from which we draw large numbers of employees - in particular Leicestershire and Merseyside. In each of these areas we have strong links with local schools, voluntary groups and charities, as is set out further below and in the Case Studies in this report.

We are proud to support Leicestershire Cares, Liverpool Cares and Manchester Cares. These are local business initiatives linking employers with volunteering opportunities. We were a founder member of Leicestershire Cares and a long-standing supporter of Liverpool Cares and we are the largest single source of volunteers in both these areas.

We are the largest sponsor of the "Beating the Odds" appeal, which helps to fund the Leicester Education Action Zone, a support initiative for 16 local schools.

Many of the schools in the Action Zone are also benefiting from some of the 220 Alliance & Leicester staff volunteers who each donate an hour of their time each week to read with children in local primary schools in Leicester and Liverpool as part of the "Right to Read" campaign. Teachers at the schools involved have reported significant improvements in the children's reading skills after just one school term of this initiative.