UK FINANCIAL INVESTMENTS COMPANY OFF TO A

UNCLAS SECTION 01 OF 02 LONDON 001160 SENSITIVE SIPDIS E.O. 12958: N/A TAGS: ECON EFIN ETRD EINV UK SUBJECT: UK FINANCIAL INVESTMENTS COMPANY OFF TO A TENTATIVE START LONDON 00001160 001.2 OF 002 ¶1. (SBU) Summary: UK Financial Investments Limited (UKFI) oversees HMG's share in nationalized banks. It aims to dispose of the government investments in the banks while representing the interests of taxpayers as shareholders. UKFI is owned by the Treasury but is not technically a part of its bureaucracy; it operates at "arm's length" from the government. When HM Treasury set up UKFI in the fall of 2008, its business plan was unclear. Only now is UKFI beginning to find its way and critics claim its functions remain "shadowy." End summary. Background -------------- ¶2. (U) HM Treasury (HMT) set up UK Financial Investments Limited (UKFI) in November 2008 to manage the government's share in nationalized and partially nationalized banks. UKFI's investment strategy is focused towards actively disposing of the shares it acquired through nationalization or partial nationalization of distressed banks since the financial crisis hit the UK in late 2007. The company's objective, as determined by Chancellor of the Exchequer Alistair Darling, is to "protect and create value for the taxpayer as shareholder with due regard to the maintenance of financial stability and to act in a way that promotes competition." To carry out this mission, the company operates "at arm's length" from the government. HMT is the sole shareholder of the company and it is governed by a board that is accountable to Darling. HMT funds the company, and although its final budget has yet to be approved, it is estimated to cost GBP 1 to 5 million (USD 1.5 to 7.5 million) a year to run. UKFI is a small organization, expected to staff a maximum of 16 people drawn from the public and private sector. UKFI operates out of two rooms in the Treasury building. ¶3. (U) UKFI was established as a way for HMG to manage part of the recession. It did not have a fully formed business plan when it began and authorities have spent several months figuring out exactly what it will do and how. The company just released its framework document (http://www.ukfi.gov.uk/publications/) and is consulting with the boards of the partially nationalized banks - the Royal Bank of Scotland (RBS) and Lloyds Banking Group - on their decisions. UKFI also plans to manage the government's investments in the fully nationalized banks Northern Rock and Bradford and Bingley. Although UKFI consults with the boards of the banks, final decision making authority remains with the banks. According to its framework document, the company will: monitor bank performance, intervene when necessary, vote its shares, evaluate the banks and report the results to HMT. How the company will accomplish each task remains to be seen. UKFI is not supposed to interfere with the dayQto- day operations of the banks. A large part of UKFI's energy will be focused on developing strategies to sell the government's shares. Who's Who -------------- ¶4. (U) Glen Moreno is the acting chairman of UKFI. Several MPs criticized Moreno's appointment because he was a trustee of a Liechtenstein-based fund at the center of a dispute over tax evasion. In response to the criticism, Prime Minister Gordon Brown stated Moreno's appointment was temporary and he would not continue to chair UKFI after a permanent replacement was found. Moreno insists he never hid his business in Liechtenstein, and that when he was approached to become acting chairman, it was framed as a temporary arrangement. John Kingman, UKFI's chief executive, was previously Second Permanent Secretary of the Treasury. Before UKFI was established, Kingman was part of the Treasury negotiations with RBS, Lloyds TSB and HBOS on their recapitalization, and on the resolution process for Northern Rock. Accomplishments -------------- ¶6. (SBU) Much of UKFI's day-to-day operation remains vague. The company told Parliament's Treasury Select Committee it discussed the size of HBOS' executives' pensions with Lloyds Banking Group. The bank and UKFI LONDON 00001160 002.2 OF 002 agreed the executives should be paid bonuses no more than legally necessary based on their contracts. UKFI also helped broker parts of HMG's Asset Protection Scheme which allows banks to insure toxic assets with the government. ¶7. (SBU) UKFI did not exist when Fred Goodwin, former chief executive of RBS, left the bank, having been blamed for many of its financial problems. Therefore, it could not influence the compromise agreement signed between Goodwin, RBS, and the government regarding Goodwin's controversial pension worth GBP 16 million (USD 24 million). UKFI learned several months later that in the compromise agreement, Goodwin's pension package was established at twice the legal requirement based on his employment contract. The government, press, and public were outraged, viewing the size of Goodwin's pension as a reward for failure. UKFI consulted with lawyers to see if it could decrease Goodwin's pension. However, it is unlikely it will be able to do so because the compromise agreement was signed by Paul Myners, an MP representing the government, and several members of the RBS board. UKFI is now looking into suing the former members of the board who signed the agreement, none of whom are still on the RBS board. Outsiders Wonder: Who Are They? -------------- ¶8. (SBU) The press has become increasingly interested in UKFI over the past few months. Robert Peston, an influential BBC financial reporter, said UKFI will be as important in the next year or two as the Treasury and Bank of England. However, despite recently releasing information about itself, not much is known about the company and the press has little hard facts on which to report. Both the press and MPs have referred to UKFI as "shadowy." UKFI has not made a good impression with the Treasury Select Committee, a panel of MPs that examines the Treasury, Bank of England, banks, and other financial institutions. When Moreno and Kingman answered questions in front of the committee, they appeared to be ill-prepared and indifferent. The MPs seemed surprised and angry when they learned Moreno and Kingman did not have the answers to basic questions the committee submitted to UKFI before the hearing. One MP accused them of not taking the hearing seriously. LEBARON