Written evidence submitted by UK Financial Investments Ltd
I am writing to provide some details of UKFI's first year of work with our investee companies, and an update on our work to implement the recommendations from the Committee's Banking Crisis report, in advance of our hearing with the Committee this Wednesday.
Over the last year UKFI has discharged its remit as an "active and engaged shareholder" in RBS and L1oyds:
· The boards of both banks have been substantially overhauled. At RBS there is a new chairman and CEO; most of the previous non-execs have left; the board is much smaller; and Stephen Hester has brought in a new finance director, head of retail, head of risk, and head of the investment bank. At Lloyds there is a new chairman and two new non-execs (Tony Watson and Tim Ryan), both with strong track records in governance, have been appointed.
· UKFI has been heavily involved as shareholder with both RBS and L1oyds, who have developed and articulated their strategies to build long-term value, and reformed their risk management.
o We have worked with Lloyds on the operational and cultural integration of HBOS, and place great importance on the roll-out of L1oyds' risk management standards across the whole Lloyds Banking Group.
o At RBS we have been involved in the new strategy announced earlier this year, which covers the scaling back of investment and wholesale banking activities and balance sheet use, and a programme for disposing of non-core businesses.
· UKFI has driven through the most fundamental reforms of remuneration at any large bank in the world, with all bonuses (other than for the most junior staff) paid over three years, subject to clawback and with no discretionary bonuses paid in cash.
· UKFI has engaged intensively with other shareholders, holding more than 80 investor meetings - debating current investment issues; promoting active engagement; and developing the future shareholder base. Rebuilding the confidence of existing and potential shareholders will be essential if the banks are to attain a full market valuation for their shares - and there has been a marked resurgence of investor confidence in the two banks; since the trough, taxpayers' notional losses have been reduced from £26bn (in January) to well under £10bn.
· UKFI has worked closely with the Treasury on optimising the banks' capital structures (through exchanging preference for ordinary shares) and on the Asset Protection Scheme negotiations with both banks.
In addition, UKFI took on responsibility for managing the Government's investments in Bradford & Bingley in July, and will take on responsibility for Northern Rock when the bank is restructured shortly.
UKFI has acted on a number of specific recommendations of the Committee. We have:
· published in July a clear strategy for the market investments (Lloyds and RBS), setting out our plans for returning the banks as strengthened institutions to full private ownership over time;
· published our investment mandate, the final element in establishing UKFI's formal remit;
· worked with both banks on the revision of their remuneration practices fundamentally changing the culture and practice in both banks whilst protecting lower paid staff - and working to ensure that they are at the forefront of new domestic and international standards;
· provided more easily accessible information about UKFI on our website (www.ukfi .gov.uk) , including on: our market investments, our investment strategy, and our wholly owned investments; and
· in line with the Committee's recommendation, made arrangements to move out of the Treasury building.
3 November 2009