Memorandum submitted by HM Treasury
UKFI was established by the Government to manage
its shares in financial institutions at arm's-length from Government
and on a commercial basis. UKFI has been established with an overarching
objective to develop and execute an investment strategy for disposing
of Government's investments in an orderly and active way, within
the context of protecting and creating value for the taxpayer
as shareholder, paying due regard to financial stability and promoting
competition.
The Government believes that this objective
will be best achieved by UKFI allowing the banks' managements
to take operational decisions in the commercial interests of the
banks and their shareholders, with UKFI acting as an engaged institutional
shareholder, rather than by the Government imposing its wider
policy objectives on the banks through UKFI.
Wider objectives such as environmental policy
are more effectively pursued across the economy as a whole and
through industry-wide initiatives and incentives. The UK's sustainable
development strategy Securing the Future is being delivered both
through a range of targeted Government policies, and by integrating
the principles of sustainable development into all Government
policy, operations and wider society.
For example, Budget 2009 announced the levels
of the first three carbon budgets, ambitious legally-binding limits
for UK emissions requiring a 34% reduction in emissions by 2020
relative to 1990 levels. Carbon budgets provide a clear and credible
long-term economy-wide framework to encourage investment in energy
saving and low carbon technologies. The UK Low Carbon Transition
Plan set out how all sectors of the economy would contribute to
meeting the carbon budgets. For large non energy-intensive organisations
such as banks, the introduction of the Carbon Reduction Commitment
from April 2010 will provide incentives to improve energy efficiency.
This policy will cover all UK banks which meet the qualification
criteria.
To focus on influencing the policies of the
banks in which HMG has shareholdings would put the banks concerned
in a more constrained position relative to other major banks,
thereby damaging competitiveness and investor confidence. This
would threaten the objective of disposing of the shares and achieving
value for money for the taxpayer as shareholder through that sale.
Also, under UK company law, company directors
are required to act in the interests of all shareholders; any
attempt to require the banks to take action which they do not
consider likely to promote the success of the banks for the benefit
of their members as a whole would be resisted by the banks' boards
and would risk contravening the relevant provisions of the Companies
Act[9].
To ensure that UKFI is fit for purpose, the
Treasury has agreed UKFI's high level objectives in the UKFI
Investment Mandate and UKFI Shareholder Relationship Framework
Document; established a corporate governance structure to
reflect UKFI's objectives, while taking account of best practice
for a public company; and agreed a UKFI Business Plan 2009/10-2013/14
and reporting mechanisms to ensure rigorous internal policy
and procedures, resource management and risk oversight. All of
these documents can be found on the UKFI website: www.ukfi.gov.uk.
Under the terms of its Investment Mandate, UKFI
is required to follow best institutional shareholder practice.
This includes complying with the Institutional Shareholders' Committee's
Statement of Principles and taking on board industry-wide recommendations
or guidance contained in the Walker Review or elsewhere. It will
monitor each bank's performance and strategy, including the bank's
approach to corporate social responsibility, in order to ensure
that this is consistent with protecting the value of the bank
and its shares.
Quarterly shareholder meetings are held between
the CEO of UKFI and senior officials, weighted towards a forward-looking,
risk-based analysis of progress against the UKFI Business Plan
and Investment Mandate.
UKFI Board membership is primarily private sector,
reflecting the need for relevant expertise and experience. Treasury
appoints a private sector Chairman and two senior Government officials
as directors. Responsibility for all other appointments, including
Non Executive Directors and a private sector CEO, falls to the
Board's Nominations Committee, with a right of authorisation falling
to Treasury. There is over 100 years of banking experience on
the Board.
1. What role did the Treasury play in formulating
the UKFI's Sustainability Policy (set out on its website)? To
what extent were the publicly-owned banks consulted in formulating
the Sustainability Policy, and what representations if any did
they make about what the Policy should include/exclude?
UKFI's sustainability policy has been drawn
up by UKFI and approved by the UKFI Board. This is in line with
the UKFI Board Governance Manual agreed with HM Treasury which
sets out that one of the Board's responsibilities is to receive
and consider high level reports on matters material to UKFI, including
sustainability. Both HM Treasury and investee banks were consulted
in advance of publication of the strategy and were in agreement
with the UKFI proposed approach.
2. UKFI's Investment Mandate refers to "Investee
Company Conditions". What do these cover? What sanctions
does UKFI or the Treasury have if these are breached? What sanctions
does UKFI/Treasury have if it is not satisfied with the banks'
environmental performance?
The "Investee Company Conditions"
referred to in the UKFI Investment Mandate are conditions of the
recapitalisation of Lloyds and RBS. These include, for example,
conditions on dividend payments, and the appointment and remuneration
of directors.
These conditions derive from the Government's
direct interest in maintaining financial stability and taxpayer
value. For example, a focus on remuneration responds to the fact
that in the past, variable compensation was often aligned with
short-term results, without consideration of the quality or sustainability
of these results, or reflecting the risk assumed or an appropriate
cost of capital.
To answer the final question on UKFI's broader
engagement with the banks on environmental performance, UKFI will
follow in full the Institutional Shareholders' Committee's Statement
of Principles in acting as an active and engaged shareholder.
These principles set out the possibilities for engagement as follows:
"Instances when institutional shareholders
and/or agents may want to intervene include when they have concerns
about:
— the company's approach to corporate social
responsibility.
If boards do not respond constructively when
institutional shareholders and/or agents intervene, then institutional
shareholders and/or agents will consider on a case-by-case basis
whether to escalate their action, for example, by:
— holding additional meetings with management
specifically to discuss concerns;
— expressing concern through the company's
advisers;
— meeting with the Chairman, senior independent
director, or with all independent directors;
— intervening jointly with other institutions
on particular issues;
— making a public statement in advance
of the AGM or an EGM;
— submitting resolutions at shareholders'
meetings; and
— requisitioning an EGM, possibly to change
the board.
Institutional shareholders and/or agents should
vote all shares held directly or on behalf of clients wherever
practicable to do so. They will not automatically support the
board; if they have been unable to reach a satisfactory outcome
through active dialogue then they will register an abstention
or vote against the resolution. In both instances it is good practice
to inform the company in advance of their intention and the reasons
why."
3. What is the Treasury's current view of
how long significant investments will have to be retained in RBS
and Lloyds banks?
As stated at Treasury Select Committee and Public
Accounts Committee hearings, the duration of the Government's
investments depends on a number of factors, including Bank and
market performance, and any disposal decisions will need to be
taken in the context of changing economic and market conditions.
4. The Treasury and UKFI hold "quarterly
relationship meetings" at which the progress of the Government
investments is discussed [UKFI Investment Mandate, para 4.2(D)].
Are the minutes of these meetings published, and if not are there
any plans to make them publicly available?
The minutes are not published as they are commercially
sensitive to the Government's holdings in the banks.
5. What if any representations has the Government
made to the publicly-owned banks about the type of businesses
(and their environmental impact) that the banks have lent to or
invested in, and what were the results of such representations?
None outside of the Lending Commitments that
both banks have entered into. UKFI's Investment Mandate requires
it to follow best institutional shareholder practice in managing
the investments (on behalf of Treasury), as set out above. UKFI
was established to manage the banks at arm's length from Government
and on a commercial basis, leaving operational decisions to the
independent boards of the banks. To impose policy on the banks
would damage investor confidence and threaten the objective of
achieving value for money for the taxpayer at disposal.
6. The UKFI website notes that it is "still
considering what would be the most robust qualitative and quantitative
indicators to use" to measure its performance, potentially
in three areas: in relation to the banks' financial performance,
investor perceptions, and "strategy in our investee banks".
When will the PIs be finalised? What particular indicators does
the Treasury wish to see included? Will targets be attached to
any of the prospective PIs, and will these be published?
We understand that UKFI are currently finalising
the range of performance measures on which to report in the 2009-10
Annual Report and Accounts. These measures will focus on UKFI's
core remit set out in the UKFI Framework Document, Investment
Mandate, and UKFI Strategy for Market Investments 2008-09, including
the banks' financial performance and UKFI's strategy in relation
to investee banks. HMT expects to agree these performance indicators
before UKFI finalises its Annual Report and Accounts.
7. The cost of UKFI's operation (£4.5
million in 2009-10, rising to £5.0 million in 2013-14) is
set out in the UKFI Business Plan [para 3.11]. It notes that these
costs exclude any transaction costs when investments in the banks
are disposed of (which, as AME, will be met directly by the Treasury).
What factors or considerations influenced the Treasury's decision
to not include shareholding disposal costs in UKFI's budget?
The £4.5 million covers regular operational
costs, such as pay, pensions, rent, IT and travel. In the event
of a disposal, UKFI is likely to incur fees in line with comparable
private sector transactions. In the event of a successful transaction,
this fee will be subsumed within the return achieved by the sale.
However, on some occasions, it is possible that all or part of
this fee could fall to UKFI. In such a case, Treasury will need
to provide extraordinary funding. As these costs are unpredictable
and likely to be larger than ongoing operational costs, they are
not included explicitly in the budget.
8. The Treasury has issued an "exposure
draft" for consultation on "sustainability reports"
in the public sector, which would be produced for 2011-12 onwards.
Will UKFI have to produce Sustainability Reports under such proposals?
Would the publicly-owned banks, in their own right, have to produce
them?
UKFI is a limited company and classified by
the Office for National Statistics as a central government body.
Due to its small size, UKFI will not be consolidated into Whole
of Government Accounts. As a result, UKFI does not fall within
the scope of the Government Financial Reporting Manual and will
not be required to produce a sustainability report under HM Treasury's
current proposals.
Similarly, the publicly-owned banks will not
be required to produce such reports under current proposals. Government's
policy in relation to the disclosure of commercial information
by state-controlled limited companies (such as the Royal Mail)
is that their approach to disclosure should follow Stock Exchange
requirements. UKFI is taking the same approach to the banks in
which it has investments, and the banks will therefore report
against the relevant private sector requirements rather than public
sector requirements.
5 March 2010
9 s. 172 Companies Act 2006 Back
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