On July 13, the U.K. government released its annual report detailing certain of the government’s financial institution investments and its strategy for managing and ultimately disposing of them. UK Financial Investments Ltd. (UKFI) is a company wholly owned by the U.K. government and formed in November 2008 to manage the U.K. government’s investments in certain U.K. financial institutions made in response to the financial crisis. In the annual report, Glen Moreno, the UKFI's acting chairman, stressed that UKFI’s role is to manage the U.K. government’s investments, not the banks themselves, and to operate at arm’s-length from the U.K. government. In a press release, issued in connection with the annual report, John Kingman, UKFI's chief executive, noted that by virtue of UKFI’s ownership, each U.K. household effectively had approximately £5,000 invested in certain U.K. financial institutions.
UKFI’s responsibilities are:
- Managing the investments to create and protect value for the U.K. taxpayer as shareholder, with due regard to financial stability and competition; and
- Devising and executing a strategy for disposing of the investments in an orderly and active way over time.
UKFI’s investments consist of a 70% voting share capital investment in Royal Bank of Scotland Group (RBS) (equivalent to £15.3 billion as of June 30) and a 43% voting share capital investment in Lloyds Banking Group (Lloyds) (equivalent to £8.3 billion as of June 30), both of which were acquired in the recapitalizations of RBS and Lloyds in October 2008 to provide short-term liquidity and ensure adequate Tier 1 capital ratios. In connection with the formation of the Asset Protection Scheme, UKFI also invested in “B Shares” of both RBS and Lloyds. RBS B Shares are non-voting ordinary shares with a preferential dividend equal to the higher of 7% or 2.5 times ordinary dividends, and contain terms for both optional and automatic conversion into ordinary shares. The Lloyds B Shares are also non-voting ordinary shares with a preferential dividend equal to the higher of 7% or 1.25 times ordinary dividends, and also contain terms[http://www.alston.com/financialmarketscrisisblog/blog.aspx?entry=1635] for optional and automatic conversion into ordinary shares. UKFI will also manage the U.K. government’s investments in Northern Rock plc and Bradford & Bingley plc once European Commission approval is obtained for the relevant business plans. The U.K. government reported that its unrealized loss on the ordinary shares in RBS and Lloyds was £10.9 billion as of June 30.
In the annual report, UKFI stated its intent to formulate, along with the U.K. government, criteria to measure its investment performance and optimal time for disposition of the investments, including:
- The banks’ financial performance, including share price, profitability and capital adequacy ratios;
- Investment strategies, including risk management, reform in management remuneration, board appointments and decisions; and
- Investor perceptions, including UKFI’s effectiveness as a shareholder operating at arm’s-length from the U.K. government, the quality of UKFI’s engagement with other investors and UKFI’s impact on its investments.