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P 151015Z MAY 09
FM AMEMBASSY LONDON
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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