UK government sets up investment manager

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LONDON – UK chancellor of the exchequer, Alistair Darling, has announced arrangements for managing the government's shareholding in banks that have subscribed to its recapitalisation fund.

The government's investments will be managed on a commercial basis by a new arm's length limited company, UK Financial Investments (UKFI), which is wholly owned by the government. Its overarching objectives will be to protect and create value for the taxpayer as shareholder, with due regard to financial stability and acting in a way that promotes competition.

The government will be underwriting capital investments for RBS and, upon successful merger, HBOS and Lloyds TSB, totalling £37 billion. All three institutions subscribing to the government's bank recapitalisation fund will be seeking shareholder approval to raise their capital levels before the end of the year. The government will then take shareholdings in these banks on the terms agreed on October 13, subject to take-up by existing or new shareholders of the ordinary shares and, in the case of HBOS and Lloyds TSB, to the merger going ahead.

UKFI will work to ensure management incentives for banks in which it has shareholdings are based on maximising long-term value and restrict the potential for rewarding failure. It will also oversee the conditions of the recapitalisation fund, including maintaining, over the next three years, the availability and active marketing of competitively priced lending to homeowners and small businesses at 2007 levels.

The UKFI board will comprise a private sector chair, three non-executive private sector members, a chief executive, two senior government officials from the Treasury and the shareholder executive. Philip Hampton, chairman of Sainsbury’s and previous group finance director of Lloyds TSB Group, has agreed to become the UKFI's first chair. John Kingman, second permanent secretary and managing director, public services and growth at HM Treasury, will become chief executive. Both will take up these positions shortly. The remaining private sector board roles will be recruited soon and are intended to be filled by individuals with the relevant commercial skills and experience to enable UKFI to meet its objectives.

In due course, UKFI will also manage government investment in Northern Rock and part of Bradford & Bingley, but these companies will continue to have their own independent boards and management teams, determining their own strategies.

The government has stressed it will not be a permanent investor in UK financial institutions and will, over time, seek to dispose of the investments through sale, redemption, buy-back or other means, in accordance with the UKFI's objectives.