United Kingdom Parliament Treasury Committee Update: NAO Asked Not To Delay Review Of UKFI's Advice On RBS Sale

17 August 2016

Rt Hon. Andrew Tyrie MP, Chairman of the Treasury Committee, writes to Sir Amyas Morse, Comptroller and Auditor General, to encourage the National Audit Office to review the advice provided by UK Financial Investments (UKFI), to the Government, ahead of its first sale of shares in RBS in August 2015, before the Government becomes a minority shareholder in the bank.

Chair's comments

Commenting on the correspondence, Rt Hon. Andrew Tyrie MP, Chairman of the Treasury Select Committee, said:

"Parliament and the public will want reassurance that the Chancellor’s decision to sell the first tranche of shares in RBS in August 2015 secured the best value for money for the taxpayer, and was not influenced by political expediency.

UKFI was created with the intention to ensure that state and partly state-owned banks are run, and seen to be run, free from government interference. There is a risk that UKFI is being used as a fig leaf to disguise a high level of Treasury control. UKFI’s advice on this sale is therefore of considerable public interest.

A full and thorough review of the sale should not be left any longer."

Background

The Parliamentary Commission on Banking Standards ( PDF 592 KB), chaired by Mr Tyrie, concluded on 12 June 2013 that attempts to bolster UKFI's independence would be extremely unlikely to end political interference in the State-owned banks, and that it should therefore be wound-up and its resources absorbed back into the Treasury:

UKFI was established by the previous Government to manage the Government’s shareholdings in the State-owned and partly State-owned banks, but also crucially to ensure that Government was not involved in the day-to-day running of these institutions, thereby ensuring that they would be run on commercial lines, thus facilitating an early return to the private sector. These were sensible aims, but they have not been fulfilled. Instead, the Government has interfered in the running of the two partly State-owned banks, particularly RBS. On occasions it has done so directly, on others it appears to have acted indirectly, using UKFI as its proxy. The current arrangements are clearly not acceptable. Whatever the degree of interference, UKFI will increasingly be perceived as a fig leaf to disguise the reality of direct Government control. The current arrangements therefore cannot continue. It could be argued that bolstering UKFI’s independence from the Government is the way forward. It may be possible to bolster UKFI’s independence, but this would be extremely unlikely to end political interference in the State–owned banks. In the present economic and political climate, governments will continue to be tempted to influence or intervene in the banks. The Commission has concluded that UKFI should be wound-up and its resources absorbed back into the Treasury. (Paragraph 451)

Rt Hon. George Osborne MP, Chancellor of the Exchequer, rejected this conclusion in his Mansion House speech in June 2013, saying:

"RBS and Lloyds are led by their managements and their Boards in the interests of all shareholders, including the taxpayer.

It would be wrong for politicians to get into the day-to-day business of determining who they should lend to, and the details of their strategy.

UK Financial Investments plays an important role in making sure the Government’s shareholdings are managed on an arms length, commercial basis.

So one area where I disagree with the Banking Commission is on their recommendation that UKFI be abolished."

In August 2015, the Chancellor was criticised for selling the government's share in RBS at a 52-week low, incurring a £1.1 bn loss to taxpayers on the price originally paid. The Chancellor took his decision on when and how to sell on the basis of advice from UKFI, and a report he commissioned from Rothschild.

On 8 September 2015, the Treasury Committee took evidence from James Leigh-Pemberton, Executive Chairman, UKFI, and Oliver Holbourn, Head of Capital Markets, UKFI, on UKFI’s Annual Report and Accounts 2015. During the session, Mr Tyrie asked for the Committee to see the advice UKFI had provided to the Chancellor ahead of the government’s first sale of shares in RBS in August 2015:

Q1 Chair: Thank you very much for coming to see us this morning. It is an important hearing; there is a lot of public money at stake in these banks for which you have oversight. Could I begin by asking: was the decision that you took and the advice that you gave on RBS decisive with the Chancellor, or did he take the decision and tell you?

James Leigh-Pemberton: We provided advice. We had been providing advice to the Chancellor and Treasury colleagues over quite an extended period of time, really since the time of the strategic review and the announcements made by management in February 2014. As we got closer to the point where the decision to make the sale was finally made, we had provided more and more advice. We made a recommendation.

Chair: But who triggered it?

James Leigh-Pemberton: I think it was our recommendation that they should proceed. We sent advice up prior to the completion of the Rothschild report, and the Oral evidence: UK Financial Investments Ltd Annual Report and Accounts 2014-15, HC 444 2 Rothschild report was commissioned by Treasury probably to provide a second pair of eyes.

Q2 Chair: Can we see that advice, please?

James Leigh-Pemberton: Yes, by all means.

During the session, the Committee also asked for documentation outlining UKFI's cost of carry on RBS shares, based on the method that would be used to calculate this cost in a commercial environment; to set out the reasons why UKFI did not recommend an equity-linked bond as part of the first sale of RBS shares; for information about the safeguards UKFI put in place in relation to inside information ahead of a sale; and for UKFI's assessment of where its advisers are making a return for their work. A follow up letter was sent on 14 September 2015, requesting this information ( PDF 244 KB).

The response was received by UKFI on 28 September 2015 ( PDF 7.51 MB).

On 3 March 2016, Mr Tyrie wrote to Sir Amyas Morse, Comptroller and Auditor General, asking the National Audit Office to review the advice provided by UKFI, ( PDF 790 KB) to the Government, ahead of its first sale of shares in RBS in August.

Sir Amyas Morse responded on 4 April 2016 ( PDF 425 KB) to say that the NAO intended to do a full and broad review of the RBS shareholdings when the Government becomes a minority shareholder. This is to include an examination of the pattern of advice that was provided to HM Treasury.

Further information

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