UK Fina ncial Investments Ltd
100 Parliament Street, London, SW1A 2BQ
James Leigh-Pemberton
Chairman
www.ukfi.co.uk
2.0 ~
December 2016
TREASURY SELECT COMMITIEE: EVIDENCE SESSION 16 NOVEMBER 201 6
During the Treasury Select Committee hearing on 16th November, you asked for further detail on the
circumstances in wh ich UKFI might recommend undertaking a retail offer of bank shares owned by the
Government, and what constraints there might be on this method of disposal.
As we outlined at the hearing , a sale of shares to retail investors remains part of our disposal toolkit. A sale
to the general public can, under the right circumstances, unlock an additional source of public demand and
therefore add size and competitive price tension to a sale process. Including a well-structured retail offer at the
same time as an offer to institutions as part of a sale allows the largest possible volume of shares to be sold
at a single price point.
The principal challenge in carrying out a retail offer relates to timing and exposure to market conditions. A
large scale retail offer needs careful planning and significant time - preparation will typically take a number of
months from the time the decision is taken to proceed. As Lord Myners' Independent Review of Primary Share
Disposals to the Secretary of State for B.I. S. reported, the 'principal disadvantage of a direct offer is that it
adds considerable rigidity to the process'. This rigidity means that the seller of the shares is effectively exposed
to markets for a significantly longer period than in the case of other methods of sale.
In the case of a retail offer, there is some exposure to markets throughout the preparation process, and the
seller is fully exposed to moves in the price of the shares during the retail offer period itself. Previous retail
offers have typically allowed two weeks in order to ensure that all members of the public have the time to
consider the offer. The price at which the shares are sold is determined by reference to the market price at the
end of that two week offer period . (By way of comparison, a conventional accelerated institutional offering
takes less than 24 hours to complete.) The markets may perform well or poorly during an offer period but it is
better to be exposed to this uncertainty when markets are stable and benign and there is a reasonable chance,
all things being considered , that they could remain so. Equally, when markets are more volatile, it will be more
challenging to make the case from a value for money perspective that the risk is worth taking.
As precedents illustrate, it is also normal to provide incentives for the general public to participate in a retail
offer to stimulate demand. Such incentives may be more important in generating demand when the public
already have the opportunity to buy shares on a daily basis at market prices, as in the case of Lloyds Banking
Group and the Royal Bank of Scotland, which are both actively traded in the market. While these incentives
can bring benefit to individuals participating in the retail sale, they can have implications for the value realised
for all taxpayers.
UK Financial Investments Limited is a company registered in England and Wates with company number 06720891. Its registered office is at 27-28 Eastcastle Street, London W1W 8DH. Consistent with the principles set out in Managing Public Money, all share sales must be designed to deliver
value for money to the taxpayer - this is also an overarching objective for UKFI as set out in our Framework
Document. The rigidity of the sale process and the typical incentives which are required to ensure a successful
retail offer are important factors which must be evaluated against the advantage of capturing an attractive price
in the largest possible size.
Considerations of wider policy objectives of a retail sale fall outside UKFl's mandate. although we note that
while an offer to retail investors provides them with an opportunity, it also exposes them to risk. This risk is
mitigated if markets are, and can be expected to remain, calm for sustained periods. Such periods also allow
the planning and execution of a retail offer in an environment where the risks to achieving value for money are
reduced.
In summary, therefore, we continue to believe that in the right circumstances a retail offer may be an effective
method of sale; in particular w hen it benefits the taxpayer for a wide pool of investors to be competing to buy
shares, and when markets are calm and the prospects for them remaining so are reasonable. We will continue
to keep market conditions under close review and consider all methods of sale, including a retail offer, in light
of those conditions.
Yours sincerely,
James Leigh-Pemberton
Chairman
UK Financial Investments Limited is a company registered in England and Wales with company number 06720891 . Its registered office is at 27-28 Eastcastle Street, London W1W 8DH.