Treasury 'risks damaging shareholders in banks'

MPs are worried about the relationship between UKFI and Treasury mandarins

An influential committee of MPs will today call for root-and-branch reform of the Treasury's dealings with UK Financial Investments, the organisation charged with overseeing the state's multi billion-pound stake in the banking sector.

The Treasury Select Committee's report into the administration and expenditure of the Treasury also expresses "alarm" at low staff morale and calls for stronger links between National Savings and the Post Office.

The report expresses fears that private shareholders in part-state owned banks such as Lloyds and Royal Bank of Scotland could be damaged because of Treasury interference. UKFI is supposed to be kept at arm's length from the Government, behaving like any other shareholder and not having access to confidential information that the Treasury has that is not available to commercial investors. But the report says that concerns were raised after questioning Louise Tulett, the Treasury's group director of finance and procurement and a UKFI board member.

It says: "In an earlier report we stressed how important it was that the arm's-length relationship between the Treasury and UKFI was clearly defined so that what constituted appropriate behaviour could be clearly discerned. It appears to us that the relationship between the Treasury and UKFI remains a work in progress, and we recommend that the Government considers whether the formal terms of the relationship need some redefinition in the light of experience. It is important that the lines of demarcation are clear, and reflect the reality on the ground, not least to ensure that other shareholders are properly protected."

Such a finding could call into question the chances of a successful sale of the Government's stake in the banks, given that both the Treasury and UKFI have insisted that the organisation needs to behave like an ordinary shareholder if investors are to feel confident about buying into future bank privatisations. UKFI has recently endured a shake-up of its management team following the departure of its founding chief executive, chairman and other senior staff.

On the issue of morale, the report accepts that the Treasury faced "unprecedented challenges" during the financial crisis but says it is "particularly concerned by the dire results for HMRC of a cross-Government staff survey pilot study conducted in February 2009, which ranked HMRC against the responses of staff in 10 other government departments. Out of a total of 67 ranked questions, HMRC is ranked last or next to last for 53 questions."

The Treasury sub-committee chairman, Michael Fallon, said: "We are particularly alarmed by the low level of staff morale and engagement at HMRC, and its effect on performance. We are deeply troubled by the apparent absence of any plan to ameliorate the situation, and call on HMRC management to redouble their efforts here."

The report says National Savings has to tread "a careful path" in future to both avoid distorting the market and from seeing a large outflow of funds to other institutions. But on the issue of the Post Office link being downgraded, it says: "Whilst we recognise that it may make business sense for NS&I to move away from the Post Office, it is a government-owned body. We recommend, therefore, that the Government considers whether there is a wider public interest in retaining stronger links between the Post Office and NS&I both to ensure that all sections of the public have easy access to NS&I products and to help secure the future of Post Offices."