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City regulator rapped for Lloyds bond stitch-up

City regulator rapped for Lloyds bond stitch-up

by Michelle McGagh Jul 20, 2016 at 13:50

Lloyds’ bond holders won a moral victory today after the official watchdog overseeing financial regulators criticised the Financial Conduct Authority for ignoring their lengthy dispute with the bank.

Last month Lloyds won a two-year legal battle with some of its investors after a Supreme Court ruling enabled it to buy back a series of high yielding bonds. This saved the bank money but deprived thousands of private investors of a valuable source of income.

A report by the independent Complaints Commissioner has questioned the FCA’s decision not to consider their grievances. The FCA had previously decided not to investigate bondholders’ allegations of mistreatment by Lloyds, despite the fact the bank had issued a faulty prospectus in its drive to redeem the ‘enhanced capital notes’ (ECNs) issued in the financial crisis.

Although the commissioner found the regulator’s decisions had ultimately ‘been reasonable’ it expressed concern about how the regulator had used its discretion whether the cases could be looked at in its complaints scheme.

‘While it is right that the complaints scheme should not be used as an appeal mechanism to substitute one possible regulatory judgement for another, it is equally important that it can be used to investigate decisions which may have been indefensible and where there is, in practice, no other route of review,’ said the commissioner.

Mark Taber, the bond expert who helped Lloyds’ investors in the case, said: ‘The report highlights major failings of the FCA in handling complaints from consumers and small businesses

‘The report slams the FCA over unnecessary delays, inadequate explanations, defensiveness, unwillingness, and also indicates problems caused by high staff turnover.’

Taber added that it was only after the commissioner stepped in that the FCA looked into the complaints against Lloyds and that it had taken ‘five months to date with no end in sight’, despite the cases being urgent as the bondholders battled the bank in court.

The FCA’s complaints scheme was the only direct route investors had to try and challenge Lloyds’ decision to redeem the bonds. Many also complained to their MPs, asking them to raise the issue with the regulator on their behalf.

‘I have evidence that the FCA’s complaints department has passed details of those who have complaints to the FCA executive, which in turn, has used the fact a direct complaint has been made by an individual as a reason not to consider or reply substantively to the issue raised by their MP,’ Taber said.

‘The FCA complaints team is supposed to be independent of the executive. This is combined with the unreasonable delay in investigating complaints is a very serious abuse of the complaints scheme by the FCA,’ he said.

The FCA said it could not comment on the issue.

Background to the battle

The ECNs started life as permanent interest bearing shares (Pibs), a type of bond that were converted by Lloyds in 2009 when the bank urgently needed to boost its regulatory capital.

However, the problem arose over whether a ‘capital disqualification event’ (CDE) occurred that would allow it to buy back the bonds, which pay interest rates of up to 11% and are expensive debts for Lloyds to service.

Lloyds argued that a CDE occurred last year when the Prudential Regulatory Authority (PRA) stress-tested the bank to see if it could withstand another crash but it did not include the ECNs as part of its reserves.

The High Court then ruled a CDE had not taken place as the regulator could include the bonds in a future stress test. Lloyds argued that it had made a mistake and had meant to insert a clause for a CDE into its contract that would have been triggered if regulators raised the amount of ‘tier one’ capital it had to set aside to above 5%.

At the time the Pibs were converted to ECNs the requirement was for 4% of capital, meaning the 5% trigger would have been easily reached as regulators forced banks to strengthen their balance sheets in response to the credit crunch.

Bondholders argued they had not been told about the 4% figure and that if they had, they would not have switched their Pibs to ECNs

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Comments  (12)

  • mark antrobus: 

    A very technical set of arguments, but in principle a debtor has defaulted on its obligations. Is there any such mechanism for those who have borrowed from Lloyds to do the same? Just goes to show why there is so much mistrust for the banks, as well as the regulators.

    17:18 on 20 July 2016

  • Paul Anderson: 

    "but in principle a debtor has defaulted on its obligations"

    No it hasn't, I've never read such absolute rubbish.

    17:40 on 20 July 2016

  • mark antrobus: 

    'This saved the bank money but deprived thousands of private investors of a valuable source of income' - tell the bond holders this was 'absolute rubbish'.

    17:47 on 20 July 2016

  • Norman E: 

    It is the FCA that is absolute rubbish. They are very good at persecuting small IFA firms and useless when pitted against the big companies and their expensive lawyers.

    17:54 on 20 July 2016

  • Paul Anderson: 

    "tell the bond holders this was 'absolute rubbish"

    I did and I do regularly, they asked for a Judgement on the call, they won the first one, then lost two appeals, they were wrong in their interpretation of the prospectus, Lloyds were correct, a CDE occurred, absolutely no default on any obligation whatsoever. The FCA were entirely correct in letting this matter be decided through the correct channels, it was a civil contract matter, Mr. Taber knocking on doors trying to get anyone who would listen involved only gave false hope to a very small minority of bondholders, his persistence is admirable, but in this case misplaced, as attested to by the final judgement.

    18:03 on 20 July 2016

  • Paul Anderson: 

    "City regulator rapped for Lloyds bond stitch-up"

    Could a headline be any more emotive and wrong at the same time?

    18:22 on 20 July 2016

  • JJon: 

    PA, how else would you describe the issuing of a 'claimed' defective prospectus which was supposed to be 'retail compliant' and not bothering to advise the market or noteholders about the 'claimed' defect prior to the High Court representations?

    Can you say the prospectus is compliant? It is honest?

    I think you know very well that significant concern extend particularly widely and that it is inappropriate that you should attempt to place blame on the shoulders of one individual who you choose to name.

    Your own credentials remain undeclared.

    22:15 on 20 July 2016

  • James Wilson: 

    "Mr. Taber knocking on doors trying to get anyone who would listen involved only gave false hope to a very small minority of bondholders, his persistence is admirable, but in this case misplaced, as attested to by the final judgement."

    Paul Anderson - you talk ill-informed nonsense. Mr Taber's persistence resulted in a High Court case to interpret the contract which was won by bondholders. This delayed redemption by over a year and so earned over £400m in extra interest for bondholders. Further the regulation of prospectuses in the responsibility, under act of Parliament, of the FCA and not the courts. This was accepted by Andrew Bailey (head of the FCA) today in response to questions about Lloyds ECNs in a Treasury Select Committee hearing. See -


    Irrespective of the outcome it is in the interests of all investors in listed securities that the FCA's position on enforcing the prospectus rules in resolved. The TSC would not be pursuing this otherwise.

    23:16 on 20 July 2016

  • Neal Morris: 

    I still do not really understand this at all. Correct me if I am wrong but Lloyds missled private investors into exchanging their form high interest perpetual PIBs into ECN's by way of a poorly worded and fault prospectus that was approved by the FCA.

    However no one has compensated the private investors for their losses. How can that be right ? Surely a few people being criticised by a watch dog is not the solution here - somebody needs to step up to the plate, apologise here and compensate those who accepted or purchased these bonds in good faith - presumably Lloyds - if Lloyds are not stepping up here then someone needs to make them step up surely ???

    23:56 on 20 July 2016

  • sgjhaghsdg: 

    Even without the convenient "drafting infelicity" as Lloyds called it, the prospectus was totally unsuitable to be sent to 100s of 1000s of private investors as it didn't specifically mention the risk of Lloyds doing exactly what they did to wriggle out of paying. The FCA were deeply involved, and knew this all along, and have even now said such products can't be sold to private investors as they are too complicated.

    16:13 on 21 July 2016

  • CHMM: 

    Quite simply, the FCA failed in its duties as the watchdog with powers to protect investors, large or small. This is exactly the kind of abuse it should be stamping out. Inept, incompetent, not fit for purpose are the expressions that spring to mind.

    12:18 on 26 July 2016

  • Garth Nicholson: 

    I was a member of the group that took Lloyds to the various Courts over this matter. I was astounded that the Supreme Court judges allowed the main principle of the case - a faulty prospectus worded by Lloyds - to turn on a phrase invented by a Golden Circle Lawyer - 'drafting infelicity'. Had they translated that in to normal direct English it would have read 'Drafting Mistake'. The response to this that would have saved an awful lot of Court time and money should have been 'You - Lloyds - made a mistake and you should pay, the Prospectus means what it said, not what you would like it to say'.

    18:24 on 13 March 2018

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