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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.
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