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Lloyds blocks investors' court appeal in bond battle

Lloyds Bank has objected to bondholders' application for a Supreme Court hearing over bond dispute.

 
Lloyds blocks investors' court appeal in bond battle

Lloyds is trying to scupper a bid by bondholders angry at the bank’s attempt to force them to sell their investments from launching a further challenge in the courts.

In December, over 100,000 investors in Lloyds’ ‘enhanced capital notes’ (ECNs) were left disappointed after the Court of Appeal ruled in the bank’s favour, forcing them to sell their high-yielding investments.

The bondholders purchased the bonds, some paying generous yields of up to 11%, as part of a bank rescue plan at the height of the financial crisis.

Despite an early win in the High Court that allowed bondholders to keep their investments, the Court of Appeal sided with Lloyds after the bank said it had ‘made a mistake’ in its contracts with bondholders.

When the Court of Appeal handed down its verdict it said the bondholders would not be able to take the case to the Supreme Court, meaning the bondholders would have to ask for, and gain, permission from the Supreme Court for another hearing to take place.

Trustees, on behalf of bondholders, made an application to the Supreme Court for permission to appeal but according to Mark Taber, a fixed income expert who is assisting bondholders, Lloyds has filed an objection to the application.

In its objection, the bank said ‘the proposed appeal does not raise any arguable point of law of general public importance which ought to be considered by the Supreme Court at this time’.

It added that ‘the decision has no wider significance to anyone other than the issuers and holders of ECNs’, which are ‘unique, bespoke, instruments issued by Lloyds to provide the capital enhancement necessary to meet the capital requirements of the regulator’s stress test, as an alternative to participating in the government’s asset protection scheme’.

Questions over integrity

Taber said, in a letter to the chief executive of the Financial Conduct Authority (FCA) Tracey McDermott, that Lloyds’ objection ‘raises further questions over the honesty and integrity with which Lloyds is acting’.

He is particularly concerned by the part of the objection that states the bond battle is of little public importance.

‘Lloyds [is using the objection] to play down the public importance of the key issues and is dishonestly portraying the number of consumers concerned by the case, including those who may have sold over the past two years as a direct result of Lloyds' actions, which are at the heart of the legal proceedings,’ he said.

Lloyds is disputing that 123,000 investors are being affected by the forced sales but Taber said the figure ‘came to me in writing from the Lloyds Bank supervisor at the [regulator] at the time of the ECN exchange offer’.

Taber also challenged Lloyds’ defence that an ‘obvious mistake’ was made in the contracts and asked why the ‘obvious mistake’ was not picked up by Lloyds, the Treasury or the regulator.

‘Lloyds has not produced a shred of evidence to suggest that the fixing of the definition of core capital in the redemption clause in the prospectus was a ‘mistake’ and even the FCA was not aware until notified by a member of the public during the High Court hearing in May 2015 – over five years after the prospectus was issued and approved by (then regulator) the Financial Services Authority,’ he said in his letter.

Taber has called on McDermott to use the powers given to the regulator to protect consumers to come to the aid of bondholders.

‘It is quite amazing that the FCA, as the public authority responsible for consumer protection in financial markets… allows Lloyds to act with such dishonesty in an attempt to abuse the legal process for their own financial gain to the detriment of consumers,’ he said.

‘In many professional sports, tennis being the latest example, players who dishonestly influence the outcome of a match for their own financial gain have been banned for life and/or imprisoned.’

He added that the FCA should make it clear to the Supreme Court ‘that an appeal on the question of whether over 123,000 retail investors should be taken into account by the court… is a matter of public importance from both consumer protection and market integrity perspectives’.

Lloyds declined an offer to comment.

Background to the battle

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

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

17 comments so far. Why not have your say?

Tim Kempster

Jan 20, 2016 at 15:29

Shocking response by Lloyds to try to block a Supreme Court hearing. The exchange offer was made to 120,000+ retail investors. We have that from the horses mouth. They admit a mistake but say that its not in the public interest for the Supreme Court to rule on how these types of mistakes should be sorted out.

Clearly if the FCA has to intervene here. The prospectus that Lloyds published was not clear, had errors and even after the dissection over many months of top legal minds isn't clear.

The Supreme Court needs to rule here. Is it just and right for retail investors to be expected to spot mistakes and study many thousands of pages of technical background in order to correct them (when nobody else did)? It seems that if this goes unchallenged that's exactly what investors will be expected to do.

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simon corkswill

Jan 20, 2016 at 15:39

Lloyds continue to demonstrate that Bankers have learnt nothing since 2008 and deserve every mis-fortune they encounter , they firstly manipulated the price of these instruments down to make their redemption offer , action taken by authorites ? None , apparently price manipulation is Ok .

They then pretend that only a few holders of these are Retail investors , which I believe Mr Taber is able to prove otherwise.

To continue to suggest it is of no public importance is outrageous , clearly if one can not rely on a prospectus and at the very least to be notified if there is a significant error , then the implications for investing and for the cost of funds are of considerable and that matters to everyone .

Although its not being said , one has to wonder at the back of all this , who owns large chunks of Lloyds and wants to sell it ? Nothing to see here ; I wonder ?

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David C Hatch

Jan 20, 2016 at 16:09

If Lloyds "accidentally" left out a clause that would have made the bonds unsaleable how are retail investors supposed to know?

If Lloyds deliberately left out the clause and are now changing the contract retrospectively ... surely this is a matter of "general interest".

Or are we happy that contracts can mean whatever large organisations wish them to?

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Law Man

Jan 20, 2016 at 16:18

Speaking as a human person rather than a lawyer, it seems outrageous that Llods Bank can resile from the clearly understood obligation. I agree that the SC should look at it.

If eventually Lloyds Bank wins, I hope that in future regulators will be ruthless in enforcement action for any future failings.

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Laughton

Jan 20, 2016 at 16:36

Law Man - surely the danger is that if Lloyds wins then future regulators will do exactly as they have this time - nothing. What we need is for this to be heard and ruled on by The Supreme Court and should they find against Lloyds then they should also speak out about the regulators failings in the matter. Maybe that would force future regulators to do their job.

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Hawkipa

Jan 20, 2016 at 17:02

One of the most concerning elements of this is not Lloyds complete disregard for the very retail investors that came to their rescue in their time of need, but the lack of action from the FCA & Treasury to protect those retail investors.

It is incredulous that any one could claim there is no public interest. A drafting mistake that no one at all noticed and yet retail investors are retrospectively expected to have spotted and reacted accordingly to a mistake that no one was aware of. The FCA can not simply ignore the issue and allow Lloyds to muscle its way to a questionable ruling.

Lloyds actions should also be brought to account by authorities who have the power to intervene. This is a shameful episode in Lloyds history.

The only decision which is legally and morally correct is the original judgement and that is what the Supreme Court should be given the opportunity to determine.

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Hawkipa

Jan 20, 2016 at 17:04

One of the most concerning elements of this is not Lloyds complete disregard for the very retail investors that came to their rescue in their time of need, but the lack of action from the FCA & Treasury to protect those retail investors.

It is incredulous that any one could claim there is no public interest. A drafting mistake that no one at all noticed and yet retail investors are retrospectively expected to have spotted and reacted accordingly to a mistake that no one was aware of. The FCA can not simply ignore the issue and allow Lloyds to muscle its way to a questionable ruling.

Lloyds actions should also be brought to account by authorities who have the power to intervene. This is a shameful episode in Lloyds history.

The only decision which is legally and morally correct is the original judgement and that is what the Supreme Court should be given the opportunity to determine.

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Gibson

Jan 20, 2016 at 17:25

There is something seriously wrong here. The Court of Appeal wants to leave consumer protection to the FCA according to their judgment, and to assume a remarkable level of expertise amongst holders, many of them elderly. Meanwhile the FCA are leaving consumer protection to the courts.

Lloyds offered ECNs to 123,000 retail holders and now appear to be denying all knowledge of that.

It is essential that this case reaches the Supreme Court. There is a clear public interest in knowing whether or not we can rely on a prospectus. The FCA's inaction here is shameful

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dandigirl

Jan 20, 2016 at 17:38

I started to read Lloyds' reasons as to why permission to appeal should be refused and stopped at their point 1 - that there was no arguable point of law of general public interest to be considered by the Supreme Court! How anyone can write such rubbish and for Lloyds to allow it to go forward in their name is just unbelievable. But I guess this says much about Horta-Osario and the immorality of the Board of Lloyds Bank chaired by Blackwell.

I just hope that those deciding whether or not to allow the appeal can see beyond this rubbish.

.. and words fail me regarding our regulators. Where are you Mr Bailey? Just who is supposed to be looking after consumers' interests? Not Mr Bailey, it seems.

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apensioner

Jan 20, 2016 at 18:02

More nonsense from Lloyds.

I have never held ECNs but have been interested in the case because it seems to indicate - so far - that, as an investor, I should not believe what is written in a share prospectus. That is certainly a matter of general public importance.

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apensioner

Jan 20, 2016 at 18:19

And nobody is complaining about not being told. The bondholders are merely insisting that the prospectus should mean what it says, rather than having an alternative (and absent) meaning invented on the basis of some very imaginative analysis.

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Anwar Shah

Jan 20, 2016 at 18:25

Whether anyone with proper power wants to believe it, Lloyds is being mollycoddled until the shares are sold off the government hands.

There has been an error of judgement by the litigation team to present this at this time, I mean did they honestly think they can win when the government is in bed with the banks, I know the law is black and white but the people managing them are corrupt. PPI refunds was an error that suited the government, this isn't, neither was the business loan thingy I read some few months ago (FCA).

It is fair to assume there is probably no 'actual' email of them realising the so called error in the contract, probably lots of evidence to support the opposite, would be interesting if a disgruntled employee/whistle blower from Lloyds popped out of nowhere to claim the bounty and spill the company secrets.

Also I totally agree about the precedence this ruling has set out, basically you can change anything at any time when ever it suits you... Wrong example to show the world of investors!

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Paul Nash 2

Jan 20, 2016 at 18:45

Lloyds demonstrates yet again that it has learned nothing from past misdemeanors and simply cannot be trusted. Essentially they are attempting to cheat retail investors using some highly dubious legal technicality.

It is blindingly obvious that this is of importance to people other than the retail investors who are being shafted!

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Neal Morris

Jan 20, 2016 at 19:13

I have emailed the FCA but they told me it was a matter for the courts. However I actually was one of the private bond holders who turned up to hear the case in court last time on behalf of both myself and my elderly house bound mother. The court of appeal did not take the matter into account on behalf of private investors because (I was told) the Trustee did not have a public indemnity against erroneous costs from Lloyds.

So we have a situation here where the FCA have ignored private investors and the court have also ignored private investors. Somebody or somebodies here at the FCA are not doing their job.

The question has to be why an earth are the FCA not doing their job?

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Anonymous 1 needed this 'off the record'

Jan 20, 2016 at 19:19

Its all revolves around the government. I am pretty sure there is laws on it, but it'll be more up to you to find it, don't rely on solicitors and lawyers these days... they are as good as estate agents walking you around a house.

Probably say the investors (which isn't me) should actually start drumming harder in the media, the last I remember hearing about this many months ago... its sort of being ignored when its actually pretty serious.

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Letapt

Jan 20, 2016 at 20:18

What use is a prospectus? I base an investment decision on an offer document, apparently this offer document was approved by the FCA for Retail use. Now we are told it does not matter what the prospectus says! So what has the FCA done about this? Is this not what they are set up to do - ensure proper functioning of markets? This should never have ended up in court, this is a matter for the regulators, pure and simple.

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Gibson

Jan 21, 2016 at 15:02

There is something very wrong here. The FCA have assumed that retail bondholders rights, will be protected by the courts. Meanwhile the courts have ruled that consumer protection is not a matter for them, so retail investors, many of them elderly are caught between a rock and a hard place.

The FCA must act now and pressure the Supreme Court to hear the case as a matter of public interest. They must also ensure that they fulfil their consumer protection role.

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