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Lloyds bondholders lose Supreme Court battle

Holders of Lloyds bonds will lose out on income after the Supreme Court sided with the bank over their redemption.

Lloyds bondholders lose Supreme Court battle

Lloyds (LLOY) bondholders will lose out on income after the Supreme Court sided with the bank the redemption of its bonds.

Thousands of investors will see their income cut after the Supreme Court ruled Lloyds was allowed to redeem high-interest paying bonds following a lengthy legal battle.

The Supreme Court ruled said the bank was within its rights to stop payments and redeem the 'enhanced capital notes', some of which pay generous yields of up to 11%. The ruling means investors, many of which are pensioners, will not be liable to compensation from Lloyds to cover the income they have lost.

Bondholders lost by a whisker on a 3-2 vote in Lloyds’ favour.

Mark Taber, a fixed income expert who has been helping the bondholders, said the ruling raised ‘further massive issues over the role of the regulator’ in the bond battle. He argued it posed questions over whether the Financial Conduct Authority (FCA) failed in its duty to ensure bondholders were properly informed about their investment.

He said the judgment made ‘no reference to the arguments made in court over the statutory requirements that [the bond] prospectus should be accurate and contain all the information investors need to make an informed decision’.

‘If the courts will not consider these statutory requirements in interpreting prospectuses then it must fall on the FCA,’ he said.

Taber said he believed both Lloyds and the FCA were aware that capital requirements for banks were due to change when the bonds were issued, meaning they knew that the small print in the bond prospectus could be enforced - because a ‘capital disqualification event’ would occur - and the bonds redeemed.

‘I believe the changes they knew about, which were not disclosed in the ECN prospectus, meant that, under Lloyds' claimed intention, a capital disqualification event was a certainty at the time the ECNs were issued,’ said Taber.

‘If the court had been told this I think it would have made a difference.’

Lloyds said in a statement: ‘Throughout this process, the group has sought to balance the interests of all stakeholders including our 2.6 million shareholders, as it takes steps to meet the requirements of the changing regulatory landscape and manage its capital requirements efficiently.’

The bad news for bondholders would be a relief for Lloyds shareholders, said Hargreaves Lansdown senior analyst Laith Khalaf.

‘Lloyds has won the day, but it was a really close run thing. Lloyds shareholders will breathe a sigh of relief that a whole new avenue of redress has not opened up, just as the cost of payment protection insurance claims is coming to an end,’ he said.

‘Bondholders have basically lost out on future interest payments as a result of a shifting regulatory landscape, which encouraged the use of hybrid debt to bolster banks during the financial crisis, but has since seen new standards being set.’

Khalaf said the court case highlighted the ‘tangled web of terms and conditions’ of ‘hybrid debt securities’, the sale of which has now been restricted to ‘sophisticated investors’.

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 its 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.

13 comments so far. Why not have your say?


Jun 16, 2016 at 13:45

As I said before, in today's world these super rich some called 'pensioners' have demonstrated unbelievable, yet predictable greed in their actions. The more wealthy, the more greedy and probably corrupt.

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Jun 16, 2016 at 15:42

123000 unsophisticated investors flogged a product with a dodgy prospectus and then ripped off in a deeply callous and calculating way. That it's taken three courts to finally decide, and the judges were only at a 3:2 majority, shows that a lay man wouldn't stand a chance of understanding what they were being sold.

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Keith Cobby

Jun 16, 2016 at 17:37

This further illustrates that the banks are not suitable investments for private investors. They are now quasi-Government entities.

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william Westlake

Jun 16, 2016 at 21:27

I don't quite see how an investor having their capital returned to them after a period of being paid a hefty yield equates to being "ripped off in a deeply callous and calculating way." Perhaps I could be enlightened further, before I fall into the same trap.

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Jun 16, 2016 at 22:14

These were sold to elderly customers as a kind of annuity. They needed the income, the banks needed the capital, everyone happy. But interest rates moved, just as annuity rates did, and to get your capital handed back to you and be left without the income stream you bought and were relying upon isn't much help.

Even worse, many people bought these bonds on the open market for more than face value, so they lose the income and a big slug of capital.

Sure, buyer beware, but the prospectus was flawed and Lloyds used every trick in the book to get the outcome they wanted. I'm sure some tonight are toasting their success with Cristal and triple brandies, whereas many others in completely different walks of life are staring into their cold tea and wondering what they did wrong.

They trusted a bank, specifically Lloyds.

Big mistake.

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william Westlake

Jun 17, 2016 at 07:24

I clearly need to see an optician, since I also fail to see how the buyer of a bond being elderly justifies any kind of long term subsidy from the lloyds share holders.

The buyers of these bonds did very well out of them while they owned them. Lloyds understandably pulled the shutters down, and the investors could perhaps count their profits and be thankful that they didn't buy bonds in Northern Rock instead.

If the property market suddenly falls are these same people suddenly going to demand a hand out from the rest of us because the swimming pool in their garden is now worth less?

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Nathan Hill

Jun 17, 2016 at 08:31

The Supreme Court found by a 3:2 majority with a dissenting minority that Lloyds action was not illegal, despite their admission of faulty drafting in the prospectus and the failure of the regulator to intervene. Just because an action is not illegal doesn't make it right, either morally or as a business decision. Banks need lenders' trust otherwise they cannot survive in the long term. I have today closed my accounts with Lloyds Bank and would urge other depositors, investors and lenders to consider whether their money is safe with this institution, which has got away with rewriting the terms of its borrowings.

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Jun 17, 2016 at 11:58

@william Westlake, you are missing the point (actually, all of them) entirely. These are unsophisticated investors who were looking for something that paid more than the pittance annuities provide in their retirement. They were (at least as I understand it) professionally advised, and put their money in Lloyds PIBS, which Lloyds then offered to swap for ECNs. As it looked like the ECNs were a better deal, the pensioners were advised to accept the swap. Lloyds then declared a CDE and invoked a clause in the contract to redeem the ECNs, but this clause had unaccountably been omitted from the prospectuses that the owners' advisors had been sent. Had this clause been there then the pensioners would no doubt have been advised to keep their PIBS.

So the most important point is that the Supreme Court has now in effect nullified the statutory requirement that prospectuses for financial instruments must be accurate and contain all relevant information, and any unscrupulous institution can now say, "Oh, silly me, did I omit to tell you that I can redeem your investment any time it suits me even if it leaves you at a disadvantage?"

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Nathan Hill

Jun 17, 2016 at 12:07

The Supreme Court found by a 3:2 majority with a dissenting minority that Lloyds action was not illegal, despite their admission of faulty drafting in the prospectus and the failure of the regulator to intervene.

Just because an action is not illegal doesn't make it right, either morally or as a business decision. Banks need lenders' trust otherwise they cannot survive.

I have today closed my accounts with Lloyds Bank and would urge other depositors, lenders and investors to consider whether their money is safe with this institution, which has got away with rewriting the terms of its borrowings.

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Jun 19, 2016 at 09:45

William Westlake, I fear you on't actually wish to understand this lest you fall into the same trap as you have clearly decided the owners of theses bonds got what they deserved. Yet in fact you do indeed need to understand what went on here, and it is a many fold issue.

Lloyds bought some other banks/building societies who had issued Permanent Interest Bearing Securities (in case you missed it there is a clue as to how long these things should last, in the title). These were issued in times of higher interest than prevail now, so yes, they did pay a good coupon. But they are called Permanent for a reason, in that they don't expire. Ever. And while the interest rates were/are higher than rates are now, that could feasibly go the other way, leaving the owners with a permanent rate lower than the current prevailing rate, so it's not always good for the owner or bad for the bank, and it was the cost of raising money at the time they were issued.

These people enjoyed a good income, and some sold their PIBS to others at later times, when interest rates had changed, and these new owners got their rate locked at a new prevailing rate, as the PIBS sold above or below the par value.

The world then exploded for the banks and they desperately needed capital to shore up their accounts and a better way for them to have this was to convert these PIBS to another instrument, pushed very hard by the banks and also the government, Lloyds being one of the main issuers. Owners of the PIBS, and every single professional adviser, it appears, saw these as a fair swap, as their terms were similar and would be helping the banks out too.

Now Lloyds arbitrarily, and against the written terms of the prospectus, decided they want to cancel the ECNs and make the "very fair" offer of buying them back at par - overnight destroying the premium that had been built into the price due to the secondary market pricing them at a much higher price due to new prevailing interest rates. So not only have the original long term owners been deprived of a fair interest rate on their original investments, but any new owner from the secondary market has been completely screwed in capital terms, as well as perhaps losing a good income, depending on what price they bought at.

This is nothing like buying a house and the price falling. Everyone should and does know this can happen. This is like buying a fixed rate savings account which the bank later decides it does not want to pay, so cancels your rate, and at the same time takes half of your capital, just because it can, and because interest rates have fallen since they sold it to you. This is like taking out a fixed rate mortgage, and the bank raising the rate one year into the 5 year term, because other rates changed, and them also adding 30% to the amount you owe them. In fact, this is like buying a guaranteed income and then being told the seller has changed his mind and it is not now guaranteed - because this is exactly what Lloyds have done.

So, caveat emptor. The British justice system have just established a precedent that any bank can renege on any condition in any contract they set up, just by going to court and saying they made a mistake in the terms, and really meant something else, at a later date when it suits them. So please do not dismiss this as a load of rich people getting what they deserve, and have a think about what has been allowed to happen here, and could certainly happen to you, if this now gives other banks smart ideas about how they can change history if it suits them.

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peter mcque

Jun 19, 2016 at 11:23

I had a 5.5% bond and did not take up the ECN offer. Not sure if it was a good move or not.


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Jun 19, 2016 at 14:49

the institutions that held ECNs were paid off to keep them sweet. Joe public were told to f*** ***. This is how lloyds balances their stakeholders. Need I say anymore.

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Andrew Vincenti

Jun 20, 2016 at 11:31

Guys, it's pretty obvious what's happened - the Lords, being filthy rich bastards are siding with Lloyds; nothing unusual here. The rich help the rich to screw the rest of us. It's that simple; no matter what fancy legal jargon their Lordships wrap it up in. Did we really expect anything different? The common person being protected; oh, please. It will never happen.

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