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 ‘ 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.