Lloyds’
bondholders have been dealt a major blow after the Supreme Court announced that
the bank had acted lawfully in forcibly repurchasing £3.3bn of their bonds at ‘par’,
or face value, thereby depriving investors of valuable income at interest rates
of up to 16%.
The bank
had always maintained that the bonds, or enhanced capital notes' terms and
conditions permitted it to buy back the bonds in certain circumstances
concerned with the assets' role as reserve capital.
Veteran
campaigner for investors’ rights, Mark Taber, disputed Lloyds’ claims that the
bonds had been disqualified as capital and took the case to the High Court.
The High
Court originally found for the bondholders, but its verdict was overturned by
the Appeal Court; five Supreme Court judges supported that decision by a
majority of three to two.
Announcing
the judgement Lord Neuberger said: ‘I would dismiss the
trustee’s appeal, on the basis that I consider that a capital
disqualification event has arisen.’
The
dissenting judges said: ‘These were long-dated securities, which cannot
have been intended to be redeemed early except in some extreme event
undermining their intended function and requiring their replacement with
some other form of capital.’
Mr Taber
said: ‘Such a close split decision raises massive issues over the role of
the regulators in this. In particular, the full judgment makes no reference to
the arguments made in court over the statutory requirements that [bond]
prospectuses 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 Financial Conduct Authority [the City regulator].
‘Despite
my repeated requests to Andrew Bailey [the head of the FCA] to make the
information available to the Supreme Court, the regulators have refused to
disclose exactly what they and Lloyds knew about forthcoming changes to capital
requirements at the time the ECNS were issued.
‘I believe
the changes they knew about, which were not disclosed in the ECN prospectus,
meant that a capital disqualification event was a certainty at the time
the ECNs were issued. If the court had been told this I think it would have
made a difference.’
Alexis
Brassey of Cavendish Legal Group, working on behalf of the bondholders believes
that the close verdict shows that the issues in this case were far from clear: ‘It
is surprising that the Supreme Court allowed Lloyds to deprive investors of
their return on what can only be described as a convoluted technicality based
on a conceded drafting error in the document [which Lloyds admitted in
the High Court].
‘The
broader issue for the bond market, which was not raised in this case, relates
to the fact that additional contract uncertainty must now be factored into
pricing of certain financial instruments. [Lloyds] investors will now
be considering options in respect to further action relating to the prospectus.’
In
announcing the verdict in its favour to the Stock Exchange, Lloyds Banking
Group said: ‘The Court held that a capital disqualification event (CDE), as
defined in the conditions of the ECNs, has occurred.
‘Throughout
the process the group has sought to balance the interests of all stakeholders
and the group welcomes this decision from the Supreme Court, which confirms the
occurrence of a CDE and supports the group's redemption of all series of ECNs
earlier this year.’
Asim
Bajwa, head of advisory at Canaccord Genuity Wealth Management, said: ‘Today
is a sad day for the rights of bondholders. It was a David and Goliath battle,
but in this instance the giant won.
‘The
problem for the retail investors who have been hit by this ruling is that
many are elderly with a low risk appetite - they were relying on this income
and their living standards will be hit in many cases. It will certainly
make investors considering investing in corporate bonds think twice.’