Campaigners blame FCA for Lloyds redeeming ECNs

Campaigners blame FCA for Lloyds redeeming ECNs

IFAs and wealth managers should not have to bear the brunt of complaints over failed high-income bonds after issuer Lloyds Banking Group redeemed them last week, according to investors.

Thousands of investors who looked set to lose the bonds, known as enhanced capital notes (ECNs), were thrown a lifeline on 8 February after the Supreme Court gave them the chance to appeal on 21 March against the bank’s decision to buy back the ECNs at face value and stop paying as much as 16 per cent a year in interest.

Lloyds Banking Group redeemed the bonds anyway the following day, 9 February.

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Mark Taber, who is leading the investors’ campaign, slammed Lloyds Banking Group and the FCA for not intervening to protect investors.

He said: “IFAs or wealth managers are investing others’ money, yet the FCA refuses to do anything to even put the basics in place. It’s a question of, if you don’t like it, complain to the IFA, which is unfair as it’s not them.

“The problem is with the bond issuer not having rules and not being regulated, so consumers are not being treated equally.”

A FCA spokeswoman pointed out that last November, Antony Townsend, the Complaints Commissioner, ruled that the FCA’s decision not to intervene was within the range of decisions the regulator could reasonably take.

She added: “While the FCA is not a party to the legal action in this case, we have monitored the transaction closely and have been in contact with Lloyds Banking Group and the trustee throughout.

“Our view remains that it is for the courts to decide the legal effect of the clauses under dispute.

“Lloyds Banking Group has confirmed that it has mechanisms in place to compensate investors if the Supreme Court grants leave to appeal and ultimately decides in favour of the investors.”

The bank issued the bonds to investors in 2009 to act as a cushion in case the bank’s capital fell below what was required.

ECNs are hybrid bonds which switch into shares if the bank’s capital ratio were to fall below 5 per cent, and are aimed at helping banks through the ‘stress tests’ set by the regulators.

However, changes to regulation meant ECNs could no longer be included as part of the company’s capital buffer, and were therefore not taken into account during the Prudential Regulatory Authority’s stress test in 2014.

A spokeswoman from Lloyds Banking Group said: “Regarding compensation, we have stated that if the Supreme Court determines that a capital disqualification event had not occurred, the group would compensate fairly the holders for early redemption.”

Adviser view

Darius McDermott, managing director of Chelsea Financial Services, said: “I have discussed this with a couple of fixed income managers over the past couple of months and the aggregate view is that Lloyds has behaved very badly.”