The chief executive of the Financial Conduct Authority has dismissed concerns Lloyds Banking Group’s decision to call in more than £3bn of high income-paying bonds breached prospectus rules.
Andrew Bailey had been asked whether the FCA would take any action following the Supreme Court’s decision to back Lloyds last month.
The investment terms meant Lloyds could redeem the ‘enhanced capital notes’ early at face value, as they no longer counted towards the bank’s capital buffer.
Investors believed the bonds were worth more than par and the terms did not allow for them to be called in early.
Mark Taber, a researcher at Fixed Income Investments, said the Supreme Court’s judgment made no reference to arguments made in court over the statutory requirements that prospectuses should be accurate and contain all the information investors need to make an informed decision.
Responding to Mr Taber’s concerns, Mr Bailey said: “The FCA has considered whether Lloyds’ acceptance that the drafting of certain clauses in the underlying trust deed were, following changes to the capital rules, unclear and amounted to a breach of our prospectus rules and has concluded that it did not.
“I am satisfied that is the right decision, the risk of a capital disqualification event occurring was disclosed in the prospectus.
“I do not share your view that even more explicit disclosure of the stress-test level, as it was in 2009/10, would have made the risk of a CDE easier to understand,” Mr Bailey stated in correspondence. “The recent legal process was based on the stress test in 2014, which was different to 2009/10.”
In March 2009, the bank failed a stress test carried out by the regulator, showing it had a shortfall in core tier one capital.
“Your position akin to claiming that no action should be taken if a pedestrian is run down by a drunk, speeding motorist just because they know there is a risk involved in crossing the road.”Lloyds therefore implemented a strategy to raise the necessary core tier one capital, involving a rights issue and a restructuring of some of its securities as enhanced capital notes, which provided an advantage in the context of the regulator’s stress tests.
Mr Taber has since written to Andrew Tyrie, the chairman of the Treasury Select Committee, about this issue.
Writing back to Mr Bailey, he said: “Your response suggests that issuers can circumvent the prospectus rules by including an endless list of general risk factors in a prospectus while neglecting to disclose specific material information relevant to those risks.
“Your position akin to claiming that no action should be taken if a pedestrian is run down by a drunk, speeding motorist just because they know there is a risk involved in crossing the road.”
