Happy New Year everyone and bear with me here as I am going to try to explain something very complex in a way even retail investors can understand 😉
On the 16 December Lloyds Bank delivered (cynics might say buried in the Xmas holiday season) a festive message to the retail investors who helped save the bank and taxpayer back in 2009 by accepting Enhanced Capital Notes (ECNs) in exchange for their cosy retail preference shares and former PIBS. In simple terms the message is that Lloyds intends to redeem the ECNs early at par, and so avoid paying income to holders until maturity, if the PRA gives them the green light.
How can they do this you ask? Well it is based on Lloyds ‘interpretation’ of a particular clause in the ECN terms which is not what was written on the tin when they were issued and even lawyers, senior bankers and a leading QC disagree with. I will not confuse you with the detail but Lloyds has replaced the term ‘Core Tier 1 Capital’ as written and fixed in the terms with the term ‘Core Capital’ in order to do this. Here is an analogy. You are offered a job as a school teacher which also involves driving pupils on school trips using the school minibus. It is a condition of the job that you hold a clean driving license which qualifies you to drive a minibus under law in force at the time the job is offered. Before you are offered the job there have been several high profile accidents involving school minibuses and a government review of safety is in progress. Then after you take the job the law in changed such that a new test must be passed to drive a minibus. You are sacked and lose your income without even being asked if you will take the new test.
If they meant ‘Core Capital’ then why on earth didn’t they say it in the terms you ask? Expensive ‘magic circle’ law firms are not in the habit of making such drafting mistakes and have PI insurance in the event that they do. Lloyds has made no mention of any such mistake nor of seeking redress so one can only assume they meant ‘Core Tier 1 Capital’ all along. Either that or they think retail investors are a softer target than their lawyers !
What’s this ‘saving the bank and the taxpayer’ all about then you ask? Back in 2009 the banks were in self-inflicted crisis and Lloyds had already required tens of billions of taxpayer cash to stay afloat. It needed even more cash and was also heading for entry into the Government Asset Protection Scheme (GAPS) along with RBS. Most of the taxpayer cash had gone into Lloyds in the form of equity and, as a result, the State owned about 43% of the bank. Early in 2009 HM Treasury had formed an agency known as UK Financial Investments (UKFI) to manage its shareholding in bailed out banks such as Lloyds and salvage the best it could for the taxpayer. The management of UKFI was a combination of senior Treasury officials and senior bankers ‘with a conscience’ who ‘gave up’ their well paid City jobs for lowly six figure civil service salaries to do the right things and help sort out the mess bankers had created.
I am told that the ‘noble brains’ at UKFI came up with an idea for aiding the rights issue and avoiding having to put even more taxpayer cash into Lloyds. The idea was ECNs – a novel capital instrument which would behave like a bond unless the bank needed more capital in which case it would convert into shares. Lloyds management were keen to avoid the grasps of GAPS and so even more keen on the lifeline those clever chaps at UKFI was throwing them.
‘So what’s this “ECN scandal” you sucked us in with about then?’ This is where things get really interesting. The structuring of UKFI’s creation and the Exchange Offers were done by the FSA (predecessor financial regulator to the PRA and FCA) and Lloyds. Not just that but they did so knowing that the ECNs would be offered to approximately 123,000 retail investors. In other words the biggest retail bond offer in history. I know this because there were a few problems with the Exchange Offers which I helped persuade Lloyds and the FSA to resolve and they told me all sorts of things in the process. I nearly forgot – after the ECNs were issued they were pushed on retail investors in the secondary market by being listed on the London Stock Exchange Order Book for Retail Bonds.
‘In that case surely the FSA ensured the ECNs were properly explained to all those retail investors’ you say. Well here is the strap line they were given:
“Investors exchanging into ECNs will be offered securities with a fixed redemption date and whose ratings are generally expected to be higher than those of their current holding. The ECN securities will have a fixed maturity and a mandatory coupon with no blocker from the EU.”
No mention there that if the regulator stops monitoring and testing Core Tier 1 Capital (as was already likely in view of changes in the wind which the FSA was aware of) your bonds will be redeemed and you will lose your income.
‘If it was a real risk it would have been highlighted in the Risk Factors in the offer’ you say. From the offer summary:
Risks relating to the ECNs
* ECNs are mandatorily convertible into Ordinary Shares in certain prescribed circumstances;
* the obligations of the relevant ECN Issuer and the relevant Guarantor under the ECNs are subordinated;
* there is no active trading market for the ECNs and potentially one may not develop;
* restricted remedies for non-payment; and
* the ECNs may be Deeply Discounted Securities.
So no mention of what Lloyds is now doing there either then.
‘Hmmm – I am starting to see your point ‘you say. ‘Surely the FSA, Lloyds and UKFI could have excluded retail investors from the ECN Exchange Offers?’ I think I got the answer to that one when I asked Lloyds back in 2009-
There were two principal aims in structuring the Exchange Offers:
– a successful commercial outcome; and 
– treating holders fairly. 
A successful commercial outcome required a large take up from both institutional and retail holders
In other words they NEEDED retail investors to take part. I have much more and It gets much worse but we will save that for another time.
Or perhaps the FSA thought retail investors should be able to figure out that the terms meant something they did not say?
I never asked them that at the time because I did not realise either. However, the FSA’s successor (the FCA) has since restricted retail investors from holding Contingent Convertibles (including ECNs) stating:
The FCA has taken this step because it deems that CoCos are risky and highly complex products that “pose particular risks of inappropriate distribution to ordinary retail customers”
  1. contingent-convertible-instruments
‘Crikey’ you say ‘so these ECNs are too risky and complex for retail investors yet the FSA, UKFI and a largely State owned bank contrived to push them on over 120,000 retail investors to satisfy their own commercial objectives?‘ That is one way of putting it.
‘Sounds like a public mis-selling scandal involving the FSA, UKFI / HMT and a largely State owned bank.’ Possibly and certainly if Lloyds is allowed to dishonour its commitment to the retail investors who saved it and redeem the bonds as they say they intend.
‘But didn’t you say the PRA (successor to the FSA) have to agree to what Lloyds is proposing?’ Yes.
‘How can they even consider it given the massive conflicts involved …’


So there you have it. In view of the parties involved the most outrageous abuse of retail investors I have ever seen. It cannot be allowed to go unchecked. A large number of affected investors have contacted me already asking if I can help and I have written a number of private letters to key individuals at the various authorities at which I have contacts from my previous endeavours. This includes the regulators (PRA and FCA), HM Treasury and UKFI. I prefer to keep these communications private but have serialised some of my representations in posts which you can read at the following links:
Is Lloyds talking rubbish? Chapter 1
Is Lloyds talking rubbish? Chapter 2
Is Lloyds talking rubbish? Chapter 3
Is Lloyds talking rubbish? Chapter 4
Is Lloyds talking rubbish? Chapter 5
Is Lloyds talking rubbish? Chapter 6
Is Lloyds talking rubbish? Chapter 7
Is Lloyds talking rubbish? Chapter 8


So if you are affected please get in touch so that I can email you campaign updates by completing this FORM and –


Sign this PETITION started by the great grandson of an old lady who depends on the income from the Lloyds Bank ECNs.


Below is a list of names and email addresses to use for lobbying:
PRA- Andrew Bailey email:
FCA – Martin Wheatley email:
FCA – Jason Pope email:
HM Treasury – Andrea Leadsom (City Minister) emails: and (use both)
HM Treasury – John Kingman (Second Permanent Secretary) email:
Treasury Select Committee – Chair is Andrew Tyrie email:
Lloyds – Antonio Horta-Osorio email:
Lloyds – Douglas Radcliffe (Director of Investor Relations) email:
UKFI – James Leigh-Pemberton (Chair) email: