There are interesting developments on the long running battle for compensation for RBS shareholders who took part in the bank’s 2008 rights issue. The Times reported yesterday that –

Leading institutions that claimed that they were misled into supporting the bank’s £12 billion fundraising have agreed to a “full and final settlement” in a deal expected to be announced this week.

and RBS made an announcement that –

In order to minimise further material litigation expense and management distraction and without any admission of liability, RBS has concluded a full and final settlement with three out of the five shareholder groups representing 77% of the claims by value in the 2008 Shareholder Rights Issue litigation.

In total, RBS is willing to make available settlement sums of up to £800 million assuming settlement of all claims, to be split among all five shareholder groups, subject to agreement and claim validation. RBS will now seek to agree finalised terms with members of the remaining two groups whose claims are presently continuing.  Any claims for which settlement is not achieved will, however, continue to be vigorously defended. The trial for such claims is due to commence in March 2017.

This battle has been going on for years and RBS has been reported to have spent over £100 million in legal fees alone defending it. I believe there are 5 different shareholder groups involved in litigation and, no doubt, a huge cohort of retail investors who took part in the rights issue who are not part of any of these groups. There should be particular concern over the plight of this latter cohort.

As I understand it the claim is essentially that the 2008 rights issue prospectus failed to disclose various pieces of material information. And that this constituted a breach of Section 80 of the Financial Services and Markets Act 2000 (FSMA). Section 90 of FSMA goes on to provide  that any person publishing a prospectus is liable to pay compensation if shares were subscribed for and a loss suffered as a result of the omission of any information that investors and their advisors would reasonably require and reasonably expect to find there.

While it is a remarkable achievement that the shareholder groups have lasted the course in this high profile case and are close to some level of settlement I think the question of where the regulators (FCA and its predecessor the FSA) have been in all this needs to be examined. At the time the 2008 rights issue prospectus was published the FSA had a statutory duty to develop and enforce rules which provided an appropriate degree of protection to investors in listed securities. The relevant rules here are the Prospectus Rules which reflect the requirements for prospectuses under FSMA.

Prospectus Rule 2.1.1 in force at the time the rights issue prospectus was prepared and approved which stated –

Sections 87A(2), (3) and (4) of the Act provide for the general contents of a prospectus:

(2) The necessary information is the information necessary to enable investors to make an informed assessment of –

(a) the assets and liabilities, financial position, profits and losses, and prospects of the issuer of the transferable securities and of any guarantor; and

(b) the rights attaching to the transferable securities.

(3) The necessary information must be presented in a form which is comprehensible and easy to analyse.

(4) The necessary information must be prepared having regard to the particular nature of the transferable securities and their issuer.

In other words the FSA / FCA should have taken a view on whether the rights issue prospectus was defective under the same criteria as those under which the litigation has been brought. Yet there is no evidence that the they have even considered the matter. I tried to establish, using FoI requests, exactly how the Prospectus Rules are enforced by asking the following question –

From Legal Cutover, on 1 April 2013, to 29 February 2016 how many complaints against issuers regarding potential breaches of the FCA’s Prospectus Rules in respect of prospectuses and supplementary prospectuses for shares and bonds listed on the London Stock Exchange has the FCA (including the UKLA) investigated.

The FCA refused to provide this information citing an exemption that doing so would be prejudicial to its law enforcement function. I successfully appealed this decision and finally obtained the following information in June this year –

During the period you specified in your request, the FCA carried out no formal enforcement investigations into the matters you have identified.

At this point it is worth citing a statement made by the Complaints Commissioner following his examination of the FCA’s decision not to intervene to assist retail investors in obtaining a declaratory judgment on the prospectus terms of Lloyds Bank Enhanced Capital Notes –

However, there was a danger that retail investors might be disadvantaged in comparison with institutional investors, since the latter might be able to secure a private settlement with Lloyds in a way which retail investors probably would not. One advantage of a declaratory judgment would have been to help put retail and institutional investors on an equal footing – one of the FCA’s principal objectives in this matter.

So in the case of the RBS rights issue prospectus there is clearly a very credible claim that it was defective and did not comply with the Prospectus Rules in force at the time it was issued. Yet the regulators have done nothing. As a result there has been a hugely expensive and time consuming eight year legal battle at the end of which it seems certain investors will be securing private settlements while a huge cohort of retail investors gets nothing. The exact situation the FCA says it should seek to avoid.