Early Redemption of ‘Cocos’: Win for LBG in Supreme Court

26 06 2016

BNY Mellon Corporate Trustee Services Ltd v LBG Capital No 1 Plc & Anor [2016] UKSC 29 (16 June 2016)

Almost like the British public on Brexit, the Supreme Court remained closely divided on the issue of whether the Court of Appeal erred in its construction of the terms of enhanced capital notes (ECNs) by relying on technical and specialist information as part of the factual matrix. Formally described as ECNs, the loan notes were contingent convertible securities (or “Cocos”). Lord Neuberger (with whom Lord Mance and Lord Toulson agreed) dismissed BNY Mellon’s appeal whereas Lord Sumption (with whom Lord Clarke agreed) would have done otherwise. As Lord Sumption said in his brief note of dissent, the case was “of considerable financial importance to the parties” but it raised “no questions of wider legal significance”. The outcome in the case is a major blow for investors (receiving up to 16pc interest) who had hoped that the court would not have held that the terms of the bonds (or ECNs) allowed Lloyds Banking Group (LBG) to redeem them early at face value. The High Court found in favour of the bondholders but the Court of Appeal reversed that decision, one that the Supreme Court has upheld: albeit not without doubts and dissent. Led by Mark Taber, the bondholders disputed that the ECNs had been disqualified as capital and resorted to litigation. A disgruntled Taber said that the division between the justices “raises massive issues over the role of the regulators”.

He is particularly aggrieved that the court’s judgment does not engage with the arguments aired about statutory requirements that bond prospectuses must be accurate and provide crystal clear information to investors so that they may make informed choices and decisions. Worse still Taber also complains that he lobbied the FCA’s new boss Andrew Bailey to make germane information – about the exact scope of the regulator and LBG’s knowledge about impending changes to capital requirements when the ECNs were issued – available to the court. But since his request was not granted, he argues that because the courts are not willing to intervene it must be the City regulator’s job to interpret the prospectuses. “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,” is how Taber expressed his frustration with the situation. However, his claim appears to directly contradict even Lord Sumption’s dissenting judgment that despite its financial importance the appeal contained no legally significant questions of wider importance. Read the rest of this entry »





King and Country: Reflections on the Costs of Market Misconduct

1 04 2016

Read as updated SSRN paper with reference to the Panama Papers. Because of the Budget 2016, the chancellor has been accused of “looking more like Gordon Brown as a purveyor of gimmicks.” In difficult times when calls for his scalp over the row regarding the budget seemed to have eclipsed everything else, the rare bit of good news for George Osborne is that he can use the opportunity provided by the threat of Brexit – “a leap in the dark” which may cost the UK £100 billion or 5 per cent of GDP and 950,000 jobs by 2020 – to camouflage and obfuscate the real problems of conduct in the world of economics and finance. On the other hand, in an important interview with Charles Moore the former Bank of England governor Mervyn King showed hallmark signs of euroscepticism and said the people need to make up their own minds about the upcoming referendum. King also warned that lenders have not stopped taking excessive risks with savers’ money and the result is “bankers have not learnt the lessons of the Great Crash”. Unsurprisingly, in his somewhat controversial new book The End of Alchemy he makes the case against financial sorcery by arguing that it must be squeezed out of the world’s banking system. Perhaps, such failings are amplified further because “financial crises are a fact of life” and we are “moving into a rerun of the credit crunch”. Indeed, Lord King calls banks “the Achilles heel of capitalism.”

Below I sketch important/emerging issues in the intersecting themes of economics, law and misconduct as seen in the media, especially through the lens of “conduct costs” – some other themes are also explored. Mentioning Walter Bagehot and his classic text Lombard Street, which argued that the BoE should provide short-term financial support in times of crisis, King advises us that the old “lender of last resort” model (LOLR) is in need of revision because “banking has changed almost out of recognition since Bagehot’s time.” The former governor argues that the time has come to replace LOLR with the pawnbroker for all seasons (PFAS) system. For him, it is time for financial institutions to drop LOLR and embrace PFAS and be prepared to advance funds to just about anyone who has sufficient collateral. “The essential problem with the traditional LOLR,” argues King “is that in the presence of alchemy, the only way to provide sufficient liquidity in a crisis is to lend against bad collateral – at inadequate haircuts and low or zero penalty rates.” Read the rest of this entry »





Narratives of Misconduct: Emerging Trends in the Finance Sector

26 11 2015

As seen on this blog, the spectre of misconduct hangs over the finance sector. Even after seven painful years of conduct related revelations, the fall out from the global financial crisis (GFC) continues to haunt consumers and banking institutions alike. To conceal the low-point in public confidence, empty rhetoric and hollow buzzwords such as “social licence” and “real markets” reign supreme while regulatory spin seeks to reconstruct the common person’s trust in the system. Equally, to make themselves palatable to the public, market pundits can be heard trumpeting the mantra of “inclusive capitalism”. Yet an overall lack of ethics permeates corporate culture and a continuing tendency to act in a twisted way can still be gleaned from events. If anything, the deficit in trust is increasing because resort to outright cheating can still be evinced in numerous instances. For example, along with Deutsche Bank, Barclays is in the spotlight yet again after paying £320 million in forex manipulation fines to the New York Department of Financial Services (NYDFS) earlier this May; today, it has been fined £72 million by the Financial Conduct Authority (FCA) for poor handling of financial crime risks. Equally, The Review into the failure of HBOS Group highlights the legacy of negligence in holding the finance sector to account. In addition to everyday outrage arising out of economic inequality, public anger in the finance sector has risen to a crescendo because the nadir of people’s sufferings has been reached. As the National Audit Office finds, state funds totalling £1,162 billion have been injected into the UK banking system to save it from collapse.

The paradox, of course, is that unlimited funds have been made available to rescue recklessly managed and overexposed banks – concerned less with integrity and more with ways to exploit token regulation – whereas the neediest in society are being shunned from basic necessities such as healthcare, care services, welfare and all the savage cuts that accompany the long-term goal of shrinking the state to 36% of GDP. Even to those who earnestly believe in the free market, official viewpoints and narratives often directly contradict reality. Most of all, officials fail to acknowledge wholesale abdication of duties owed to citizens and their attitude exposes a continuing tendency to overlook capitalism’s corruption. In the roundup below, among other things, further light is shed on developments trending in the bullring of financial misconduct and the theoretical jargon used by regulators is paired up with a cogent critique – by O’Brien, Gilligan, Roberts and McCormick – of the trickle down reforms enacted to positively anchor the finance sector to society’s needs. Read the rest of this entry »





PPI Complaints Deadline: FCA Gives Consumers Until 2018

6 10 2015

Marking the removal of a dark stain on the financial services industry, the end of the Payment Protection Insurance (PPI) saga is finally in sight. A cut-off point to the debacle appears to be in the offing and the eagerly-awaited decision of the Financial Conduct Authority (FCA) – aiming to “rebuild trust in the retail financial sector” – about further intervention in PPI complaints has finally descended upon us. The PPI problem is said to have already cost the industry £20 billion and further payments up to £33.5 billion had been predicted by some studies because of the Supreme Court’s judgment in Plevin v Paragon Personal Finance Ltd [2014] UKSC 61 (though more conservative estimates place this at £15 billion). The FCA has decided to consult, by the end of the year, on setting a deadline by which PPI complaints need to be made “or else lose their right to have them assessed by firms or by the Financial Ombudsman Service.” Because questions hover over the influence of industry lobbying on the FCA, the Chairman of the Treasury Select Committee Andrew Tyrie MP said that the FCA should provide “reasons for its change of mind” over the deadline, one which may be linked to George Osborne’s new “settlement” for the City. The FCA wants to bring “finality” to the conundrum and wishes to prompt many consumers who want to complain, but have not yet done so, into action, resulting in them potentially getting redress sooner.

Consumers’ PPI problem, which generated billions in annual revenue for lenders, represents the UK’s costliest mis-selling episode – an ugly chapter in the history of the banks, one the industry surely wants closed for good. A flood of claims is expected because of the deadline and five leading banks have earmarked significant sums of money to put the controversy to rest. The sums set aside are Lloyds £13.4 billion, Barclays £6 billion, RBS £3.8 billion, HSBC £2.6 billion and Santander £800 million. Adding this to the misconduct bill of £200 billion from 2010-2014 (calculated by the Conduct Costs Project) takes the total to over £226 billion. However, some reports suggest that worst of the fines and penalties are already behind the banks; but only time will tell, you never know what’s around the corner. It has been reported that PPI complaints are declining with only 883,043 complaints Read the rest of this entry »