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West Bromwich Building Society in profit

The West Bromwich Building Society recently issued their accounts for their financial year ending in March 2014. They actually managed to make a small profit after years of losses. Does that mean that the PIBS holders will start to receive their dividends again? In essence no. According to Peter Morgan who led a campaign on the issue, it might yet be another 5 years before these bondholders receive any interest whatsoever.

To remind readers about this problem, in 2009, the Society ran into major financial difficulties, mainly due to unwise commercial property lending. They then proposed changes to the 6.15% Permanent Interest Bearing Shares (“PIBS”) as part of a financial restructuring of the Society so as to improve the Tier 1 capital (mainly at the behest of the FSA). On the 12th June 2009, the Society announced that the future coupon on the PIBS would be reduced, on a permanent basis, to the lower of the current coupon and the yield on the new Profit Participating Deferred Shares (“PPDS”) which were to be issued to other subordinated debt holders (mainly institutions). PIBS holders suffered a massive erosion of their income, with no certainty on the future level, when many purchasers of the PIBS were under the impression that these were fixed interest investments. The market value of the PIBS collapsed as a result and has not recovered so PIBS holders have lost all their income and could only sell their holdings at a very large capital loss. As these were mainly bought for retirement income, this has been enormously damaging to the financial position of the PIBS holders. The Board of Directors claimed they had the right to vary the interest payment terms at their whim, much to consternation of the holders, i.e. the directors claim absolute discretion in this matter. There was no consultation with PIBS holders or opportunity for them to take legal advice on this matter before the restructuring was announced. The holders might have accepted that if the society had no profits, then dividends on the PIBS would be suspended. But a temporary suspension of dividends is a different matter to a total change of the terms. The FSA seemed not to protect the interests of PIBS holders – exactly the reverse.

As more evidence of the duplicity if not downright incompetence of the West Brom B.S., they recently had to report that they are having to refund £2 million to thousands of mortgage holders for charging then interest incorrectly when mortgages were redeemed.

In addition the Society is fighting a legal battle with buy-to-let borrowers where they thought they had tracker mortgages that would follow Bank of England interest rates with a fixed added margin but where the Society is now choosing to increase rates regardless. About 400 people are affected and in some cases the charges will double.

It is clear that doing business with the West Bromwich Building Society is tricky. Read the small print is obviously the motto to bear in mind.

Roger Lawson

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