The news that the holders of Lloyds bonds (ECNs) have lost their legal battle in the Supreme Court reinforces the message that when it comes to investing in bonds, you should trust nobody – not the issuer of the bonds, your friendly stockbrokers and wealth managers who advise you, or the FCA to protect your interests.
The bondholders won their case initially in the lower courts, that Lloyds should not be able to force redemption of these bonds at par. But after appeals the Supreme Court voted 3 to 2 in favour of Lloyds Banking Group. Mark Taber, who has been campaigning on behalf of the bond holders, alleges that the prospectus for the bonds did not disclose all the information that investors needed to make an informed decision. He also says the FCA are refusing to disclose what they knew about the likely changes to capital requirements when the ECNs were issued, which subsequently caused the “capital disqualification” event to arise enabling Lloyds to redeem the bonds at par.
Unfortunately many private investors buy bonds on the basis that they are safe and secure investments for their retirement, and they are advised so by brokers and other financial advisors. But one needs to look very carefully at the terms of bonds, i.e. read and understand all the small print in detail which private investors would have difficulty in doing even if they had the inclination. In other words you need to look at the prospectus and the trust deed that is issued.
It also reinforces the point that banks and financial institutions in general are still not to be trusted to act in an ethical manner. They and the courts will stick to the technical wording even though only the issuer really understands the risks. This happened of course to PIBs holders such as those at the West Bromwich Building Society, even though the Society did lose a recent case on appeal brought by landlords against a rise in tracker mortgage rates. A classic example of being sold one thing which the Society retrospectively tried to change when it realised it would be losing money on the contracts because of very low interest rates. But perhaps that will be appealed to the Supreme Court also.
Can you rely on your financial advisor to give you the facts and advise on the real risks in bonds? From experience no. They rarely know more than the educated amateur.
Can you rely on the Financial Conduct Authority (FCA) to protect the interests of the private investor against large financial institutions? In essence no because they seem to side with the latter in most cases. The FCA does spend a lot of time introducing regulations to protect private investors against their own foolishness (which ultimately is an impossible task). But when it comes to complex issues that require urgent decisions, they fail completely to protect the interests of individual investors.
So the message is clear when it comes to bonds – trust no-one because you are your own.
The result of the Lloyd’s notes case was a disappointment. The judges are indeed far too bank friendly and seem to have lost the innate sense of fairness which was evident in an earlier generation of judges. I believe this is because, since the abolition of legal aid, a mid range to senior barrister’s experience at the bar is now overwhelmingly for big commercial businesses. As the courts are now largely no go areas for the private client and SME, too many barristers have a one dimensional view of the world by the time they get promoted to the bench.
None of the political parties are in the least bit interested in opening up the courts to the average citizen or small business. I see no hope for change unless the ECJ has a crack at our judicial arrangements. It has been critical before, but if we Brexit, this will not get better.