The Financial Services Authority and Lloyds developed this new type of investment as a way to help the bank on the path to independence from government assistance after the financial crisis, saving the bank and taxpayers a significant sum of money.
ECNs were offered in a prospectus, which was put together under rules and regulations and approved by the FSA.
Antonio Horta Osorio joined Lloyds Banking Group as CEO in 2011. In late 2014 Lloyds Bank announced that they planned to redeem the ECNs early, stating that this had been triggered by a stress test and was in line with a clause in the prospectus. Nothing in the prospectus indicated that a right to redeem had been triggered and experienced lawyers agreed.
Retail customers approached the Financial Conduct Authority (FCA), successor to the FSA, asking for protection. The FCA declined and suggested that retail investors should deal with the issue in court.
In May 2015 the Chancellor of the High Court judged that Lloyds Bank did not have the right to redeem ECNs early. Lloyds Bank claimed in the court that they made a mistake in drafting the early redemption clause in the prospectus and that the court should apply a different meaning to what was written. The bank had never mentioned this error in the prospectus from 2009 until the court case in May 2015. The FCA was not aware of it until retail investors notified them during the court proceedings.
The Court of Appeal allowed Lloyds Bank's appeal in December 2015 despite lengthy disagreements and arguments between learned counsel. The 'mistake' was described as a 'drafting error' which all but the most naive investor should have understood. Effectively the judgement stated that a contract as written can be changed later in court to suit the organisation that drafted it. 'A verbal contract isn't worth the paper it's written on' becomes 'a written contract is an approximation of the legal agreement you've signed.'
In late January 2016 the Chancellor of the Exchequer, George Osborne, announced a delay to the sale of government owned Lloyds Bank shares until after Easter 2016, because the share market has dropped in the banking sector.
Lloyds Bank then set 9 February 2016 as the date to redeem the ECNs, despite a request from investors for an appeal to the Supreme Court. The Supreme Court ruled on 8 February 2016 that an appeal by retail investors would be allowed. This was an unusually fast decision. Neither the FCA nor the government intervened to delay redemption of the ECNs by the bank and Lloyds has now automatically redeemed these at par. The appeal will be heard by the Supreme Court on 21 March 2016. If retail investors win then compensation will be decided by Lloyds Bank. Other costs, such as increased tax, may not be included.
The Wild West has come to the UK, as we can no longer rely on the government or financial regulators to uphold regulations and protection for market stability and retail investors, even though this is part of their stated remit. Organisations with enough money to go to court can make a contract with reasonable terms and then have them overturned in a court of law, arguing that any fool should have known they would have disadvantaged the organisation and were not intended as written.
Members of the Treasury Select Committee have challenged Lloyds, but they have little power or influence when the regulators and the Chancellor seem determined to focus on national finances rather than the legal and regulatory framework of the UK. Now our only hope seems to be in the hands of Mark Taber and the Supreme Court. Perhaps there are still judges and lawyers who understand the risk and future consequences of a decision in favour of Lloyds Bank over its ECN prospectus.