Regulators pressured to appeal against Lloyds being let off £1bn in bond interest payments

Following our note last week stating that Lloyds had won a Court of Appeals decision allowing it to buy bonds back from armchair investors at below market price, thereby saving around £200m a year over five years, pressure has been mounting on regulators over the weekend from MP's to step in and force a further appeal that will not allow Lloyds to be let off £1bn in bond interest payments. Treasury Select Committee Chairman, Andrew Tyrie, is writing to Lloyds boss, Antonio Horta-Osorio, asking him to explain why the bank has made the decision to force investors to sell back the bonds at a lower rate.

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Pressure grew on City regulators yesterday to step in and force Lloyds Banking Group to fuel a further appeal against a court ruling letting it off £1bn in bond interest payments.

Lloyds won a Court of Appeal decision on Thursday allowing it to buy bonds back from armchair investors at below market price, saving it around £200m a year over the next five years.

An outcry from MPs and bondholders over the decision could open the door to a further appeal at the Supreme Court, but only if Lloyds agrees to indemnify the trustee to bring another case.

Lloyds had previously granted an indemnity to bondholders in the Court of Appeal action, but has not said whether it will do so again.

The Financial Conduct Authority can force the bank to offer such a guarantee, which promises not to hit the trustee and retail investors with legal costs if Lloyds wins again.

Sources said while the FCA had not publicly called on Lloyds to make such an exception, it had previously requested the indemnity for the trustee behind closed doors. If no exception is made, retail investors could be on the hook if a Supreme Court appeal fails. The trustee all but ruled out an appeal after Thursday’s ruling due to the risks involved if it loses again.

“The trustee does not propose to take any further action in relation to a possible and further appeal,” it said.

However, mounting pressure from MPs could force the regulator to step in and act.

Treasury Select Committee chair Andrew Tyrie will write to Lloyds boss Antonio Horta-Osorio asking him to explain why the bank has decided to force investors to sell back the bonds at a lower price. “This doesn’t look good,” he said.

Lloyds had tried to cancel £3.3bn of enhanced capital notes that were sold to investors in 2009 as part of its emergency bailout. It lost the initial case but won the appeal.

It doesn’t look good. Why must investors sell back bonds at a lower price?