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I have just discovered that I have written to the FSA no less than 16 times concerning the Lloyds Exchange Offer since it was announced in November. The saga is still ongoing with many issues still to be resolved. These include:

Your ref: 1890

Dear Ms Christofides

Thankyou for your letter of 4 February. As requested I am writing with further details of my complaint and supporting evidence. The examples of individual cases I have provided as evidence represent a very small proportion of those who have contacted me. However, in the short time available I have only had opportunity to obtain permission to pass on their details from a small sample. I have assumed that you already have copies of all my e-mails to the FSA. If this is not the case please let me know and I will send them.

I would add a further element to those listed in your letter. This being that, in respect of the Lloyds Exchange Offer, the FSA has failed its statutory objective of consumer protection and responsibility to protect investors. I would summarise the elements of the complaint as follows:

1.1 The FSA has a statutory objective of securing the appropriate degree of protection for consumers and an obligation to protect investors and overall market integrity.

1.2 Lloyds Banking Group (‘LBG’) is an ‘authorised person’ under the Financial Services and Markets Act 2000 (FSAM).

1.3 The Exchange Offer (‘EO’) was a public offer of complex new Enhanced Capital Notes, which are not dis-similar in nature to ‘precipice bonds’, and admission to a regulated market. The EO therefore constituted a ‘regulated activity’ under the FSAM. The EO was not, in substance, a buy-back or repurchase of securities but rather a complex exchange of higher tier capital into lower tier capital with associated variations in rights. It was also an exchange of Crest held preference shares into bonds which, under the terms of the offer, were Clearing System only. It therefore required careful scrutiny to ensure investor protection.

1.4 Members of the public to whom the EO was made were therefore considering an offer with was made by and authorised person in carrying on regulated activities and so are ‘consumers’ under the FSAM. Furthermore, many of the affected consumers held ex-Halifax bonds which were very much a consumer offering, distributed by IFA’s as a gilt edged security for low risk investors.

1.5 The FSA have stated to me in writing (see MT1) that the EO was structured by LBG in consultation with the FSA. The FSA therefore had every opportunity to secure the appropriate degree of protection for investors and consumers prior to finalisation of and approval of the EO and its prospectus.

1.6 LBG has, by its own admission, the largest number of retail consumer investors holding its preference shares and subordinated bonds of any company in the UK. This includes in excess of 100,000 retail holders of its preference shares and subordinated bonds which were the subject of the EO. The EO was therefore the largest offer ever made to fixed income retail investors and, in addition, was made by a largely State owned bank. It therefore demanded particular scrutiny by the FSA in exercising its responsibility for the approval of prospectuses.

1.7 The majority of these 100,000 plus individuals are not sophisticated retail investors and do not have existing arrangements for broker services or financial advice. Many of these individuals are elderly pensioners who hold their investments in certificated form and rely on the income from them for their pensions. The outcome of the ‘do nothing’ option under the EO was a loss of income for 2 years from 31 January 2010. It was therefore proportionate and essential for every care to be taken by the FSA in structuring and approving the EO to ensure it was appropriate and accessible to LBG’s retail investors. I included evidence of these cases in my communications with the FSA and have included a number of them with this report (see MT2). No action has been taken by the FSA or LBG to provide a solution for affected certificated holders.

1.8 The EO was a highly complicated offer of very complex Enhanced Capital Notes (‘ECNs’). Due to their nature ECNs are commonly referred to as ‘death spirals’ and share many common features with ‘precipice bonds’. The past experience of the FSA in relation to such instruments should have alerted it to the fact that very careful supervision was required to ensure consumer protection.

1.9 The EO, as announced on 3 November 2010, made it a condition of acceptance that only holders who had a Clearstream or Euroclear account were eligible. Clearstream and Euroclear accounts are, almost exclusively, used by institutional investors and were not available through the execution only stockbrokers used by the majority of retail investors or to certificated holders without a stockbroker. This fact should have been obvious to both LBG and the FSA and considered in structuring the offer. If it was not obvious it would have been if they had consulted with brokers and registrars before finalising and approving the EO. I have received evidence that senior management of Capita (the registrars for the ex-HBOS bonds held by many in certificated form) had reservations about the EO (see MT3).

1.10 Lloyds only made arrangements for ECN’s to be held in Crest via brokers nominee accounts AFTER the offer was announced and that was done in response to the uproar from affected investors and brokers to whom the issue was immediately apparent as soon as the EO was announced (see MT4). If the FSA or LBG had taken the simple step of checking the suitability of the offer with the main retail brokers, or listened to the concerns of the senior management of their registrar, before announcing the Exchange Offer these issues would have been avoided. However, despite the clear problems which became apparent after the Offer was announced Lloyds failed to provide or communicate a solution for certificated holders. If Lloyds felt unable to offer the ECN’s the retail investors in a suitable form it should have made a separate offer of a simpler alternative available.

1.11 Even many retail investors with access to a financial adviser or bank manager were unable to make arrangements to access the offer. Some, who were Lloyds Banking Group customers sought advice from financial advisers and staff within LBG branches and found that they knew nothing about the EO and were not able to assist (see MT5 for evidence). LBG branch staff told customers that they had not been briefed on the EO and how to assist affected consumers.

1.12 The FSA has advised that the prospectus must meet the requirements of the FSMA and the Prospectus Directive Regulation (‘PR’). Section 87a(6) of the FSMA and PR 2.1.2-5 require that:

The summary on pages 7-12 of the Exchange Offer Document does not even contain the 2 key issues for retail investors let alone explain them in non-technical language. These being the requirement for investors to have access to a Clearstream or Euroclear account and the income loss consequences of the ‘do nothing option’. So even if it was appropriate for Lloyds to require retail investors to have a Clearstream or Euroclear account they failed to communicate it in any form in the standalone Summary. The FSA failed to identify and act upon this issue in its involvement in structuring the EO and approving the Prospectus.

1.13 As already stated in paragraph 1.5 the EO was structured by LBG in consultation with the FSA.

1.14 The EO contained a very complicated and unusual ECN Exchange Priority List or’waterfall’ in which securities stated to be pari passu were given unequal ranking. Preference shares (such as the 9.25% and 9.75% issues) which are most widely held by retail investors were ranked lower than other pari passu or parity preference shares in the waterfall. As a direct result these preference shares were not accepted for ECN exchange whereas others stated to be pari passu were. In this respect the Offer has effectively made certain shares Tier 2 rather than Tier 1 and so the new ECN’s are not pari passu (in insolvency) with the preference shares they were exchanged for. The offer has therefore breached the ‘pari passu on insolvency terms’ of the preference shares. The FSA failed to address this issue, and so protect the investors concerned, in its involvement in structuring and approving the EO.

2.1 I e-mailed the FSA on 16 November 2009 and Jon Pain on 17 November 2009 and 18 November 2009 .

2.2 I received a brief response from Jean Moorhouse on 26 November 2009 (after the EO had closed) concerning the single issue of Crest holding of ECN’s for investors whose existing holders were in broker’s nominee accounts. This was an issue which LBG had already resolved (a fact I stated in my original e-mail of 16 November) in response to pressure from a campaign I launched and others as had been reported in the Investors Chronicle on 13 November 2009 (see MT4) - before I first wrote to the FSA.

2.3 I e-mailed Jean Moorhouse again on 27 November 2009, 8 December 2009, 14 December 2009, 6 January 2010, 14 January 2010, 5 February 2010, 8 February 2010, 9 February 2010, 10 February 2010 and 12 February 2010 in complaint against LBG in respect of many of the issues outlined in (1) above and suggesting potential solutions. There is no evidence that any of these e-mails have been acted upon and the FSA did not take up my offers to provide further information and evidence.

2.4 I received an e-mail from the FSA on 13 January 2010 stating that my communications were being treated as a potential complaint against the FSA. I received a belated letter from the FSA dated 4 February 2010 (see MT1) which fails to fully understand the offer, the issues or the FSA’s duty of investor protection.

Please do not hesitate to contact me if anything is not clear or you require further information.

Yours sincerely