City watchdog probing final HBOS rights issue

Nov 9 2009 by Chris Knox, The Journal

THE City watchdog is probing the "accuracy and completeness" of information given to investors by ailing bank HBOS before its rescue by Lloyds TSB last year, it has emerged.

Details of the Financial Services Authority’s (FSA) investigation surfaced in documents published alongside Lloyds Banking Group’s £21bn fundraising last week.

The probe centres on the £4bn rights issue launched by HBOS in April 2008, less than four months before the Lloyds takeover was announced, according to reports.

The FSA is “conducting a supervisory review into the accuracy and completeness of financial disclosures made by HBOS” which Lloyds is “co-operating fully” with, the documents said.

When the rights issue was launched, the-then HBOS chief executive Andy Hornby said the group was “optimistic about the fundamental prospects for our core businesses”, adding that the bank was “well placed to deliver long term sustainable growth.”

But HBOS’s reckless lending was exposed in the wake of the crisis triggered by the Lehman Brothers collapse in September last year.

The Government is now a 43% shareholder in the combined group after pumping in an initial £17bn.

Just over £2bn of this has been repaid but the taxpayer will pump in another £5.7bn under the fundraising plans announced last week.

Shareholders in both banks approved the merger last year but in the prospectus Lloyds said an investigation could lead to a heightened risk of legal action or “public sanction”.

The UK Shareholders Association is also considering a possible legal move Spokesman Roger Lawson said: “We have always said that one of the possible grounds for complaint of the HBOS shareholders was that rights issue. There were a number of issues at HBOS – particularly their approach to risk management.”

The FSA declined to comment on individual firms. A Lloyds spokesman added: “We never comment on matters of a regulatory nature.”

Last month it emerged that Lloyds will pay the Government £2.5bn to avoid a taxpayer-backed insurance scheme for toxic debts. The bank is paying the fee for the implicit guarantee given to £260bn in bad loans, which Lloyds said it would put into the Asset Protection Scheme in March. It is understood that the £2.5bn dwarfs the £150m first offered by the bank.

Under the current terms of its entry, it will pay £15.6bn in new shares as a fee for the scheme, taking the Government’s stake to 62%.