FCA’s Wheatley Says Co-Op Bondholders Were Warned of Risks

Investors in Co-Operative Bank Plc bonds were warned of the risks before they bought them, said Martin Wheatley, chief executive officer of the U.K.’s Financial Conduct Authority.

“It’s not a deposit, it’s a bond, it’s subject to certain risks,” Wheatley told journalists at a conference in London today. “The prospectus has all the risk warnings you’d expect to see.” Wheatley said that if the investors have concerns they can go to the Financial Ombudsman Service, which mediates between financial companies and clients.

Co-Operative Bank said last month it will swap some debt for equity as part of a plan to raise 1.5 billion pounds ($2.3 billion) of capital after the failure of its bid for 632 Lloyds Banking Group Plc branches exposed the deficit. The Manchester, England-based bank has about 7,000 bondholders with holdings of 25,000 pounds or less.

Mark Taber, organizer of a group of individual bondholders, wrote to Wheatley last week to ask that individual investors be told their options and not be frightened into selling their holdings at a loss.

“The regulator has known about the Co-Op’s problem for years, but did nothing and told no one,” Taber said today. He referred to Prudential Regulation Authority CEO Andrew Bailey’s July 2 testimony that he told the Co-Op it should raise capital in 2011.

“People have been buying and holding Co-Op bonds on the basis of a safe bank, and it turned out it wasn’t,” Taber said in a telephone interview. “That wasn’t in the prospectus.”

Bondholder Groups

Taber wrote to Bailey this month to ask for a review of the bank’s plan to raise 1.5 billion pounds, including its rationale for raising that amount. The PRA said it received the letter and will respond.

His group is one of at least three seeking to negotiate a better terms in the restructuring. Aurelius Capital Management LP, a New York-based hedge fund, and some other bondholders are considering hiring a legal adviser, according to a person with knowledge of the matter. A third bondholder committee comprising U.K. insurance companies is being formed by the Association of British Insurers, the Financial Times said last month.

Co-Operative Bank’s capital has been depleted by soured consumer and commercial real estate loans stemming from the purchase of Britannia Building Society in 2009. Loan impairments more than quadrupled to 468.7 million pounds in 2012, the Co-Op said in March. The bank had a pretax loss of 673.7 million pounds in 2012.

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