A campaigner has told the financial regulator that its actions to protect the Co-operative bank have caused duress and financial distress for thousands of pensioners. The regulator told the bank to stop paying interest to holders of certain types of Co-op bonds. Many of them are pensioners, who rely on them for income, and in some instances they need the money to pay their nursing home fees.
So what will happen to them now?
Mark Taber, a professional fixed income investor, has launched a campaign to seek recompense for those savers and pensioners who have lost out as a result of the decision. There are thought to be around 15,000 of them, many of whom have been left high and dry, and 1,300 of them have joined the campaign.
The bondsThe products they invested in are a little bit out of the ordinary: they are certain sorts of corporate bonds - which is essentially where people lend the bank money in return for an interest payment (or coupon). They lend it for a particular period of time and as long as the bank is still trading, at the end of the period they get their money back.
The bonds which these pensioners have bought are known by three different names: permanent interest-bearing shares (Pibs), perpetual subordinated bonds or floating subordinated notes.
These will have been bought through a financial adviser or stockbroker, so it won't affect anyone with a savings product bought from the Co-op itself. Advisers have tended to recommend them to pensioners seeking a high return, because they pay interest of around 13%.
StrandedThese bondholders are already highly likely to lose a large proportion of the money they have in these bonds, as the bank is expected to swap them in October for new investments worth substantially less.
To make matters worse, last week the regulator told the bank that as a condition of a rescue plan, it would have to stop paying the interest on these bonds. The bank hasn't cancelled the payments altogether, but has postponed paying them until at least November.
Regardless of whether or not it is eventually paid, many of these pensioners rely on these sums in order to meet day living costs. Taber has written to the Prudential Regulation Authority, highlighting the distress this decision has caused.
BlameHe added that the regulator chose not to disclose the Co-op's need for further capital earlier, and that the government identified the Co-op as a role model for good banking. He said a combination of these factors: "created a false market in Bank's London Stock Exchange listed preference shares and PSBs, in direct conflict with the role of the regulators to protect investors' interests." In other words, if we had known about all these problems there's no way we would have given the Co-op money.
He added that these bondholders: "trusted the regulators, politicians, bank and its accounts and are the one blameless group in this national disgrace."
The bank may argue that the bonds were always a risk, and that's why they paid such high interest. However, the campaigners argue that as an ethical bank, investors had the right to expect they would have additional protection.