The future of Lloyds Banking Group’s (LBG) structured products business is not clear following a year of marginal activity in the UK market.

The number of structured products issued by Lloyds Banking Group (LBG) in the UK market in 2013 reached its lower level in years with only three products recorded by SRP’s database following a period of declining activity. According to SRP, LBG’s issuance in the UK market has significantly decreased over the last three years with 14 products marketed in 2012 and 26 structures in 2011.

A UK market source who wished to remain anonym told SRP that Lloyds has been pretty inactive in the retail space for the past few years, and that one of the big issues LBG has faced is the lack of internal demand for funding, which seems to have been even more dramatic than other banks. “They don’t actually have a derivatives business, so products would either be deposits, swapped with external counterparties and then offered to third parties, or alternatively internal trades of for the group,” he said. “It is tough pitching for deposit business when you don’t need deposits! With SWIP being sold off, who knows whether we will see retail product, but in the short term I very much doubt we will see anything outside its own distribution.”

An LBG spokesperson told SRP that Lloyds Bank and Halifax do not offer structured products, and that only Lloyds Bank Private Banking will currently selling structured products, although she did not clarify the Group’s plans going forward.

“Lloyds Bank Private Banking offers capital protected structured deposits on a non advised basis,” she said. “This is only available to private banking customers.”

LBG’s market share decline in the UK structured products market over 2013 was aggravated by the recent fine from the UK Financial Conduct Authority (FCA) imposed to Lloyds TSB Bank and Bank of Scotland (both part of LBG) for serious failings in their controls over sales incentive schemes for investment and protection products.

The FCA fined Lloyds TSB and Bank of Scotland £28m, the largest fine ever imposed by the UK watchdog, or its predecessor the Financial Services Authority (FSA), for retail conduct failings.

The LBG spokesperson told SRP that the Group has accepted the findings of the FCA investigation and has agreed to pay a fine of £28m.

“The Group recognises that its oversight of these particular schemes during the period in question was inadequate and apologises to its customers for the impact that they may have had,” she said. “We are determined to ensure that any customer impacts are dealt with quickly and fully.”

Their investment product range included personal investment plans, individual savings accounts (ISAs), and open ended investment companies (Oeics) sold on a single premium basis, and ISAs/Oeics sold on a regular premium basis.

Sales strategy

According to the FCA, from 2010, LBG had a target for its combined retail bancassurance business to approximately double its customer base by 2015, and focused on sales of protection products over investment products as protection products were more profitable; and the financial crisis had resulted in a fall in customer demand for investment products.

The FCA said that LBG reduced its appetite for sale of investment products, which it saw as higher risk from a regulatory perspective, including anticipated regulatory developments. This resulted in a decrease in its sales of investment products by 54%. However, the Group’s combined revenue from investment products was £127,542,733 in the period investigated.

Structured solutions sales
Lloyds Banking Group set up in April 2013 a task force to investigate the potential mis-selling of 'guaranteed' and 'capital-protected' bonds between 2007 and 2012.

Lloyds has been reviewing a sample of sales of Scottish Widows products, including the Extra Income & Growth Plan (1, 2, 3 & 4), the Protected Capital Solutions Fund 1 (PCSF1) and the Capital Protected Fund 5 (CPF) which were sold in 2007, before the credit crunch which saw capital markets collapsing across the world.

SRP data shows that the PCSF1 returned 101.34% at maturity, while the CPF returned only the capital invested. The four tranches of the Extra Income & Growth Plan, a three-year reverse convertible linked to a basket of 30 FTSE100 shares, also provided low returns at maturity.

SRP data

SRP data shows that Lloyds TSB sold 14 structures through its commercial channels (Scottish Widows, Lloyds TSB Offshore, Birmingham Midshires, and Halifax Share Dealing) in 2012with an estimated value of £164m, compared to three products sold by Lloyds TSB Offshore with an estimated sales volume of £30 in 2013.

As a counterparty provider Lloyds TSB was used in nine products sold by Investec in 2012 (UK Banks range) vs seven in 2013 (sold by RBS IFA).

The spokesperson said that the cost of the enforcement and the review is not expected to have a material impact on the Group.

Calls to Jamie Smith, head of structured solutions/investment solutions at Lloyds Banking Group, for comment were not returned.

This update includes an official statement from LBG issued to SRP.com