Lloyds to be sued by own charity for £3.5m

Published on Tuesday 7 September 2010 19:20

THE charitable arm of Lloyds Banking Group in Scotland has launched a legal action against the financial giant in an bid to recover £3.5 million it claims the bank ought to hand over to good causes.

• Picture: Getty

The Lloyds TSB Foundation for Scotland has served a summons on the part publicly funded bank, claiming it has breached a historic agreement between the two organisations that has seen millions of pounds donated to charities across Scotland.

It took the action after receiving only 38,920 from Lloyds Banking Group this year.

Foundation chief executive Mary Craig said her organisation was due more than 3.5m under the terms of a covenant that has existed between the foundation and the bank for the past quarter of a century.

Politicians and charities last night spoke of their frustration that the dispute appears to be heading for the Court of Session and were angered that charities were losing out as a result of the bank's failure to commit more cash to the foundation.

Over the past 25 years, Lloyds TSB Foundation for Scotland has overseen the distribution of 82m to charity as a result of its relationship with the bank, which benefited from a 17 billion bail-out from the taxpayer.

In recent months, the relationship between the bank and its charitable arm has deteriorated dramatically culminating in the foundation's decision to take legal action yesterday.

In the past, a covenant, sealed by an act of parliament, had ensured the foundation - and sister organisations in England, Wales, Northern Ireland and the Channel Islands - received a share of 1 per cent of the bank's pre-tax profits. This is based on the average pre-tax profits for the previous three years.

Ms Craig argued that the bank had recorded a pre-tax profit of more than 1bn and therefore the five foundations across the UK were entitled to a share of 1 per cent of that.

The Scottish foundation argued it should have been in line to receive 19.46 per cent of the original 1 per cent - the equivalent of 3.5m.

Instead, Ms Craig said, the bank had based its calculations on the fact it made an overall loss last year of 6.2bn rather than its pre-tax profits. Therefore, the bank had claimed the foundation was entitled to a minimum payment of only 38,920.

Ms Craig described the decision to go to the courts as an "action of last resort".

She said: "We cannot afford to allow the discussion about our funding to drag on any longer, as there are also implications for our future monies if the group continues to misinterpret the covenant calculation. Court action is the only way to resolve this situation once and for all.

"In previous years, the amounts reached using the formula in the covenant have been agreed between us with little difficulty. Even last year, there was no disagreement when the banking group's diminished profit levels meant we received a much reduced sum of money via the covenant."

Ms Craig claimed the banking group had come up with a "new way" of "interpreting" the calculation this year.

"Despite the fact they should use their publicly stated statutory pre-tax profits of 1.042bn for the last financial year as the basis of the calculation, they haven't," she said.

A spokesman for Lloyds Banking Group said: "We disagree with the foundation's interpretation. However, it would be inappropriate to comment further on the litigation.

"We proposed a solution earlier this year which would have provided substantial funding and long-term support for Scotland's charities at a time of great uncertainty for the third sector. However, this was rejected by the Lloyds TSB Foundation for Scotland. Lloyds Banking Group is fully committed to remaining one of Scotland's biggest charitable donors."

The deteriorating relationship between Lloyds Banking Group, formed from the merger of Lloyds TSB and HBOS, and its foundation has been met with dismay from charities.

Kathleen Bryson, of the Lighthouse Foundation, an Edinburgh charity that helps families struggling with drug and alcohol addiction and has been a beneficiary of the foundation, said: "I don't think the bank has been very fair. I know they've had a lot of financial problems. But they have also had this covenant to uphold and it is not as if the foundation is asking for a lot."

Martin Sime, chief executive of the Scottish Council for Voluntary Organisations, said: "We're disappointed that the dispute between the banking group and the foundation has come to this. Through the foundation, the bank's profits have funded a great many vital projects. That kind of support is needed now more than ever as charities deal with the consequences of the banking crisis.

"For the sake of the many communities who rely on the foundation's support, we strongly urge the two parties to work together to resolve this dispute."

Scottish Liberal Democrat leader Tavish Scott MSP said: "I cannot believe the way in which Lloyds Banking Group is behaving. If they don't want to fund charity and voluntary work around Scotland, they should say so. This is turning into an unedifying spectacle."

The row between the foundation and bank began last year when Lloyds issued a warning that the banking crisis meant it was not expecting to make any profit in the immediate future.

The bank offered the five UK foundations a funding package - similar to its recent annual income - over the next four years until the bank returned to profit. In exchange, the charities were asked to agree to a new covenant to take 0.5 per cent of profits and accept a Lloyds director on their boards.