‘Going right to the heart of whether we have trust in the markets’

Just as the British government is trying to clear a path for the politically sensitive sale of its 39% stake in Lloyds Bank, resentment is brewing among the investors who would be expected to buy the stock.

Some fund managers say they are wary of buying stock released in staggered sales until banks and regulators clarify the rules on how quickly company owners are allowed to sell more shares — a dispute that could hurt large stock offers such as Lloyds.

They say they have been burned before by banks allowing owners to bypass lock-up agreements, which are meant to prevent too much stock hitting the market too fast and pushing the share price down.

Any boycott could complicate the privatisation of Lloyds Banking Group, one of the UK government’s most high-profile strategies to show it is improving Britain’s national finances and getting banks to lend more to businesses.

“Decisions to blacklist are on people’s agenda,” said one fund manager at a UK investment house running around £80bn (€93.5bn).

“This goes right to the heart of whether we have trust in the markets in which we operate.”

The debate was prompted by a deal in May, where Lloyds sold 15% of wealth manager St James’s Place, just over 10 weeks after a previous sale, despite having agreed not to reduce its stake further for at least a year.

The lock-up was waived by bookrunner Bank of America Merrill Lynch.

Although lock-ups are waived relatively often, and investors are warned that the timetable for additional share sales can change, it usually happens closer to the expiry date than in the St James’s case.

A source said the sale had the backing of the treasury and of UKFI, the organisation which manages the government’s stakes in banks, because Lloyds needed to boost its capital, and the offer drew strong demand.

However, investors say they want clarity on the terms and conditions under which such agreements can be waived.

The British government has flagged it is ready to start offloading shares in Lloyds and on Friday began the process of appointing advisers for the sale, which is expected to take place incrementally over many months.

Further down the line, the government will also look to sell down its even larger stake — 81% — in Royal Bank of Scotland, the parent group of Ulster Bank.

“It is very important the authorities do what they can to shore up investor confidence before the likes of Lloyds and RBS come to market. They will be some of the biggest partial stake sales seen for a long time,” said a second UK investor at a fund management firm.

The Association of British Insurers has written to the Financial Conduct Authority asking it to look at the issue of lock-ups and their importance in maintaining an orderly market, people familiar with the matter said. The association declined to comment.

Some investors are waiting for the outcome of the association’s discussions with regulators and bankers on whether Lloyds and its advisers behaved appropriately before deciding whether to impose boycotts.

A spokesman for the authority said the regulator was aware of the issue and was looking into whether this comes under its remit.