Lloyds Banking Group plc (Form: 20-F, Received: 05/13/2010 13:56:26)

As filed with the Securities and Exchange Commission on 13 May 2010

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

o REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended 31 December 2009

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 001-15246

LLOYDS BANKING GROUP plc

(previously Lloyds TSB Group plc)

(Exact name of Registrant as Specified in Its Charter)

Scotland

(Jurisdiction of Incorporation or Organization)

25 Gresham Street
London EC2V 7HN

United Kingdom

(Address of Principal Executive Offices)

Securities registered or to be registered pursuant to Section 12(b) of the Act:


Title of each class	Name of each exchange on which registered

Ordinary shares of nominal value 10 pence each, represented by American Depositary Shares.	The New York Stock Exchange.

Securities registered or to be registered pursuant to Section 12(g) of the Act:

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None

The number of outstanding shares of each of Lloyds Banking Group plc’s classes of capital or common stock as of 31 December 2009 was:


Ordinary shares, nominal value 10 pence each		63,774,511,536
Limited voting shares, nominal value 10 pence each		80,921,051
Deferred shares, nominal value 15 pence each		27,242,603,417
Preference shares, nominal value 25 pence each		484,144,705
Preference shares, nominal value 25 cents each		3,038,001
Preference shares, nominal value 25 euro cents each		500,000

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes x No o

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Yes o No x

Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x Accelerated filer o Non-Accelerated filer o

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements including in this filing:

U.S. GAAP o International Financial Reporting Standards as issued by the International Accounting Standards Board x
Other o

If ‘Other’ has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow:

Item 17 o Item 18 o

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

TABLE OF CONTENTS



Presentation of information	1

Business overview	2

Selected consolidated financial data	3

Exchange rates	4

Business	4

Operating and financial review and prospects	11

Management and employees	101

Compensation	104

Corporate governance	123

Major shareholders and related party transactions	129

Regulation	133

Listing information	137

Dividends	140

Memorandum and articles of association	141

Taxation	146

Where you can find more information	149

Enforceability of civil liabilities	149

Risk factors	150

Forward looking statements	162

Lloyds Banking Group structure	163

Index to consolidated financial statements	F-1

Glossary	165

Form 20-F cross-reference sheet	167

Exhibit index	169

Signatures	170

P RESENTATION OF INFORMATION

In this annual report, references to the ‘Company’ are to Lloyds Banking Group plc; references to ‘Lloyds Banking Group’, ‘Lloyds’ or the ‘Group’ are to Lloyds Banking Group plc and its subsidiary and associated undertakings; references to ‘Lloyds TSB Bank’ are to Lloyds TSB Bank plc; and references to the ‘consolidated financial statements’ or ‘financial statements’ are to Lloyds Banking Group’s consolidated financial statements included in this annual report. References to the ‘Financial Services Authority’ or ‘FSA’ are to the United Kingdom (the UK) Financial Services Authority.

On 16 January 2009 the Company acquired 100 per cent of the ordinary share capital of HBOS plc and changed the Company’s name to Lloyds Banking Group plc. Accordingly, where this annual report provides information for dates prior to 16 January 2009, unless otherwise indicated, such information relates to the Lloyds Banking Group prior to the acquisition of HBOS plc. References to ‘HBOS’ or the ‘HBOS Group’ are to HBOS plc and its subsidiary and associated undertakings.

The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB).

In this annual report, amounts described as ‘statutory’ refer to amounts included within the Group’s consolidated financial statements.

Lloyds Banking Group publishes its consolidated financial statements expressed in British pounds (‘pounds sterling’, ‘sterling’ or ‘£’), the lawful currency of the UK. In this annual report, references to ‘pence’ and ‘p’ are to one-hundredth of one pound sterling; references to ‘US dollars’, ‘US$’ or ‘$’ are to the lawful currency of the United States (the US); references to ‘cent’ or ‘c’ are to one-hundredth of one US dollar; references to ‘euro’ or ‘e’ are to the lawful currency of the member states of the European Union that have adopted a single currency in accordance with the Treaty establishing the European Communities, as amended by the Treaty of European Union; references to ‘euro cent’ are to one-hundredth of one euro; and references to ‘Japanese yen’, ‘Japanese ¥’ or ‘¥’ are to the lawful currency of Japan. Solely for the convenience of the reader, this annual report contains translations of certain pounds sterling amounts into US dollars at specified rates. These translations should not be construed as representations by Lloyds Banking Group that the pounds sterling amounts actually represent such US dollar amounts or could be converted into US dollars at the rate indicated or at any other rate. Unless otherwise stated, the translations of pounds sterling into US dollars have been made at the noon buying rate in New York City for cable transfers in pounds sterling as certified for customs purposes by the Federal Reserve Bank of New York (the Noon Buying Rate) in effect on 31 December 2009, which was $1.6167 = £1.00. The Noon Buying Rate on 31 December 2009 differs from certain of the actual rates used in the preparation of the consolidated financial statements, which are expressed in pounds sterling, and therefore US dollar amounts appearing in this annual report may differ significantly from actual US dollar amounts which were translated into pounds sterling in the preparation of the consolidated financial statements in accordance with IFRS.

B USINESS OVERVIEW

Lloyds Banking Group is a leading UK based financial services group providing a wide range of banking and financial services, primarily in the UK, to personal and corporate customers. At 31 December 2009, total Lloyds Banking Group assets were £1,027,255 million and Lloyds Banking Group had some 107,000 employees (on a full-time equivalent basis). Lloyds Banking Group plc’s market capitalisation at that date was some £32,327 million. The profit before tax for the 12 months to 31 December 2009 was £1,042 million and the capital ratios as at that date were 12.4 per cent for total capital, 9.6 per cent for tier 1 capital and 8.1 per cent for core tier 1 capital.

Set out below is the Group’s summarised income statement for the last two years:


	2009 £m			2008 £m		¹

Net interest income		9,026			7,718
Other income		36,271			(709	)

Total income		45,297			7,009
Insurance claims		(22,019	)		2,859

Total income, net of insurance claims		23,278			9,868
Operating expenses		(15,984	)		(6,100	)

Trading surplus		7,294			3,768
Impairment		(16,673	)		(3,012	)
Share of results of joint ventures and associates		(752	)		4
Gain on acquisition		11,173			—

Profit before tax		1,042			760


¹	Restated for IFRS 2 (Revised).

Lloyds Banking Group was formed in January 2009 following the acquisition of HBOS and the Group’s main business activities are retail, commercial and corporate banking, general insurance, and life, pensions and investment provision. Services are offered through a number of well recognised brands including Lloyds TSB, Halifax, Bank of Scotland, Scottish Widows, Clerical Medical and Cheltenham & Gloucester, and via a distribution capability comprising the largest branch network in the UK and intermediary channels. The new Group also operates an international banking business with a global footprint in over 30 countries.

Since the acquisition of HBOS in January 2009 there have been four primary operating divisions, which constitute the Group’s reporting segments: Retail, Wholesale, Wealth and International, and Insurance. Retail provides banking, mortgages and other financial services to personal customers in the UK. Wholesale provides banking and related services for major UK and multinational corporates and financial institutions, and small and medium-sized UK businesses. It also provides asset finance to personal and corporate customers and manages Lloyds Banking Group’s activities in financial markets through its treasury function. Wealth and International provides private banking, wealth and asset management in the UK and overseas and corporate, commercial and retail banking services outside the UK. Insurance offers life assurance, pensions and investment products in the UK and Europe and provides general insurance to personal customers in the UK.

The acquisition of HBOS plc on 16 January 2009 has had a significant effect on the comparability of the Group’s financial position and results with prior periods. Profit before tax is analysed further on pages 13 to 23 on a statutory basis and, in order to provide a more comparable representation of business performance of the Group’s segments, on pages 25 to 40 on a combined businesses basis. The key principles adopted in the preparation of the combined businesses basis of reporting are described on page 25. The Group Executive Committee, which is the chief operating decision maker for the Group, reviews the Group’s internal reporting based around these segments (which reflect the Group’s organisational and management structures) in order to assess performance and allocate resources; this reporting is on a combined businesses basis, which the Group Executive Committee feel best represents the underlying performance of the Group. These combined businesses segmental results for 2009 and 2008 are therefore presented in compliance with IFRS 8 but the aggregated total of the combined businesses segmental results constitutes a non-GAAP measure as defined in the SEC’s Regulation G and a reconciliation of this aggregated total to the statutory income statement is therefore provided on page 39. The following table shows the results of Lloyds Banking Group’s Retail, Wholesale, Wealth and International, and Insurance segments and Central group items in the last two fiscal years, and their aggregation.


	2009 £m			2008 £m

Retail		1,382			2,542
Wholesale		(4,703	)		(10,479	)
Wealth and International		(2,356	)		277
Insurance		975			1,540
Group Operations and Central items:
Group Operations		(149	)		(76	)
Central items		(1,449	)		(517	)
		(1,598	)		(593	)

Loss before tax – Combined businesses basis		(6,300	)		(6,713	)

Lloyds Banking Group plc was incorporated as a public limited company and registered in Scotland under the UK Companies Act 1985 on 21 October 1985 with the registered number 95000. Lloyds Banking Group plc’s registered office is The Mound, Edinburgh EH1 1YZ, Scotland, and its principal executive offices in the UK are located at 25 Gresham Street, London EC2V 7HN, United Kingdom, telephone number + 44 (0) 20 7626 1500.

S ELECTED CONSOLIDATED FINANCIAL DATA

The financial information set out in the tables below has been derived from the annual reports and accounts of Lloyds Banking Group plc for each of the past five years adjusted for subsequent changes in accounting policy and presentation. The financial statements for each of the years shown have been audited by PricewaterhouseCoopers LLP, independent accountants.



	2009			2008		¹	2007		¹	2006		¹	2005		¹

Income statement data for the year ended 31 December (£m)
Total income, net of insurance claims		23,278			9,868			10,696			11,098			10,543
Operating expenses		(15,984	)		(6,100	)		(5,568	)		(5,300	)		(5,481	)
Trading surplus		7,294			3,768			5,128			5,798			5,062
Impairment losses		(16,673	)		(3,012	)		(1,796	)		(1,555	)		(1,299	)
Gain on acquisition		11,173			—			—			—			—
Profit before tax		1,042			760			3,999			4,249			3,810
Profit for the year		2,953			798			3,320			2,908			2,545
Profit for the year attributable to equity shareholders		2,827			772			3,288			2,804			2,483
Total dividend for the year ²		—			648			2,026			1,928			1,915

Balance sheet data at 31 December (£m)
Share capital		10,472			1,513			1,432			1,429			1,420
Shareholders’ equity		43,278			9,393			12,141			11,155			10,195
Customer deposits		406,741			170,938			156,555			139,342			131,070
Subordinated liabilities		34,727			17,256			11,958			12,072			12,402
Loans and advances to customers		626,969			240,344			209,814			188,285			174,944
Total assets		1,027,255			436,033			353,346			343,598			309,754

Share information
Basic earnings per ordinary share ³		7.5p			6.7p			28.9p			24.8p			22.0p
Diluted earnings per ordinary share ³		7.5p			6.6p			28.7p			24.5p			21.8p
Net asset value per ordinary share		68p			155p			212p			195p			180p
Total dividend per ordinary share ²		—			11.4p			35.9p			34.2p			34.2p
Equivalent cents per share ^2,4		—			20.3c			71.0c			67.0c			62.2c
Market price per ordinary share (year end)		50.7p			126.0p			472.0p			571.5p			488.5p
Number of shareholders (thousands)		2,834			824			814			870			920
Number of ordinary shares in issue (millions) ⁵		63,775			5,973			5,648			5,638			5,603

Financial ratios (%) ⁶
Dividend payout ratio		—			83.9			61.6			68.7			77.1
Post-tax return on average shareholders’ equity		8.8			7.0			28.1			26.6			25.5
Post-tax return on average assets		0.28			0.21			0.94			0.88			0.83
Average shareholders’ equity to average assets		3.0			2.9			3.3			3.2			3.2
Cost:income ratio ⁷		68.7			61.8			52.1			47.8			52.0

Capital ratios (%) ⁸
Total capital		12.4			11.2			11.0			10.7			10.9
Tier 1 capital		9.6			8.0			8.1			8.2			7.9


¹	Restated for IFRS 2 (Revised).

²	Annual dividends comprise both interim and final dividend payments. The total dividend for the year represents the interim dividend paid during the year and the final dividend, which is paid and accounted for in the following year.

³	Earnings per share calculations for 2008 and earlier years have also been restated for the impact of the bonus element of the share issues in 2009.

⁴	Translated into US dollars at the Noon Buying Rate on the date each payment was made.

⁵	This figure excludes the limited voting ordinary shares owned by the Lloyds TSB Foundations.

⁶	Averages are calculated on a monthly basis from the consolidated financial data of Lloyds Banking Group.

⁷	The cost: income ratio is calculated as total operating expenses as a percentage of total income (net of insurance claims).

⁸	Capital ratios for 2008 and later years are in accordance with Basel II requirements; ratios for 2007 and earlier years reflect Basel I.

EXCHANGE RATES

In this annual report, unless otherwise indicated, all amounts are expressed in pounds sterling. For the months shown the US dollar high and low Noon Buying Rates per pound sterling were:

2010
April

2010
March

2010
February

2010
January

2009
December

2009
November

US dollars per pound sterling:

High

1.55

1.53

1.60

1.64

1.66

1.68

Low

1.52

1.49

1.52

1.59

1.64

For each of the years shown, the average of the US dollar Noon Buying Rates per pound sterling on the last day of each month was:

2009

2008

2007

2006

2005

US dollars per pound sterling:

Average

1.57

1.84

2.01

1.86

1.81

On 30 April 2010, the latest practicable date, the US dollar Noon Buying Rate was $1.5308 = £1.00. Lloyds Banking Group makes no representation that amounts in pounds sterling have been, could have been or could be converted into US dollars at that rate or at any of the above rates.

BUSINESS

HISTORY AND DEVELOPMENT OF LLOYDS BANKING GROUP

The history of the Group can be traced back to the 18th century when the banking partnership of Taylors and Lloyds was established in Birmingham, England. Lloyds Bank Plc was incorporated in 1865 and during the late 19th and early 20th centuries entered into a number of acquisitions and mergers, significantly increasing the number of banking offices in the UK. In 1995, it continued to expand with the acquisition of the Cheltenham and Gloucester Building Society (C&G).

TSB Group plc became operational in 1986 when, following UK Government legislation, the operations of four Trustee Savings Banks and other related companies were transferred to TSB Group plc and its new banking subsidiaries. By 1995, the TSB Group had, either through organic growth or acquisition, developed life and general insurance operations, investment management activities, and a motor vehicle hire purchase and leasing operation to supplement its retail banking activities.

In 1995, TSB Group plc merged with Lloyds Bank Plc. Under the terms of the merger, the TSB and Lloyds Bank groups were combined under TSB Group plc, which was re-named Lloyds TSB Group plc with Lloyds Bank Plc, which was subsequently re-named Lloyds TSB Bank plc, the principal subsidiary. In 1999, the businesses, assets and liabilities of TSB Bank plc, the principal banking subsidiary of the TSB Group prior to the merger, and its subsidiary Hill Samuel Bank Limited were vested in Lloyds TSB Bank plc, and in 2000, Lloyds TSB Group acquired Scottish Widows. In addition to already being one of the leading providers of banking services in the UK, this transaction also positioned Lloyds TSB Group as one of the leading suppliers of long-term savings and protection products in the UK.

On 18 September 2008, with the support of the UK Government, the boards of Lloyds TSB Group plc and HBOS plc announced that they had reached agreement on the terms of a recommended acquisition by Lloyds TSB Group plc of HBOS plc. The shareholders of Lloyds TSB Group plc approved the acquisition at the company’s general meeting on 19 November 2008. On 16 January 2009, the acquisition was completed and Lloyds TSB Group plc changed its name to Lloyds Banking Group plc.

Pursuant to two placing and open offers which were completed by the Company in January and June 2009 and the Rights Issue completed in December 2009, the UK Government acquired 43.4 per cent of the Company’s issued ordinary share capital. Following the issue of ordinary shares in February 2010 pursuant to the Group’s capital raising announced in November 2009, the UK Government’s holding was reduced to approximately 41.3 per cent.

STRATEGY OF LLOYDS BANKING GROUP

The Group’s corporate strategy supports its vision of being recognised as the best financial services company in the UK by customers, colleagues and shareholders. The strategy is focused on being a conservative, ‘through the cycle’ relationship-based business.

The main focus for the Group remains the financial services markets in the UK and the Group’s strategic position was strengthened through the acquisition of HBOS in January 2009. The Group is a well diversified UK financial services group and the largest retail financial services provider in the UK. The Group has leading positions in many of the markets in which it participates, a market leading distribution capability, well recognised brands and a large customer base. The scale of the organisation provides the opportunity to further invest in products and services, systems and training that combined will offer improved choice and service to the Group’s customers. The effective integration of the two businesses will be a significant challenge over the next few years, but comprehensive plans are in place and progress is already being made.

The Group’s corporate strategy is focused on:

DEVELOPING STRONG CUSTOMER FRANCHISES THAT ARE BASED ON DEEP CUSTOMER RELATIONSHIPS

The Group’s businesses are focused on extending the reach and depth of its customer relationships, whilst enhancing product capabilities to build competitive advantage. Striving to understand and effectively meet the needs of the Group’s customers from core banking products to the more specialist services such as insurance, wealth management or corporate banking is at the heart of the Group’s business and is fundamental to ensuring that the Group is developing long-lasting customer relationships.

BUILDING A HIGH PERFORMANCE ORGANISATION

In building a high performance organisation the Group is focused on improving its cost efficiency and utilising its capital more effectively whilst maintaining a prudent approach to risk.

BUSINESS


–	The Group aspires to have one of the lowest cost: income ratios amongst UK financial institutions and further improving the Group’s processing efficiency and effectiveness will remain a priority. The anticipated synergies arising from the acquisition will be key to further improving the Group’s efficiency.

–	Utilising capital more effectively is increasingly important in the current environment and capital will be rigorously allocated across the Group’s portfolio of businesses to support business growth.

–	The prudent Lloyds TSB ‘through the cycle’ approach to risk has been applied to the enlarged Group. The Group’s conservative and prudent approach to risk is core to the business model and the ‘through the cycle’ approach means that the Group will continue to support its customers throughout the economic cycle. The risk structures and frameworks that have been implemented are the foundation for good business management.

MANAGING THE GROUP’S MOST VALUABLE RESOURCE, PEOPLE

Executing the Group’s strategy effectively will only be possible if the Group ensures that deliverables are effectively aligned with its corporate strategy and it manages its most valuable resource, people, well. In driving performance it is important to encourage, manage and develop staff whilst creating a great place to work.

SUMMARY

The Group believes that the successful execution of its strategy to focus on core markets, customer and cost leadership, capital efficiency, a prudent risk appetite and the effective management of its most valuable resource, its people, will bring the Group closer to achieving its vision of being recognised as the best financial services company in the UK.

BUSINESS AND ACTIVITIES OF LLOYDS BANKING GROUP

At 31 December 2008, the Group’s activities were organised into three segments: UK Retail Banking; Insurance and Investments; and Wholesale and International Banking. Following the acquisition of HBOS plc on 16 January 2009, the Group was reorganised into four segments: Retail; Wholesale; Wealth and International; and Insurance. The Group has restated its segmental information for 2008. The Group has determined that the cost to develop the information required to restate 2007 was excessive. In order to provide comparability with the segmental information for 2007 the Group has supplementally presented its segmental information for 2008 on a consistent statutory basis (see also note 4 to the consolidated financial statements).

Further information on the current and previous segments is set out on pages 25 to 50.

MATERIAL CONTRACTS

Lloyds Banking Group plc and its subsidiaries are party to various contracts in the ordinary course of business.

In 2008, the Company entered into a placing and open offer agreement with The Commissioners of Her Majesty’s Treasury (HM Treasury) and the joint sponsors and joint bookrunners named therein, as well as a preference share subscription agreement with HM Treasury, both with effect from 13 October 2008. Prior to the completion of the acquisition of HBOS, HBOS also entered into a placing and open offer agreement with HM Treasury and the joint sponsors and joint bookrunners named therein, as well as a preference share subscription agreement with HM Treasury, both with effect from 13 October 2008.

In 2009, the Company entered into a placing and compensatory open offer agreement with HM Treasury (as amended and restated on 20 March 2009 between the Company, HM Treasury, Citigroup Global Markets U.K. Equity Limited, J.P. Morgan Cazenove Limited and UBS Limited and further amended and restated between the same parties on 18 May 2009). In addition, the Company entered into a registration rights agreement with HM Treasury on 12 January 2009 (as amended with effect from 11 June 2009) pursuant to an obligation to do so under the 2008 placing and open offer agreement referred to above. The Company also entered into a resale rights agreement with HM Treasury pursuant to its obligations under the 2009 placing and open offer agreement. The Company entered into a Pre-Accession Commitments Deed dated 7 March 2009 and a Lending Commitments Deed dated 6 March 2009 (as amended on 23 March 2010) with HM Treasury, both relating to the Company’s proposed participation in the Government Asset Protection Scheme. In addition, in connection with the 2009 rights issue and the Group’s withdrawal from its proposed participation in the Government Asset Protection Scheme, the Company entered into a GAPS Withdrawal Deed with HM Treasury as well as the HMT Undertaking to Subscribe and the Cost Reimbursement Deed. For further details on each of the 2008 and 2009 agreements described above, see Major shareholders and related party transactions – Information about the Lloyds Banking Group’s relationship with the UK Government .

In addition to those agreements discussed above, the Company entered into the following agreements, which it considers to be material:

RIGHTS ISSUE UNDERWRITING AGREEMENT

Pursuant to an underwriting agreement dated 3 November 2009 (entered into in relation to the 2009 rights issue described in Major shareholders and related party transactions – Information about the Lloyds Banking Group’s relationship with the UK Government between the Company, the banks, the senior co-lead managers, the co-lead managers and the co-bookrunner (all as named therein)), new shares in the Company were issued at a price of 37 pence per share. Sufficient new shares were issued to ensure that the gross proceeds of the rights issue receivable by the Company, including pursuant to the HMT Undertaking to Subscribe, were not less than £13.5 billion.

HM Treasury undertook to subscribe for its pro rata entitlement under the rights issue and the new shares that were the subject of the HMT Undertaking to Subscribe were not underwritten pursuant to the Rights Issue Underwriting Agreement. Further details of the HMT Undertaking to Subscribe are set out in Major shareholders and related party transactions – Information about the Lloyds Banking Group’s relationship with the UK Government .

In consideration of their services under the Rights Issue Underwriting Agreement, (i) the underwriters (as named in the Rights Issue Underwriting Agreement) were paid an aggregate base fee of 2.25 per cent of the issue price multiplied by the aggregate number of new shares issued (excluding the new shares that were subscribed by HMT), and (ii) the joint bookrunners (as named in the Rights Issue Underwriting Agreement) were paid additional performance-based discretionary fees. Out of such fees (to the extent received by the joint global co-ordinators (as named in the Rights Issue Underwriting Agreement), the joint global co-ordinators were to pay any sub-underwriting commissions (to the extent that sub-underwriters were procured). The joint global co-ordinators had the ability to arrange sub-underwriting in respect of some, all or none of the new shares issued (other than the new shares to be subscribed by HM Treasury).

The Company agreed to pay all costs and expenses of, or in connection with, the rights issue, the general meeting of the Company convened to approve the rights issue, the related subdivision of the Company’s shares, the allotment and issue of the new shares and the Rights Issue

BUSINESS

Underwriting Agreement, including (but not limited to) the UK Listing Authority and the London Stock Exchange listing and trading fees, other regulatory fees and expenses, printing and advertising costs, postage, Equiniti Limited’s charges (as registrar), its own and the banks’, the senior co-lead managers’ and the co-lead managers’ properly incurred legal and other out of-pocket expenses, all accountancy and other professional fees, properly incurred public relations fees and expenses and all stamp duty and stamp duty reserve tax (if any) and other duties and taxes (other than corporation tax incurred by any of the banks, the senior co-lead managers and the co-lead managers on the commissions payable to them).

The obligations of the banks, the senior co-lead managers and the co-lead managers under the Rights Issue Underwriting Agreement were subject to certain limited conditions which were satisfied.

TOP UP ISSUES UNDERWRITING AGREEMENT

Pursuant to the Top Up Issues Underwriting Agreement dated 3 November 2009 among the Company, LBG Capital No.2 plc (as issuer), Lloyds TSB Bank plc (as guarantor) and the joint bookrunners (as named therein), in the event that the exchange offers described in Risk factors – Government-related risks did not generate or were not expected to generate prior to 30 April 2010, or such other date as the Company and the joint bookrunners might agree, £7.5 billion or more of core tier 1 and/or nominal value of contingent core tier 1 capital, the joint bookrunners severally agreed to underwrite one or more further issues of enhanced capital notes in an aggregate amount sufficient to reduce such shortfall to zero by such date.

In consideration of their underwriting services under the Top Up Issues Underwriting Agreement, and subject to their obligations under the Top Up Issues Underwriting Agreement having become unconditional and the Top Up Issues Underwriting Agreement not having been terminated, the joint bookrunners were to be paid an aggregate underwriting fee of £75 million and additional performance-based discretionary fees.

The obligations of the joint bookrunners under the Top Up Issues Underwriting Agreement and, in relation to each issue of additional enhanced capital notes, the obligations of the joint bookrunners under the Top Up Issues Underwriting Agreement were subject to certain conditions which were satisfied.

Each of the Company, the issuer and the guarantor gave certain customary representations, warranties, undertakings and indemnities to the joint bookrunners, all of which have now expired.

In addition to the fees described above, the joint bookrunners and their affiliates were to be paid pursuant to the Rights Issue Underwriting Agreement and the Top Up Issues Underwriting Agreement:


(a)	an aggregate transaction praecipuum of 0.088 per cent of £15.1 billion (being the aggregate of the underwriting commitments of the underwriters and the joint bookrunners), or of a sum in excess thereof dependent on the notional amount of the securities submitted in the exchange offers; and

(b)	a further discretionary aggregate transaction praecipuum (to be paid at the sole discretion of the Company, as to payment and allocation) of 0.088 per cent of £15.1 billion (being the aggregate of the underwriting commitments of the underwriters and the joint bookrunners), or of a sum in excess thereof dependent on the notional amount of the securities submitted in the exchange offers.

ENVIRONMENTAL MATTERS

The Group has a long-standing commitment to managing its environmental impacts. It first introduced an environmental policy in 1996. In 2009, the Group reviewed the policy against best practice to ensure that it is fit for purpose across the whole of the Group. Further work will be undertaken during 2010 to produce and embed an enhanced and integrated environmental management system.

CLIMATE CHANGE

The UK Government is committed to reducing the country’s carbon emissions by 80 per cent from 1990 levels by 2050. A central part of its strategy is the introduction of a mandatory climate change and energy savings scheme, the Carbon Reduction Commitment Energy Efficiency Scheme, due to start in April 2010. The Group qualifies as a participant in this scheme, which requires a collective 22 per cent emissions reduction from participants by 2012. The Group fully understands its obligations and is committed to driving down CO ₂ emissions. It is developing a carbon management policy and strategy to deliver a single approach for the new combined Group, and continues to invest significant capital in carbon reduction projects across the Group’s estate.

In 2009 the Group chaired an initiative with Business in the Community and the Cambridge Programme for Sustainability Leadership to create a Guide for Carbon Management in the Supply Chain. The guide has helped inform the Group’s approach and, as a freely downloadable resource, the Group is also encouraging its suppliers and customers to use it to help manage carbon risks in the supply chain.

Lloyds Banking Group is represented by Group Executive Director Truett Tate on the ‘Corporate Leaders Group on Climate Change’. This group of leading businesses released the ‘Copenhagen Communiqué’, widely viewed as the progressive voice of business, for the Copenhagen Climate Change talks in December 2009.

BUSINESS TRAVEL

In 2009 the Group introduced a common travel policy across the organisation. It supports a focus on sustainable travel and helped the Group deliver a 13 per cent reduction in the costs of travel.

The Group’s Sustainability Network holds events and runs awareness campaigns to encourage colleagues to play their part. Travel reduction was one of the Network’s key themes in 2009, inspiring colleagues to take steps to reduce their travel footprints.

The Group achieved a reduction of 143,000 journeys in 2009 compared with 2008. Across the combined Group, the volume of teleconferences increased by over 40 per cent to over 1.1 million. The Group will continue to promote virtual conferencing technologies to colleagues as an environmentally friendly, cost efficient alternative to travelling.

ENVIRONMENTAL RISK MANAGEMENT

The Group has introduced policies and procedures to reduce the environmental impact of its lending activities. The Group aims to reduce environmental impacts through effective risk management. In 2009 it implemented an integrated groupwide environmental risk policy to manage these risks; this requires transactions to be assessed for material risks as part of the credit sanctioning process.

BUSINESS

EQUATOR PRINCIPLES

The Equator Principles are voluntary guidelines for the financial industry to manage social and environmental issues in project financing. Lloyds Banking Group is a signatory to the Equator Principles.

During 2009 the Group implemented a harmonised groupwide approach to monitoring and reporting Equator Principles transactions, and training colleagues on the Equator Principles. An Equator Principles Review Group has been formed, comprising experts from both Risk and Project Finance teams, and supported by external environmental consultants. This Group is responsible for reviewing all new Equator Principle transactions, to ensure that each transaction is compliant and is consistent with the group environmental risk policy, prior to being sanctioned.

Equator Principles reporting January to December 2009:

DEALS


	Equator Principle risk category

	Category A higher risk		Category B medium risk		Category C lower risk		Total

Completed		—		7		7		14
In progress		—		4		1		5
Not completed		—		1		—		1

		—		12		8		20


GEOGRAPHY OF COMPLETED TRANSACTIONS

	Category A higher risk		Category B medium risk		Category C lower risk		Total

US		—		2		2		4
Europe		—		4		5		9
Middle East		—		1		—		1

		—		7		7		14


INDUSTRY OF COMPLETED TRANSACTIONS

					Number		£m

Renewables						4		89
Infrastructure						7		376
Energy and utilities						3		72

						14		537

PROPERTIES

As at 31 December 2009, Lloyds Banking Group occupied 3,467 properties in the UK. Of these, 953 were held as freeholds, 98 as long-term leaseholds and 2,416 as short-term leaseholds. The majority of these properties are retail branches, widely distributed throughout England, Scotland and Wales. Other buildings include the Lloyds Banking Group’s head office in the City of London and customer service and support centres located to suit business needs but clustered largely in London, Birmingham, West Yorkshire, Chester and Bristol (in England), Edinburgh (in Scotland) and Cardiff and Newport (in Wales).

In addition, there are 699 properties which are either sub-let or vacant. There are also a number of ATM units situated throughout the UK, the majority of which are held as short-term leasehold. In addition, the Group also owns, leases or uses under licence properties for business operations elsewhere in the world, principally in Spain, Switzerland, Dubai, Asia and Ireland.

LEGAL ACTIONS

During the ordinary course of business the Group is subject to threatened or actual legal proceedings and regulatory challenge both in the UK and overseas.

UNARRANGED OVERDRAFT CHARGES

In April 2007, the OFT commenced an investigation into the fairness of personal current accounts and unarranged overdraft charges. At the same time, it commenced a market study into wider questions about competition and price transparency in the provision of personal current accounts.

The Supreme Court published its judgment in respect of the fairness of unarranged overdraft charges on personal current accounts on 25 November 2009, finding in favour of the litigant banks. On 22 December 2009, the OFT announced that it will not continue its investigation into the fairness of these charges. The Group is working with the regulators to ensure that outstanding customer complaints are concluded as quickly as possible and anticipate that most cases in the county courts will be discontinued. The Group expects that some customers will argue that despite the test case ruling they are entitled to a refund of unarranged overdraft charges on the basis of other legal arguments or challenges. The Group is robustly defending any such complaints or claims and does not expect any such complaints or claims to have a material effect on the Group.

The OFT however continued to discuss its concerns in relation to the personal current account market with the banks, consumer groups and other organisations under the auspices of its Market Study into personal current accounts. In October 2009, the OFT published voluntary initiatives agreed with the industry and consumer groups to improve transparency of the costs and benefits of personal current accounts and improvements to the switching process. On 16 March 2010 the OFT published a further update announcing several further voluntary industry wide initiatives to improve a customer’s ability to control whether they used an unarranged overdraft and to assist those in financial difficulty. However, in light of the progress it noted in the unarranged overdraft market since July 2007 and the progress it expects to see over the next two years, it has decided to take no further action at this time and will review the unarranged overdraft market again in 2012. The OFT also announced it will shortly be commencing an investigation into the barriers to entry in the personal current accounts market.

BUSINESS

INTERCHANGE FEES

The European Commission has adopted a formal decision finding that an infringement of European Commission competition laws has arisen from arrangements whereby MasterCard issuers charged a uniform fallback interchange fee in respect of cross border transactions in relation to the use of a MasterCard or Maestro branded payment card. The European Commission has required that the fee be reduced to zero for relevant cross-border transactions within the European Economic Area. This decision has been appealed to the General Court of the European Union (the General Court). Lloyds TSB Bank plc and Bank of Scotland plc (along with certain other MasterCard issuers) have successfully applied to intervene in the appeal in support of MasterCard’s position that the arrangements for the charging of a uniform fallback interchange fee are compatible with European Commission competition laws. MasterCard has announced that it has reached an understanding with the European Commission on a new methodology for calculating intra European Economic Area multi-lateral interchange fees on an interim basis pending the outcome of the appeal. Meanwhile, the European Commission and the UK’s OFT are pursuing investigations with a view to deciding whether arrangements adopted by other payment card schemes for the levying of uniform fallback interchange fees in respect of domestic and/or cross-border payment transactions also infringe European Commission and/or UK competition laws. As part of this initiative, the OFT will also intervene in the General Court appeal supporting the European Commission position and Visa reached an agreement with the European Commission to reduce the level of interchange for cross-border debit card transactions to the interim levels agreed by MasterCard. The ultimate impact of the investigations on the Group can only be known at the conclusion of these investigations and any relevant appeal proceedings.

PAYMENT PROTECTION INSURANCE

UK COMPETITION COMMISSION

In January 2009, the Competition Commission completed its formal investigation into the supply of Payment Protection Insurance (PPI) services (except store card PPI) to non-business customers in the UK. Various members of the Group underwrite PPI, while other members distribute PPI, by offering it for sale with a variety of the credit products which they supply.

On 5 June 2008, the Competition Commission issued its provisional findings, to the effect that there are market features which prevent, restrict or distort competition in the supply of PPI to non-business customers, with an adverse effect on competition and with the result being detrimental to consumers.

Following consultation, the Competition Commission published its final report on 29 January 2009 setting out its remedies. In summary, the Competition Commission has decided to adopt the following remedies: (i) a prohibition on the active sale of PPI by a distributor to a customer within seven days of the distributor’s sale of credit to that customer. However, customers may pro-actively return to the distributor to initiate a purchase by telephone or online from 24 hours after the credit sale; (ii) a requirement on all PPI providers to provide certain information and messages in PPI marketing materials; (iii) a requirement to provide personal PPI quotes to customers; (iv) a requirement on all PPI providers to provide certain information on PPI policies to the FSA; (v) a recommendation to the FSA that it use the information provided under the requirement in (iii) to populate its PPI price comparison tables; (vi) a requirement on distributors to provide an annual statement for PPI customers containing information on their PPI policy and what it costs; and (vii) a prohibition on the levying by distributors of payments for PPI on a single premium basis. Instead, distributors are permitted to charge only regular premiums at a constant rate, paid monthly or annually. This remedy therefore precludes the selling of multi-year PPI policies for a single premium.

On 30 March 2009, Barclays Bank PLC lodged an appeal in the Competition Appeal Tribunal against the Competition Commission’s findings. In particular, it requested that the Competition Appeal Tribunal quash the decision of the Competition Commission insofar as it relates to the prohibition of distributors selling PPI at the credit point of sale and the Competition Commission’s findings on market definition and the nature and extent of competition in the supply of PPI. The Group filed a notice of its intention to intervene in the appeal on 23 April 2009. On 28 April 2009, the Group was granted permission by the Competition Appeal Tribunal to intervene in the appeal. The hearing of the appeal took place from 7 September 2009 to 11 September 2009. The Competition Appeal Tribunal handed down its judgment on 16 October 2009. It found in favour of Barclays in respect of its challenge to the Competition Commission’s prohibition of distributors selling PPI at the credit point of sale but it did not uphold Barclays’ challenge to the Competition Commission’s findings on market definition. The matter has been referred back to the Competition Commission with direction to reconsider their remedies and make a new decision in accordance with the Competition Appeal Tribunal’s ruling. This may or may not result in the Competition Commission ultimately reaching a different conclusion.

Depending on the outcome of the referral back to the Competition Commission, the Competition Commission’s decision may have a significant adverse impact on the level of sales and thus the revenue generation and profitability of the payment protection insurance products which the Group offers its customers, but the ultimate impact would be determined by a number of factors including the extent to which the Group was able to mitigate the potentially adverse effects of such statutory changes through restructuring the payment protection products which it offers its customers and/or developing alternative products and revenue streams. To this end, the Group took a commercial decision to sell only regular monthly premium PPI to its personal loan customers in the UK from early 2009. The FSA subsequently wrote to certain other firms still selling single premium PPI with unsecured personal loans asking them to withdraw the product as soon as possible, and no later than 29 May 2009.

On 1 July 2008, the Financial Ombudsman Service referred concerns regarding the handling of PPI complaints to the FSA as an issue of wider implication. The Group has been working with other industry members and trade associations in preparing an industry response to address regulatory concerns regarding the handling of PPI complaints. On 29 September 2009, the FSA issued a consultation paper on PPI complaints handling. The FSA has escalated its regulatory activity in relation to past PPI sales generally and has proposed new guidance on the fair assessment of a complaint and the calculation of redress and a new rule requiring firms to reassess historically rejected complaints. On 9 March, the FSA issued a further consultation paper on this area, the consultation period for which closed on 22 April (the Group has responded to this consultation). The FSA’s proposals are materially the same, although it has placed the new rule requiring firms to reassess historically rejected claims on hold for the present.

The statement on 29 September 2009 also announced that several firms had agreed to carry out reviews of past sales of single premium loan protection insurance. The Group has subsequently agreed in principle that it will undertake a review in relation to sales of single premium loan protection insurance made through its branch network since 1 July 2007. The precise details of the review are still being discussed with the FSA. The ultimate impact on the Group of any review and/or the FSA’s complaints handling proposals can only be known at the conclusion of these discussions and on publication of the FSA’s final rules.

US ECONOMIC SANCTIONS

BUSINESS

settlement documentation contains details of the results of the investigations including the identification of certain activities relating to Iran, Sudan and Libya which Lloyds TSB Bank plc conducted during the relevant period. In 2008, Lloyds TSB Bank plc made a provision of £180 million which fully covered the settlement amount paid to the Department of Justice and the New York District Attorney’s Office. On 22 December 2009 OFAC announced the settlement it had reached with Lloyds TSB Bank plc in relation to its investigation and confirmed that the settlement sum due to OFAC had been fully satisfied by Lloyds TSB Bank plc’s payment to the Department of Justice and the New York District Attorney’s Office. No further enforcement actions are expected in relation to the matters set out in the settlement agreements. A purported shareholder filed a derivative civil action in the Supreme Court of New York, Nassau County on 26 February 2009 against certain current and former directors, and nominally against Lloyds TSB Bank plc and the Company, seeking various forms of relief following the settlement. The derivative action is at a very early stage, but the ultimate outcome of the action is not expected to have a material impact on the Group.

OTHER LEGAL ACTIONS

In addition to the matters listed above the Group is subject to threatened or actual legal proceedings and regulatory challenge both in the UK and overseas. All such material cases are periodically reassessed, with the assistance of external professional advisers where appropriate, to determine the likelihood of the Group incurring a liability. In those instances where it is concluded that it is more likely than not that a payment will be made, a provision is established to management’s best estimate of the amount required to settle the obligation at the relevant balance sheet date. In some cases it will not be possible to form a view, either because the facts are unclear or because further time is needed to properly assess the merits of the case and no provisions are held against such cases. However the Group does not currently expect the final outcome of any such case to have a material adverse effect on its financial position.

COMPETITIVE ENVIRONMENT

The Group is a diversified UK based financial services group providing a wide range of banking and financial services, predominantly in the UK, to personal and corporate customers. Its main business activities are retail, commercial and corporate banking, general insurance, and life, pensions and investment provision.

In the retail banking market, the Group competes with banks and building societies, major retailers and internet-only providers. In the mortgage market, competitors include the traditional banks and building societies and specialist mortgage providers. The Group competes with both UK and foreign financial institutions in the wholesale banking markets and with bancassurance, life assurance and general insurance companies in the UK insurance market.

The Group’s businesses are subject to inherent risks arising from general and sector-specific economic conditions in the markets in which it operates, particularly the United Kingdom in which the Group’s earnings are predominantly generated. Following the acquisition of HBOS, the Group now has greater exposure in a number of other jurisdictions; these include Ireland, Australia and the United States, and hence the Group is exposed to general and sector-specific economic conditions in these markets. Over approximately the past two and a half years, the global economy and the global financial system have been experiencing a period of significant turbulence and uncertainty, particularly the very severe dislocation of the financial markets around the world that began in August 2007 but substantially worsened in September 2008 and has contributed to related problems at many large global and UK commercial banks, investment banks, insurance companies and other financial and related institutions.

UK Government, EU or other intervention in the banking sector may impact the competitive position of banks within a country and among international competitors which may be subject to different forms of intervention, thus potentially putting the Group at a competitive disadvantage to other banks.

RECENT DEVELOPMENTS

SHARE CAPITAL

As part of the Group’s recapitalisation and withdrawal from its proposed participation in the Government Asset Protection Scheme the Group announced on 23 November 2009 that an aggregate amount of £1.48 billion would be issued in the form of new ordinary shares of Lloyds Banking Group plc in exchange for certain existing preference shares and preferred securities. The conversion price was determined as the five day weighted average price for the five trading days ending on 11 February 2010.

On 18 February 2010, the exchange completed and 3,141 million ordinary shares in Lloyds Banking Group plc were issued as consideration for the redemption of preference shares and preferred securities. In accordance with the Group’s accounting policy in respect of debt for equity exchanges, a gain of £85 million will be recognised on this exchange transaction in the year ended 31 December 2010.

SALE OF ESURE

On 11 February 2010, the Group announced the sale of its 70 per cent stake in esure, the online insurer, to a management buyout vehicle to be called esure Group Holdings Limited, led by the esure chairman, for a cash consideration slightly in excess of book value in the Lloyds Banking Group accounts. The impact on the Group’s accounts is not expected to be material.

TRADING UPDATE – 19 MARCH 2010

The Group issued an update on its current trading on 19 March 2010, which included the following comments:

In the first 10 weeks of 2010, the Group’s trading performance has been strong and we are pleased with the Group’s performance against each area of recent guidance. The banking net interest margin is trending in line with recent guidance and this has supported a good level of income growth, on a combined businesses basis and excluding last year’s gains from liability management transactions.

Costs have remained well controlled and are lower than the equivalent period in 2009. Impairment provisions are currently trending at lower levels than anticipated and as a result the Group now expects to deliver a better impairment performance than previously guided, in both the retail and corporate businesses, in 2010. Overall, based on the Group’s current economic and regulatory assumptions which remain unchanged since our recent 2009 preliminary results announcement, the Group believes that it will be profitable on a combined businesses basis (see Operating and financial review and prospects – Line of business information – 2009 compared to 2008 and Combined businesses basis summary – 2009 compared with 2008 ) in 2010.

BOARD CHANGES

On 11 February 2010, the Group announced the appointment of Glen Moreno and David Roberts as directors with effect from 1 March 2010. On 22 March 2010, the Group announced that Dr Wolfgang Berndt would retire as a director at the annual general meeting on 6 May 2010.

BUSINESS

INTERIM MANAGEMENT STATEMENT

The Group issued an Interim Management Statement on 27 April 2010, which included the following comments:

‘The Group is continuing to see positive trends in line with our recent trading update on 19 March 2010. In particular, impairments have slowed significantly in the first few months of the year giving us confidence that we will achieve a better financial performance than previously guided. I am pleased to report that we returned to profitability in the first quarter and expect this momentum to be sustained throughout 2010.’

	Eric Daniels
	Group Chief Executive

Key highlights

In the first quarter of 2010 the Group returned to profitability on a combined businesses basis due mainly to a significant slowing of impairments in the wholesale business (see Operating and financial review and prospects – Line of business information – 2009 compared to 2008 and Combined businesses basis summary – 2009 compared to 2008 ).


•	The Group is delivering good income growth, on a combined businesses basis, excluding last year’s impact from liability management transactions.

•	Banking net interest margins are running in line with recent guidance of circa 2 per cent for the full year.

•	Costs continue to be well controlled and remain lower than the equivalent period in 2009. Integration savings are being delivered in line with recent guidance and the Group remains on track to achieve a £2 billion run-rate of synergies and other operating efficiencies by the end of 2011.

•	The run rate of impairments has slowed significantly and has continued to perform better than our 2009 preliminary results guidance in both retail and corporate businesses.

•	Customer deposit gathering has remained robust, with good growth in balances, while lending balances are flat. Asset reductions within the Group’s portfolios identified for run-off continue albeit, as expected, at a slower pace than last year.

•	The Group continues to de-risk its funding position, with strong term issuance in the early part of the year while continuing to maintain high levels of liquid assets.

Good trading performance with guidance reaffirmed

The Group is continuing to see good income growth on a combined businesses basis (excluding the impact of liability management exercises). In particular, margin improvements have more than offset the impact of asset reductions over the last year.

Overall banking margins are trending positively and we continue to be confident of delivering a circa 2 per cent margin for the full year.

Income in the Group’s core banking businesses has continued to benefit from higher asset pricing and lower funding costs. Good progress continues to be made in improving the quality of both sides of our balance sheet as we continue to grow our customer relationship focused assets and deposits, whilst running down our non-core assets. Deposit gathering activities during the first quarter have seen continued good momentum, particularly in the Retail business where we have built on the strong product sales over the last 12 months and delivered good levels of growth in both current account and savings balances. In our Wealth business income levels were supported further by improved equity market conditions.

In Insurance, new business sales are modestly lower than the equivalent period of last year. However our decision in 2009 to refocus certain product offerings to improve returns is having a favourable impact on the profitability of those products.

The Group’s strong track record of effective cost control continues to yield benefit. The integration programme is progressing well and synergy savings continue to be delivered in line with the recent guidance. As a result, the Group remains on track to deliver on its commitment to a £2 billion run-rate of synergies and other operating efficiencies by the end of 2011.

Impairments have slowed significantly as a result of proactive management and more benign economic conditions and we continue to see lower impairments in both our Retail secured and unsecured lending portfolios. In our Wholesale division, the level of impairments has been significantly lower than the last quarter of 2009 and is also at a lower level than our initial expectations for 2010. In our Wealth and International division, impairments continue at a high level, principally as a result of further provisions in Ireland relating to our commercial real estate portfolio; however, the level of impairments in the first quarter of 2010 was lower than the last quarter of 2009 and we continue to believe that we are past the peak for impairment losses in the division. We remain vigilant to changes in economic conditions and to individual lending positions and continue to monitor the position of the Irish economy in particular.

The Group is pleased to have returned to profitability, on a combined businesses basis, in the first quarter. Based on the Group’s current economic and regulatory assumptions we expect this trend to continue and for the Group to deliver a combined businesses profit at both the half and full year.

Further strengthening of the balance sheet position

Customer deposits have grown robustly during the first quarter by over £5 billion, mainly in our Retail division. We are supporting our relationship customers and the economy by continuing to lend. Lending balances have remained flat overall, with assets within the Group’s run-off portfolios continuing to reduce, albeit at a slower pace than last year. Our assets continue to be appropriately priced for risk and funding costs and risk-weighted assets remain broadly unchanged to the position at the end of 2009.

Since the start of 2010, we have seen further improvements in wholesale funding market conditions and we are pleased with progress on our public term issuance so far this year. The Group continues to maintain a substantial liquid asset portfolio which is now broadly equivalent to the proportion of our wholesale funding (including bank deposits) which has a maturity of less than one year. In addition, the Group has maintained the maturity profile of wholesale funding such that 50 per cent has a maturity date of over one year.

As a result, the Group has continued to improve its liquidity and funding position, further de-risking the balance sheet.

The foregoing trading update and interim management statement include certain forward looking statements with respect to management’s expectations for the Group’s financial condition and performance, which by their nature involve risk and uncertainty. See Forward looking statements and Risk factors for a discussion of factors that could cause actual results to differ materially from the expectations expressed in such forward looking statements.

O PERATING AND FINANCIAL REVIEW AND PROSPECTS

The results discussed below are not necessarily indicative of Lloyds Banking Group’s results in future periods. The following information contains certain forward looking statements. For a discussion of certain cautionary statements relating to forward looking statements, see Forward looking statements .

The following discussion is based on and should be read in conjunction with the consolidated financial statements and the related notes thereto included elsewhere in this annual report. For a discussion of the accounting policies used in the preparation of the consolidated financial statements, see Accounting policies in note 2 to the consolidated financial statements.

TABLE OF CONTENTS



Overview and trend information		12

Critical accounting policies		13

Future accounting developments		13

Results of operations – 2009, 2008 and 2007		13

Economic profit		23

Integration		24

Line of business information		25

Average balance sheet and net interest income		53

Changes in net interest income – volume and rate analysis		56

Risk management		57

Credit risk		64

Loan portfolio		67

Risk elements in the loan portfolio		72

Market risk		77

Insurance risk		80

Operational risk		81

Financial soundness		83

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

O VERVIEW AND TREND INFORMATION

THE ECONOMY

2009 has been a mixed year in terms of economic developments. With an estimated fall of 5 per cent, UK GDP growth was towards the bottom end of the Group’s, and the market’s, range of expectations. The UK experienced the biggest recorded single-year GDP fall since the 1930s, and the peak to trough decline in GDP currently matches the early 1980s recession (see chart 1). The downturn in most other industrialised economies was of similar magnitude. In response, official interest rates have fallen to their lowest level since the Bank of England was founded. Interest rates elsewhere have also fallen to extremely low levels.

CHART 1:


UK GDP IN THE LAST THREE RECESSIONS

(LINE GRAPH)

CHART 2:


UK EMPLOYMENT IN THE LAST THREE RECESSIONS

(LINE GRAPH)

CHART 3:


UK COMPANY FAILURES IN THE LAST THREE RECESSIONS

(LINE GRAPH)

Perhaps partly in response to such low interest rates, other economic indicators have not turned out so badly in 2009 as many had feared.

At the beginning of the year, most commentators would have expected such a sharp drop in GDP to result in much worse unemployment numbers than has been the case. In fact, employment has held up quite well given the severity of the decline in GDP (see chart 2). Similarly, the rate of company failures so far in this downturn has been lower than might have been expected given the severity of the GDP decline (see chart 3).

Companies went into this recession in better shape generally than during the last recession, and seem to have taken early action to cut investment, stocks and working hours. Helped by very low interest rates, the aggregate financial position of the corporate sector has remained strong. This has undoubtedly helped to limit failure rates. And this in turn has probably helped to limit the rise in unemployment – the biggest single cause of job losses in most recessions is business failure.

Meanwhile, property prices have also held up better than many forecasters had expected. At the beginning of the year, the average view was that house prices would fall by around 15 per cent during 2009, and decline further in 2010. In fact, the Halifax house price index ended the year higher than twelve months earlier, and other indices showed a similar picture. House prices fell during the early part of the year, but then started to recover in the second half and finished the year still above long-term average levels relative to household incomes, albeit well down on their peak in 2007.

Commercial property prices showed a similar recovery. Having fallen sharply in late 2008 and early 2009, commercial property capital values have stabilised recently, despite continued falls in rental values, and many forecasts for 2009 and 2010 have been revised up. At the end of 2009, the consensus forecast was for modest growth in capital values this year and next, even as rental values decline further.

Looking forward, the most likely immediate economic scenario is one of slow and erratic growth. GDP is estimated to have begun to recover in Q4 2009, and may even have done so earlier once final revisions are made to earlier estimates for Q3. Survey evidence, including purchasing manager indices, was pointing to positive growth in manufacturing and services for most of the second half of 2009. Retail sales growth accelerated in late 2009, although some of this may have been spending brought forward to beat the restoration of Value Added Tax (a UK sales tax) to 17.5 per cent. Unemployment appears to have levelled off, at least temporarily, and actually fell in late 2009. Financial market conditions have continued to normalise, in line with the improving economic outlook. The consensus forecast for 2010 has risen gradually, and by the end of 2009 was suggesting 2010 GDP growth of around 1.5 per cent, close to the Group’s own central scenario. This slow recovery is consistent with the sort of upturn seen after past financial crises. But even that below-trend growth relies mainly on a recovery in net external trade and an end to company destocking. Domestic demand growth is likely to be minimal in 2010.

Alternative scenarios remain possible. The Bank of England’s most likely outcome, as published in the February 2010 Inflation Report, is for a somewhat faster recovery during 2010 than the consensus forecast. However, the risks around that are skewed towards the downside.

It is possible that the economy will dip again if hit by some new shock – and what might start as a temporary setback to recovery could have longer-lasting effects if it damages consumer, business or financial market confidence. Furthermore, uncertainties remain about how the economy will respond as and when the Bank of England begins to reverse quantitative easing and restore interest rates to more normal levels, and the Government begins to take action to reduce the large fiscal deficit.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

IMPACT ON OUR MARKETS

2009 was a year of weakening growth in most of the Group’s markets. On the retail side, net new market mortgage lending (i.e. new lending minus repayments) was very low throughout 2009, as a result of which growth in outstanding balances slowed to around 1 per cent by year end. Net new market unsecured consumer lending was very weak in the first half of the year, and turned negative in the second half.

Weakening lending growth appears to have been driven by both supply and demand. Some lenders have pulled back from the market, especially from higher-risk segments. But at the same time, data on the Group’s retail customers shows that they have reacted to the recession by prioritising reducing debt. This trend is apparent across all the Group’s customer groups, whether split by age, income, or indebtedness. This helps to explain why market deposit growth also weakened in 2009, despite a higher national saving ratio. Households have on average chosen to use the cash freed up by reduced spending and lower debt interest payments to pay off debt rather than save more.

Market mortgage arrears rose during the first half of 2009, but then fell back in the second half. Market credit card arrears also fell during the second half. Improving arrears trends may have been helped by households starting to pay down debt. And many mortgage borrowers will have found their debt servicing costs reduced during 2009 as their variable mortgage rates fell or as their fixed rate loans expired and they rolled off onto lower standard variable rates. Quite strong growth in the average household’s real disposable income in 2009 will also have helped, aided by better-than-expected employment levels in the second half and falling inflation.

Businesses also appear to have used 2009 to strengthen their financial position where possible. Sharp cutbacks in investment spending, and in stocks, have enabled businesses in aggregate to remain in financial surplus and reduce their reliance on external credit – from banks, trade creditors and others. Large companies have also taken advantage of the recovery in financial markets to increase capital market borrowing thereby further reducing bank credit demand. As a result, the outstanding stock of bank and building society lending to private non-financial businesses declined in 2009, and corporate deposits returned to positive growth despite the weakness of demand in many companies’ markets. Strengthened corporate finances were probably a major factor limiting the growth in company failures in 2009. Indeed, as chart 3 shows, the rate of company failures reduced in the second half of 2009.

The Group expects that the weakness of likely economic recovery will be mirrored in slow growth of major banking markets in 2010 as both households and businesses continue to restructure their finances. However, 2010 may see company failure rates rise again, since it is typically when companies have to restock to meet an upturn in demand that the financial pressures on them are greatest.

C RITICAL ACCOUNTING POLICIES

The preparation of financial statements requires management to make estimates and assumptions that affect amounts reported therein. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be based upon amounts which differ from those estimates.

The accounting policies that are deemed critical to the Group’s results and financial position, based upon materiality and significant judgements and estimates, are discussed in note 3 to the consolidated financial statements.

F UTURE ACCOUNTING DEVELOPMENTS

Future developments in relation to the Group’s IFRS reporting are discussed in note 56 to the consolidated financial statements.

R ESULTS OF OPERATIONS – 2009, 2008 AND 2007


SUMMARY

	2009 £m			2008 £m		¹	2007 £m		¹

Net interest income		9,026			7,718			6,099
Other income		36,271			(709	)		12,119

Total income		45,297			7,009			18,218
Insurance claims		(22,019	)		2,859			(7,522	)

Total income, net of insurance claims		23,278			9,868			10,696
Operating expenses		(15,984	)		(6,100	)		(5,568	)

Trading surplus		7,294			3,768			5,128
Impairment		(16,673	)		(3,012	)		(1,796	)
Share of results of joint ventures and associates		(752	)		4			10
Gain on acquisition		11,173			—			—
Profit on sale of businesses		—			—			657

Profit before tax		1,042			760			3,999
Taxation		1,911			38			(679	)

Profit for the year		2,953			798			3,320


Profit attributable to minority interests		126			26			32
Profit attributable to equity shareholders		2,827			772			3,288

Profit for the year		2,953			798			3,320


¹	Restated for IFRS 2 (Revised).

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

2009 COMPARED WITH 2008

Profit before tax was £282 million, or 37 per cent, higher at £1,042 million in 2009 compared to £760 million in 2008; however, the profit in 2009 included a negative goodwill credit of £11,173 million in relation to the acquisition of HBOS plc by the Group; a fee of £2,500 million paid to the UK Government as part of the agreement for the Group not to enter into the Government Asset Protection Scheme; and significant post-acquisition impairment losses in respect of the HBOS portfolios.

Total income increased by £38,288 million to £45,297 million in 2009 compared to £7,009 million in 2008. Excluding the total income of £23,240 million arising on the consolidation of HBOS’s post-acquisition results, total income was £15,048 million higher at £22,057 million in 2009 compared to £7,009 million in 2008; with a reduction in the Group’s net interest income being more than offset by a large increase in other income.

Net interest income was £1,308 million, or 17 per cent, higher at £9,026 million in 2009 compared to £7,718 million in 2008. Excluding the net interest income of £4,049 million arising on the consolidation of HBOS’s post-acquisition results, net interest income was £2,741 million, or 36 per cent, lower at £4,977 million in 2009 compared to £7,718 million in 2008. Excluding the interest flows arising on the consolidation of HBOS’s post-acquisition results, both interest income and interest expense fell in response to the historically low interest rate environment that prevailed throughout 2009; net interest income was reduced as the benefit of higher asset pricing was more than offset by the impact of lower deposit margins, reflecting the impact of falling base rates, and higher funding costs, which included the impact of the Group extending its wholesale funding maturity profile. The Group’s net interest margin decreased by 157 basis points to 1.06 per cent in 2009 compared to 2.63 per cent in 2008 with reductions across the Group’s businesses.

Other income was £36,980 million higher at £36,271 million in 2009 compared to a deficit of £709 million in 2008. Fee and commission income was £1,023 million, or 32 per cent, higher at £4,254 million in 2009 compared to £3,231 million in 2008. However, excluding the fee and commission income which arose on the consolidation of HBOS’s post-acquisition results, fee and commission income was £479 million, or 15 per cent, lower at £2,752 million in 2009 compared to £3,231 million in 2008, largely due to a £424 million reduction in insurance broking income as a result of a market-wide move to monthly premiums on payment protection products. Net trading income improved by £28,284 million to net income of £19,098 million in 2009 compared to a net loss of £9,186 million in 2008. Excluding net trading income of £12,093 million arising from the consolidation of the post-acquisition results of HBOS, net trading income improved by £16,191 million to net income of £7,005 million in 2009 compared to a net loss of £9,186 million in 2008. Trading income in 2008 in the Group’s banking operations was particularly impacted by market dislocation, leading to significant downwards valuations on a number of assets; this was not repeated in 2009. In addition there was an improvement of £14,179 million in gains on policyholder investments held in the Group’s insurance businesses (and largely offset by an increase in the claims expense, see below) as the improvement in market conditions has led to trading profits in 2009, compared to substantial losses in 2008. During 2009 the Group exchanged certain existing subordinated debt securities for new securities, these exchanges resulted in a gain on extinguishment of the existing liability of £1,498 million, being the difference between the carrying amount of the securities extinguished and the fair value of the new securities together with related fees and costs.

Insurance claims were £24,878 million higher at an expense of £22,019 million in 2009 compared to a credit of £2,859 million in 2008. Excluding the insurance claims expense of £12,385 million arising on the consolidation of HBOS’s post-acquisition results, insurance claims were £12,493 million higher at an expense of £9,634 million in 2009 compared to a credit of £2,859 million in 2008. The insurance claims amount in respect of life and pensions business in 2008 was a credit of £3,052 million as a result of the negative returns in that year on policyholder investments in the long-term insurance business which led to a reduction in insurance related liabilities and a credit to the insurance claims expense; positive returns in 2009 have led to the return to an insurance claims expense with the movement in claims being broadly matched by an improvement in net trading income reflecting the gains on policyholder investments. Insurance claims in respect of general insurance business were £441 million higher at £634 million in 2009 compared to £193 million in 2008. Excluding the general insurance claims of £362 million arising on the consolidation of HBOS’s post-acquisition results, general insurance claims were £79 million, or 41 per cent, higher at £272 million in 2009 compared to £193 million in 2008, this was due primarily to higher payment protection insurance claims related to unemployment.

Operating expenses increased by £9,884 million, or 162 per cent, to £15,984 million in 2009 compared to £6,100 million in 2008. Excluding the operating expenses of £6,456 million arising on the consolidation of HBOS’s post-acquisition results, operating expenses were £3,428 million, or 56 per cent, higher at £9,528 million in 2009 compared to £6,100 million in 2008; this increase principally reflects the £2,500 million fee paid to the UK Government as part of the agreement for the Group not to enter into the Government Asset Protection Scheme, costs of £635 million borne within the Lloyds TSB businesses in respect of the integration of the enlarged group and an increased charge in respect of goodwill impairment, only partly offset by the fact that operating expenses in 2008 included a £180 million settlement in relation to certain historic US dollar payments which was not repeated in 2009. Staff costs were £3,697 million, or 124 per cent, higher at £6,675 million compared to £2,978 million in 2008. Excluding the staff costs of £3,014 million that arose on consolidation of the post-acquisition results of HBOS, staff costs were £683 million, or 23 per cent, higher at £3,661 million in 2009 compared to £2,978 million in 2008, with particular increases in restructuring costs and other staff costs (reflecting increased use of agency staff in relation to the integration programme). Premises and equipment costs were £506 million, or 78 per cent, higher at £1,156 million in 2009 compared to £650 million in 2008. Excluding the premises and equipment costs that arose on the consolidation of the post-acquisition results of HBOS, premises and equipment costs were £84 million, or 13 per cent, higher at £734 million in 2009 compared to £650 million in 2008. Other expenses were £1,167 million, or 69 per cent, higher at £2,853 million in 2009 compared to £1,686 million in 2008. Excluding the £1,185 million of costs that arose on consolidation of the post-acquisition results of HBOS, other costs were £18 million, or 1 per cent, lower at £1,668 million in 2009 compared to £1,686 million in 2008; however operating expenses in 2008 included the £180 million settlement in relation to certain historic US dollar payments and, excluding this, operating expenses excluding HBOS in 2009 were £162 million, or 11 per cent, higher at £1,668 million compared to £1,506 million in 2008. Depreciation and amortisation costs were £1,874 million higher at £2,560 million compared to £686 million in 2008; £1,813 million of this increase reflects the impact of consolidation of the post-acquisition results of HBOS. A charge of £240 million (2008: £100 million) arose in respect of the impairment of goodwill attributable to the Group’s asset finance business.

Impairment losses increased by £13,661 million to £16,673 million in 2009 compared to £3,012 million in 2008. Excluding the impairment losses of £12,257 million arising from the consolidation of HBOS’s post-acquisition results, impairment losses were £1,404 million, or 47 per cent, higher at £4,416 million in 2009 compared to a £3,012 million in 2008; this increase includes £1,664 million in respect of loans and advances to customers and reflects the substantial deterioration in the credit environment; partly offset by a reduction in the charge in respect of loans and advances to banks and other impairment provisions. During 2009, following the acquisition of HBOS, the Group has experienced a significant rise in impairment levels in its lending portfolios. This largely represents falls in the value of commercial real estate and the impact of the economic deterioration during the year, including the effects of rising unemployment and reduced corporate cash flows. The Group has spent a significant amount of time analysing and addressing the issues in the legacy HBOS portfolios, with the greatest attention paid to the over-concentration in real estate related lending and those portfolios that fall outside of the Lloyds TSB risk appetite; and, as a consequence, the Group has taken prudent and material impairment charges in the period following the acquisition.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

The Group’s share of results of joint ventures and associates was a net loss of £752 million compared to a net profit of £4 million in 2008. However, excluding the losses of £755 million arising on the consolidation of HBOS’s post-acquisition results, the share of results of joint ventures and associates was £1 million, or 25 per cent, lower at a profit of £3 million compared to a profit of £4 million in 2008.

On 16 January 2009, the Group acquired 100 per cent of the ordinary share capital of HBOS plc. The consideration for the acquisition of HBOS comprised the issue of 7,776 million ordinary shares in Lloyds Banking Group plc together with the costs of acquisition. In determining the fair value of the consideration, the Company used the share price of its equity securities quoted on the London Stock Exchange, as at the date of completion. As the fair value of the identifiable net assets acquired was greater than the total consideration paid, negative goodwill of £11,173 million arose on the acquisition. The negative goodwill is recognised as ‘Gain on acquisition’ in the income statement for the year ended 31 December 2009.

The exercise to fair value the assets and liabilities of HBOS took into account prevailing market conditions at the time of completion and, where appropriate, the Group engaged independent external advisers. As the consideration paid was significantly less than the provisional fair value of the net assets acquired, the results of the fair value calculations were subject to additional challenge in accordance with the requirements of IFRS 3.

On the date that the acquisition was announced (18 September 2008) the implied goodwill was a small positive amount based on the share price of the Company and the originally announced conversion factor of 0.833 Lloyds Banking Group plc shares for each HBOS share. However, a number of factors led to negative goodwill being recognised on completion of the transaction. By the time of the recommended offer, it had become increasingly difficult for HBOS to raise funds in wholesale markets and HBOS faced an outflow of customer deposits, reflecting reduced investor and depositor confidence. Subsequent to the announcement of the offer, turbulence in the markets continued, fuelled by concerns about credit risk and worsening economic conditions. For HBOS, confidence continued to deteriorate amid ongoing funding difficulties and concerns over the extent of future credit losses. Measures by national authorities and central banks failed to stem this turbulence and the UK Government decided in October 2008 that it would be appropriate for the UK banking sector to increase its level of capitalisation. The capital raising, underwritten by the UK Government, was made available to HBOS on condition that the acquisition by the Company completed. As a consequence of the capital that HBOS was required to issue and the impact of market conditions on the future prospects of the new group, the terms of the final agreed offer were revised down to a ratio of 0.605. Additionally, the share price of the Company fell from 280p at the date of the announcement to 98.4p on 15 January 2009 reflecting both the dilutive impact of the capital that the Company raised and the turmoil in the banking sector and equity markets in general. These factors combined to reduce the value of the consideration for HBOS.

In 2009, the Group recorded a tax credit of £1,911 million compared to a tax credit of £38 million in 2008. The tax credit in 2009 on a profit before tax of £1,042 million reflects the fact that the gain on acquisition of £11,173 million is not taxable, partly offset by the impact of losses in joint ventures and associates, losses where no deferred tax is provided and the tax charge attributable to UK life insurance policyholders and the Group’s interests in Open Ended Investment Companies (OEICs), which is required to be included within the income tax credit.

Total assets were £591,222 million higher at £1,027,255 million at 31 December 2009 compared to £436,033 million at 31 December 2008; loans and advances to customers were £386,625 million higher at £626,969 million at 31 December 2009 compared to £240,344 million at 31 December 2008; and customer deposits were £235,803 million higher at £406,741 million at 31 December 2009 compared to £170,938 million at 31 December 2008. These increases reflect the impact of the HBOS acquisition and, after allowing for the acquisition, total assets have reduced as the Group has commenced its announced strategy to reduce assets associated with non-relationship lending and investments, including business which is outside the Group’s current risk appetite. During 2009, the Group identified approximately £300 billion of such assets; it is the Group’s intention to manage these assets for value and, given the current economic climate, the primary focus will be on running these assets down over time. Over the next five years, the Group expects to achieve a reduction in these assets of approximately £200 billion (customer lending approximately £140 billion; treasury assets £60 billion). During 2009, this portfolio of assets reduced by some £60 billion. Subsequent to the HBOS acquisition, the Group’s loans and advances to customers have decreased as a result of the alignment of heritage risk appetites in Retail, a reduction in wholesale lending in Corporate Markets and a reduction in Wealth and International; customer deposits also decreased as growth in Retail was offset by the planned reduction in higher interest paying term deposits elsewhere.

The Group’s credit market exposures primarily relate to asset-backed securities exposures held in the Wholesale division; on the balance sheet these exposures are classified as loans and receivables, available-for-sale or trading and other financial assets at fair value through profit or loss depending on the nature of the investment. A detailed analysis of the Group’s asset-backed security exposures is provided in note 54 to the consolidated financial statements on page F-110. The total exposure to asset-backed securities has increased by £29,769 million from £16,521 million at 31 December 2008 to £46,290 million at 31 December 2009; however £31,010 million of these assets arise within the heritage HBOS business and, excluding these, total exposure to asset-backed securities was £1,241 million lower at £15,280 million at 31 December 2009 compared to £16,521 million at 31 December 2008.

Mortgage-backed security exposures were £11,817 million higher at £18,218 million, although excluding the heritage HBOS exposures they were £1,303 million lower at £5,098 million compared to £6,401 million at 31 December 2008. Exposures to Alt-A US residential mortgage-backed securities were £3,479 million higher, although adjusting for the heritage HBOS assets they were £167 million lower at £321 million compared to £488 million at 31 December 2008; there is no exposure to sub-prime US residential mortgage-backed securities.

For credit market exposures the Group’s approach is to analyse the underlying transaction to determine whether it needs to place reliance on any protection provided by an insurer or guarantor. In note 54 to the consolidated financial statements on page F-111 the Group discloses its exposures where reliance is placed on monoline insurers, which are limited to a total of £444 million at 31 December 2009. Of this total exposure, £436 million is rated AA with the remaining £8 million being sub-investment grade.

At the end of December 2009, the Group’s capital ratios, following the capital raising in December 2009, increased with a total capital ratio on a Basel II basis of 12.4 per cent (compared to 11.2 per cent at 31 December 2008), a tier 1 ratio of 9.6 per cent (compared to 8.0 per cent at 31 December 2008) and a core tier 1 ratio of 8.1 per cent (compared to 5.6 per cent at 31 December 2008). During 2009, risk-weighted assets increased by £322,817 million to £493,307 million compared to £170,490 million at 31 December 2008; this increase reflects the impact of the HBOS acquisition and, after allowing for the acquisition, there was a small decrease in risk-weighted assets as the effect of a reduction in balance sheet assets was partly offset by the procyclical impact of the weaker economic environment.

2008 COMPARED WITH 2007

The Group’s profit before tax in 2008 was £3,239 million, or 81 per cent, lower at £760 million compared to £3,999 million in 2007. Profit attributable to equity shareholders was £2,516 million, or 77 per cent, lower at £772 million compared to £3,288 million in 2007. Earnings per share were 22.2p, or 77 per cent, lower at 6.7p compared to 28.9p in 2007.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

Net interest income increased by £1,619 million, or 27 per cent, to £7,718 million in 2008 from £6,099 million in 2007. Average interest-earning assets increased by £34,167 million, or 14 per cent, to £282,400 million in 2008 from £248,233 million in 2007, excluding the fine margin reverse repurchase agreement assets (instruments held for funding and liquidity purposes which are efficient in terms of regulatory capital requirements and on which, as a consequence, small interest margins are earned). The increase in average interest-earning assets consisted principally of an £8,652 million, or 9 per cent, rise in average retail mortgages and a £7,331 million, or 18 per cent, rise in corporate lending balances.

The net interest margin was 30 basis points higher at 2.63 per cent, or 27 basis points higher at 2.73 per cent excluding the fine margin reverse repurchase agreement assets. The increase in net interest margin largely reflected an improvement in margins on the unsecured lending products within UK Retail Banking, in Asset Finance and in Corporate Markets, partially offset by a deterioration in Commercial Banking margins as a result of an increase in the proportion of secured, lower margin lending; the margin within UK Retail Banking increased by 9 basis points and the margin within Wholesale and International Banking, excluding the fine margin reverse repurchase agreement balances, was 27 basis points higher.

Other income was a net expense of £709 million compared with net income of £12,119 million in 2007. The decrease of £12,828 million principally resulted from a decrease of £12,309 million in net trading income, with smaller decreases in net fee and commission income, of £87 million, other operating income, of £414 million, and insurance premium income, of £18 million. The reduction in net trading income principally arose in the Group’s insurance businesses and arose from the losses on policyholder investments; this decrease was broadly matched by a reduction in the insurance claims expense and on other lines within the income statement. Net trading income in Corporate Markets was also adversely affected by the impact of the continued market turmoil in 2008. Fees and commissions receivable were £7 million higher at £3,231 million compared to £3,224 million in 2007; increases in fees from corporate banking and card services were largely offset by a reduction in fees from insurance broking and as a result of disposals in 2007. Fees and commissions payable were £94 million, or 16 per cent, higher at £694 million compared to £600 million in 2007 as a result of increases in fees payable related to added-value account packages and cards, in both cases as a result of increased business volumes. Other operating income was £414 million, or 44 per cent, lower at £528 million compared with £942 million in 2007. The majority of this reduction resulted from the deterioration of the value of in-force asset in the insurance business.

The insurance claims expense was a credit of £2,859 million in 2008 compared with an expense of £7,522 million in 2007. The negative returns in 2008 on policyholder investments in the long-term insurance business have led to a reduction in insurance-related liabilities and a credit to the insurance claims expense. The charge in respect of general insurance was £109 million, or 36 per cent, lower at £193 million in 2008 compared to £302 million in 2007, principally reflecting the absence in 2008 of the severe weather related claims experienced in 2007.

Operating expenses were £532 million, or 10 per cent, higher at £6,100 million compared to £5,568 million in 2007. Operating expenses in 2008 included provisions in respect of certain historic US dollar payments and in respect of a Financial Services Compensation Scheme levy of £180 million and £122 million, respectively, and operating expenses in 2007 included £76 million in respect of the settlement of overdraft claims (see Operating expenses for more detail on these items). Staff costs were £73 million, or 3 per cent, higher at £2,978 million compared with £2,905 million in 2007. Salaries were £102 million higher at £2,230 million as the decrease in costs resulting from the sale of businesses in 2007 was more than offset by annual pay awards and an increased charge in respect of share-based compensation. Social security and pension and other post-retirement costs were broadly flat at £411 million in 2008 compared with £405 million in 2007. There was a decrease of £53 million in redundancy costs as the level of particular restructuring initiatives seen in 2007 was not repeated in 2008. Other staff costs were £18 million, or 6 per cent, higher at £323 million in 2008 as a result of a further increase in agency staff costs (used to cover project work). Excluding the provisions in respect of certain historic US dollar payments and in respect of the Financial Services Compensation Scheme levy in 2008 and the settlement of overdraft claims in 2007, other administrative expenses increased £77 million, or 4 per cent, to £2,034 million in 2008 from £1,957 million in 2007.

The impairment charge in the income statement was £1,216 million, or 68 per cent, higher at £3,012 million in 2008 compared with £1,796 million in 2007. The 2008 charge comprised a charge of £2,876 million, compared to £1,721 million in 2007, in respect of impairment losses on loans and receivables, a charge of £130 million, compared to £70 million in 2007, in respect of the impairment of available-for-sale financial assets and a charge of £6 million, compared to £5 million in 2007, relating to other credit risk provisions. In UK Retail Banking the charge increased by £248 million, or 20 per cent, to £1,472 million from £1,224 million in 2007; for personal loans and overdrafts the charge increased by £100 million and the charge in respect of mortgages increased by £149 million. The impairment charge as a percentage of average lending was higher at 1.22 per cent compared to 1.10 per cent in 2007. In Wholesale and International Banking the charge in respect of impairment losses on loans and receivables increased by £905 million, or 182 per cent, to £1,402 million from £497 million in 2007, reflecting the economic slowdown in the UK and the impact of a number of high profile financial services company collapses. Overall, the Group’s charge in respect of impairment losses on loans and receivables expressed as a percentage of average lending increased to 1.24 per cent compared to 0.84 per cent in 2007.

In 2007, a profit of £657 million arose on the sale of businesses, principally Abbey Life, a life assurance company, and Lloyds TSB Registrars, the company registration business of the Group.

In 2008, the Group recorded a tax credit of £38 million compared to a tax charge of £679 million in 2007. The tax credit arose as a result of the tax credits attributable to UK life insurance policyholders and the Group’s interests in Open Ended Investment Companies (OEICs), which are required to be included within the income tax expense.

At the end of 2008, the total capital ratio was 11.2 per cent compared with 11.0 per cent at the end of 2007. Risk-weighted assets increased by £27,923 million, or 20 per cent; the increase in UK Retail Banking was £4,817 million, or 11 per cent, and in Wholesale and International Banking was £22,821 million, or 25 per cent. Total assets increased by £82,687 million, or 23 per cent, principally as a result of increases in loans and advances to customers, available-for-sale financial assets and derivatives.

The increase in loans and advances to customers and available-for-sale financial assets was in part caused by the strengthening of the US dollar against the pound sterling.

In accordance with the amendment to IAS 39, in 2008 the Group reviewed the categorisation of its assets classified as held for trading and available-for-sale financial assets. On the basis that there was no longer an active market for some of those assets, which are therefore more appropriately managed as loans, the Group reclassified £2,993 million of assets classified as held for trading (measured at fair value through profit or loss immediately prior to reclassification) to loans and receivables with effect from 1 July 2008 and £437 million of assets classified as available-for-sale financial assets (measured at fair value through equity) to loans and receivables with effect from 1 November 2008. If the reclassifications had not been made, the Group’s income statement for 2008 would have included unrealised fair value losses on the reclassified trading assets of £347 million and an additional impairment charge of £209 million in respect of available-for-sale financial assets.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

NET INTEREST INCOME


	2009		2008		2007

Net interest income £m		9,026		7,718		6,099
Average interest-earning assets £m		849,534		293,967		262,144
Average rates:
– Gross yield on interest-earning assets % ¹		3.32		5.98		6.44
– Interest spread % ²		1.02		2.37		2.20
– Net interest margin % ³		1.06		2.63		2.33
Margin excluding average balances held under reverse repurchase agreements ⁴ :
– Net interest income £m		9,026		7,718		6,099
– Average interest-earning assets £m		841,713		282,400		248,233
– Net interest margin %		1.07		2.73		2.46


¹	Gross yield is the rate of interest earned on average interest-earning assets.

²	Interest spread is the difference between the rate of interest earned on average interest-earning assets and the rate of interest paid on average interest-bearing liabilities.

³	The net interest margin represents the interest spread together with the contribution of interest-free liabilities. It is calculated by expressing net interest income as a percentage of average interest-earning assets.

⁴	Comparisons of net interest income and margins are impacted by the holdings of fine margin reverse repurchase agreements. To improve comparability, figures are also shown excluding average balances held under reverse repurchase agreements (2009: £7,821 million; 2008: £11,567 million; 2007: £13,911 million).

2009 COMPARED WITH 2008

Excluding the interest flows arising on the consolidation of HBOS’s post-acquisition results, both interest income and interest expense fell in response to the historically low interest rate environment that prevailed throughout 2009; net interest income was reduced as the benefit of higher asset pricing was more than offset by the impact of lower deposit margins, reflecting the impact of falling base rates, and higher funding costs, which included the impact of the Group extending its wholesale funding maturity profile.

Average interest-earning assets were £555,567 million higher at £849,534 million in 2009 compared to £293,967 million in 2008. Excluding the average interest-earning assets of £526,630 million arising on the consolidation of HBOS’s post-acquisition results, average interest-earning assets were £29,207 million, or 10 per cent, higher at £323,174 million in 2009 compared to £293,967 million in 2008.

Excluding the average interest-earning assets arising on the consolidation of HBOS’s post-acquisition results, average personal mortgage balances within Retail were £5,973 million, or 6 per cent, higher at £106,068 million in 2009 compared to £100,095 million in 2008 as a result of the full-year effect on average balances of mortgage growth during 2008; period end mortgage balances being little changed over 2009. Average other personal lending balances within Retail were flat as the full-year effect on average balances of lending growth during 2008 has been offset by the impact of lower lending balances over 2009 as customers have reduced their personal indebtedness and not taken on new financial commitments in the current difficult economic environment. Average interest-earning assets in the Group’s other businesses were £23,312 million, or 14 per cent, higher at £190,591 million in 2009 compared to £167,279 million in 2008 as the full year benefit of lending growth over 2008 more than offset the asset reductions in 2009.

The Group’s net interest margin decreased by 157 basis points to 1.06 per cent in 2009 compared to 2.63 per cent in 2008 with reductions across the Group’s businesses. Margins in Retail declined as the impact of higher wholesale funding costs and lower deposit margins, in the low base rate environment, was only partly offset by the benefit of higher pricing on lending products. In Wholesale margins were also reduced, again as higher wholesale funding costs were only partly offset by higher asset pricing. Declining margins in Wealth and International reflected reducing base rates, a very competitive deposit environment and the increased funding costs.

2008 COMPARED WITH 2007

Net interest income increased by £1,619 million, or 27 per cent, to £7,718 million in 2008 compared to £6,099 million in 2007. Within Insurance and Investments, net interest income was £235 million, or 65 per cent, higher as a result of a further decrease in the amounts payable to unitholders in those OEICs included in the consolidated results of the Group; since these are policyholder items there was no impact on profit attributable to shareholders. For the rest of the Group, net interest income increased by £1,384 million, or 24 per cent, to £7,120 million in 2008 compared to £5,736 million in 2007. This increase arose as a result of both asset growth and an improvement in margins.

Average interest-earning assets were £31,823 million, or 12 per cent, higher at £293,967 million in 2008 compared to £262,144 million in 2007. Excluding the fine margin reverse repurchase agreement assets held for liquidity purposes, average interest-earning assets were £34,167 million, or 14 per cent, higher at £282,400 million in 2008 compared to £248,233 million in 2007. Average interest-earning assets in UK Retail Banking were £9,234 million higher; average mortgage balances were £8,652 million higher, reflecting the Group’s significantly increased share of net new mortgage lending, albeit in a reduced total market; and average balances on personal loans and overdrafts were £854 million higher although there was a small reduction in average credit card outstandings. Average interest-earning assets within the Insurance and Investments businesses, which included the mortgage book within Scottish Widows Bank, were £72 million lower; an increase of £722 million in the average mortgage balances was more than offset by a fall in deposit balances held by the consolidated funds. Within Wholesale and International Banking, average interest-earning assets increased by £22,547 million, or £24,891 million excluding the fine margin reverse repurchase agreement balances. Average balances within Corporate Markets, excluding the reverse repurchase agreement balances, were £19,333 million higher as the business improved levels of customer retention and continuing new business opportunities resulted in further growth in corporate lending and there was further balance growth in the lower margin treasury and structured finance areas. Further expansion of the Group’s lending to smaller businesses led to a £2,819 million increase in average balances in Commercial Banking, and International Banking average balances were £2,907 million higher (in part reflecting exchange rate movements) although average balances within Asset Finance fell slightly.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

The Group’s net interest margin increased by 30 basis points to 2.63 per cent in 2008, compared to 2.33 per cent in 2007; if the average balances held under reverse repurchase agreements are excluded from both years, the margin in 2008 was 27 basis points higher at 2.73 per cent compared to 2.46 per cent in 2007. Within Insurance and Investments, the net interest income consolidated in respect of policyholder items was £190 million higher in 2008, as a result of the £229 million reduction in the amounts payable to unitholders in those OEICs included in the Group’s results; this increase contributed some 7 basis points to the increase in the Group’s net interest margin, excluding average balances held under reverse repurchase agreements. The net interest margin in UK Retail Banking was 9 basis points higher than in 2007, reflecting improved key product margins, particularly in unsecured personal lending and new mortgages. The margin within Wholesale and International Banking, excluding the fine margin reverse repurchase agreement balances, was 27 basis points higher. Margins continued to fall in Commercial Banking, as a result of a further change in mix towards secured, but lower margin, lending but there were improved margins in Asset Finance and within Corporate Markets. The improvement in margins in Corporate Markets reflected improvements in pricing of new lending and the benefit of favourable funding opportunities.

OTHER INCOME


	2009 £m		2008 £m		2007 £m

Fee and commission income:

– Current account fees	1,088		707		693
– Insurance broking	539		549		648
– Credit and debit card fees	765		581		536
– Trust and other fiduciary fees	395		413		362
– Other	1,467		981		985

	4,254		3,231		3,224
Fee and commission expense	(1,517	)	(694	)	(600	)

Net fee and commission income	2,737		2,537		2,624
Net trading income	19,098		(9,186	)	3,123
Insurance premium income	8,946		5,412		5,430
Gain on capital transactions	1,498		—		—
Other operating income	3,992		528		942

Total other income	36,271		(709	)	12,119

2009 COMPARED WITH 2008

Other income was £36,980 million higher at £36,271 million in 2009 compared to a deficit of £709 million in 2008, as a result of the factors discussed below.

Fee and commission income was £1,023 million, or 32 per cent, higher at £4,254 million in 2009 compared to £3,231 million in 2008. However, excluding the fee and commission income that arose on the consolidation of HBOS’s post-acquisition results, fee and commission income was £479 million, or 15 per cent, lower at £2,752 million in 2009 compared to £3,231 million in 2008. The £479 million decrease in fee and commission income excluding the fee income in HBOS is largely due to a £424 million reduction in insurance broking income as a result of a market-wide move to monthly premiums on payment protection products, rather than up-front annual income.

Fee and commission expense was £823 million, or 119 per cent, higher at £1,517 million in 2009 compared to £694 million in 2008. Excluding fees payable of £862 million arising on the consolidation of the post-acquisition results of HBOS, fee and commission expense was £39 million, or 6 per cent, lower at £655 million in 2009 compared to £694 million in 2008 primarily as a result of volume-related reductions in asset management and other fees.

Net trading income improved by £28,284 million to net income of £19,098 million in 2009 compared to a net loss of £9,186 million in 2008. Excluding net trading income of £12,093 million arising from the consolidation of the post-acquisition results of HBOS, net trading income improved by £16,191 million to net income of £7,005 million in 2009 compared to a net loss of £9,186 million in 2008. Trading income in 2008 in the Group’s banking operations was particularly impacted by market dislocation, leading to significant downwards valuations on a number of assets; this was not repeated in 2009. In addition there was an improvement of £14,179 million in gains on policyholder investments held in the Group’s insurance businesses (and largely offset by an increase in the claims expense) as the improvement in market conditions has led to trading profits in 2009, compared to substantial losses in 2008.

Insurance premium income was £3,534 million, or 65 per cent, higher at £8,946 million in 2009 compared to £5,412 million in 2008. Excluding the premium income of £4,718 million that arose on consolidation of the post-acquisition results of HBOS, insurance premium income was £1,184 million, or 22 per cent, lower at £4,228 million in 2009 compared to £5,412 million in 2008. Earned premiums in respect of the Group’s long-term life and pensions business were £2,660 million, or 55 per cent, higher at £7,460 million in 2009 compared to £4,800 million in 2008. The consolidation of the post-acquisition results of HBOS contributed £3,890 million and, excluding this, premiums were £1,230 million, or 26 per cent, lower at £3,570 million in 2009 compared to £4,800 million in 2008; this reflects reduced new business sales as a result of the general contraction in the UK market. General insurance earned premiums were £874 million higher at £1,486 million in 2009 compared to £612 million in 2008. Excluding premiums of £828 million arising from the consolidation of the post-acquisition results of HBOS, general insurance earned premiums were £46 million, or 8 per cent, higher at £658 million in 2009 compared to £612 million in 2008; this primarily reflects modest growth in home insurance income.

During 2009 the Group exchanged certain existing subordinated debt securities for new securities, these exchanges resulted in a gain on extinguishment of the existing liability of £1,498 million, being the difference between the carrying amount of the securities extinguished and the fair value of the new securities together with related fees and costs; this gain arose because the balance sheet carrying values of these investments were in excess of market valuations at the time. In the first half of 2009, undated subordinated notes issued by a number of Group companies were exchanged for innovative tier 1 securities and senior unsecured notes issued by Lloyds TSB Bank plc. These exchanges resulted in a gain of £745 million. In July 2009, dated and undated subordinated liabilities issued by Clerical Medical Finance plc were exchanged for senior unsecured notes issued by Lloyds TSB Bank plc resulting in a gain of £30 million. In November 2009, as part of the restructuring plan that was a requirement for

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

EC approval of state aid received by the Group, the Group agreed to suspend the payment of coupons and dividends on certain of the Group’s preference shares and preferred securities for the two year period from 31 January 2010 to 31 January 2012. This suspension gave rise to a partial extinguishment of the original liability, equivalent to the present value of the suspended cash flows. During December 2009, as part of the Group’s recapitalisation and exit from the Government Asset Protection Scheme, certain preference shares, preferred securities and undated subordinated notes were exchanged for enhanced capital notes. These exchanges, together with the partial extinguishment of liabilities arising from the suspension of payments on coupons, resulted in a gain of £723 million.

Other operating income was £3,464 million higher at £3,992 million in 2009 compared to £528 million in 2008; excluding the income of £1,517 million that arose on the consolidation of the post-acquisition results of HBOS, other operating income was £1,947 million higher at £2,475 million in 2009 compared to £528 million in 2008, principally reflecting an improvement in the movement in value of in-force business.

2008 COMPARED WITH 2007

Other income was £12,828 million lower at a net deficit of £709 million in 2008 compared to income of £12,119 million in 2007.

Fee and commission income was £7 million higher at £3,231 million in 2008 compared to £3,224 million in 2007. UK current account fees were £14 million higher reflecting growth in the numbers of higher-fee earning accounts during 2008. Insurance broking income was £99 million lower, driven by a sharp decrease in creditor insurance income as a side-effect of the reduced availability of consumer credit. Card fees were £45 million higher; merchant service charges were higher due to continuing growth in the merchant base and interchange income was £25 million higher as a result of increased levels of card usage. Other fees and commissions were £4 million lower at £981 million; continuing increases in factoring fees, corporate banking fees and asset management fees (in part due to the contracts entered into for the ongoing management of Abbey Life funds subsequent to disposal of that business in 2007) were offset by reductions in fees following the sale of Lloyds TSB Registrars and other businesses in 2007.

Fee and commission expense was £94 million, or 16 per cent, higher at £694 million compared to £600 million in 2007. There were increases in fees payable related to added-value account packages, in line with growth in the product, and higher levels of card fees payable as a result of the increased business volumes during 2008. There were also increased levels of fees payable in respect of the Group’s fund management activities and within its treasury operations.

Net trading income was £12,309 million lower at a loss of £9,186 million compared to income of £3,123 million in 2007. Of this decrease £10,917 million arose in the insurance businesses and represented reductions in the value of policyholder investments that are required to be reported gross in the income statement; the period-on-period decrease is largely matched by a compensating movement within the insurance claims figure which has moved by £10,381 million from a charge of £7,522 million in 2007 to a credit of £2,859 million in 2008. The remainder of the decrease, £1,392 million, arose within the banking businesses. Like many other financial institutions, the Group’s Corporate Markets business has been significantly affected by the ongoing impact of market dislocation; this has led to a charge within trading income of £956 million, compared to a charge of £188 million in 2007. The market dislocation losses largely reflected the impact of continuing mark-to-market adjustments in certain legacy trading portfolios, resulting from the marketwide repricing of liquidity and credit, together with the write-down of a number of asset-backed securities.

Insurance premium income was £18 million lower at £5,412 million compared to £5,430 million in 2007, with life and pensions premiums being £39 million lower at £4,800 million and general insurance premiums £21 million higher at £612 million. The small reduction in life and pensions premiums reflected the impact of the sale of Abbey Life (which accounted for £232 million of the premiums in 2007) and a decrease of £44 million in annuity premiums largely offset by growth in other life and pensions products within the Scottish Widows business. The increase in non-life insurance premiums was due to growth in home insurance income more than offsetting a volume-related decrease in respect of creditor products.

Other operating income was £414 million, or 44 per cent, lower at £528 million compared to £942 million in 2007. The movement in value of in-force business was a reduction of £325 million compared to a reduction of £93 million in 2007, as an improvement in new business income was more than offset by lower income from existing business principally reflecting the adverse effect of changes made to the economic assumptions used to calculate the value of in-force business included in the balance sheet and the impact of weaker investment markets. There was a reduction of £1 million in operating lease rental income and a reduction of £49 million in car dealership income following the sale of the Dutton Forshaw business in 2007 as well as reductions in other non-fee income.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS


OPERATING EXPENSES

	2009 £m		2008 £m		¹	2007 £m		¹
Administrative expenses:
Staff:
– Salaries		4,369		2,230			2,128
– Social security costs		383		176			167
– Pensions and other post-retirement benefit schemes		744		235			238
– Restructuring costs		412		14			67
– Other staff costs		767		323			305
		6,675		2,978			2,905
Premises and equipment:
– Rent and rates		569		318			304
– Hire of equipment		20		16			16
– Repairs and maintenance		226		151			154
– Other		341		165			145
		1,156		650			619
Other expenses:
– Communications and data processing		668		455			462
– Advertising and promotion		335		194			192
– Professional fees		540		229			279
– Other		1,310		808			481
		2,853		1,686			1,414
Depreciation and amortisation:
– Depreciation of tangible fixed assets		1,716		648			594
– Amortisation of acquired in-force non-participating investment contracts		75		—			—
– Amortisation of other intangible assets		769		38			36
		2,560		686			630
Impairment of goodwill		240		100			—
Total operating expenses, excluding Government Asset Protection Scheme fee		13,484		6,100			5,568
Government Asset Protection Scheme fee		2,500		—			—
Total operating expenses		15,984		6,100			5,568
Cost: income ratio (%) ²		68.7		61.8			52.1


¹	Restated for IFRS 2 (Revised).

²	Total operating expenses divided by total income, net of insurance claims.

2009 COMPARED WITH 2008

Staff costs were £3,697 million, or 124 per cent, higher at £6,675 million compared to £2,978 million in 2008. Excluding the staff costs of £3,014 million that arose on consolidation of the post-acquisition results of HBOS, staff costs were £683 million, or 23 per cent, higher at £3,661 million in 2009 compared to £2,978 million in 2008. Excluding the costs within HBOS, salaries were £87 million, or 4 per cent, higher as the impact of annual pay rises has more than offset staff reductions; pension costs were £128 million higher principally as a result of reduced asset levels in the defined benefit schemes at the end of 2008 which led to a lower expected return; restructuring costs were £209 million higher principally as a result of staff rationalisation as part of the Group integration programme; and other staff costs were £241 million higher, partly reflecting increased use of agency staff in relation to the integration programme.

Premises and equipment costs were £506 million, or 78 per cent, higher at £1,156 million in 2009 compared to £650 million in 2008. Excluding the premises and equipment costs that arose on the consolidation of the post-acquisition results of HBOS, premises and equipment costs were £84 million, or 13 per cent, higher at £734 million in 2009 compared to £650 million in 2008; rent and rates were £30 million higher, largely as a result of rent reviews, repairs and maintenance were £24 million higher and other premises and equipment costs were £36 million higher.

Other expenses were £1,167 million, or 69 per cent, higher at £2,853 million in 2009 compared to £1,686 million in 2008. Excluding the £1,185 million of costs that arose on consolidation of the post-acquisition results of HBOS, other costs were £18 million, or 1 per cent, lower at £1,668 million in 2009 compared to £1,686 million in 2008; however operating expenses in 2008 included the £180 million settlement in relation to certain historic US dollar payments and, excluding this, operating expenses excluding HBOS in 2009 were £162 million, or 11 per cent, higher at £1,668 million compared to £1,506 million in 2008. On this basis, professional fees were higher as a result of consultancy and other costs incurred in relation to integration, the Group’s consideration of the Government Asset Protection Scheme and other strategic projects; there were also increases in communications and data processing costs.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

Depreciation and amortisation costs were £1,874 million higher at £2,560 million compared to £686 million in 2008. Depreciation of tangible fixed assets was £1,068 million higher at £1,716 million compared to £648 million in 2008; £1,035 million of this increase reflects the impact of consolidation of the post-acquisition results of HBOS. Amortisation of £75 million in respect of the acquired value of in-force non-participating investment contracts and £703 million in respect of acquisition-related intangibles (brands, core deposit intangibles, purchased credit card relationships and other customer related intangibles) arose from the acquisition of HBOS.

A charge of £240 million (2008: £100 million) arose in respect of the impairment of goodwill. The Group reviews goodwill held on its balance sheet for impairment at least annually or when events or changes in economic circumstances indicate that an impairment may have taken place. Goodwill attributable to the Group’s Asset Finance business, for which an impairment charge of £100 million was recognised in the Group’s financial statements for the year ended 31 December 2008, has been further reviewed for impairment due to the continuing uncertainties over the short-term macroeconomic environment. As a consequence, the carrying value of the consumer finance cash generating unit in Asset Finance (within Wholesale division) has been reassessed resulting in an additional goodwill impairment charge of £240 million in the year ended 31 December 2009.

The Group also paid a fee of £2,500 million to the UK Government in respect of the Group’s withdrawal from the Government Asset Protection Scheme (GAPS). The Group had entered into a Pre-Accession Deed dated 7 March 2009 relating to the proposed participation in GAPS. However, following the rights issue in November 2009, the Group withdrew from its proposed participation and, on 3 November 2009, entered into a GAPS Withdrawal Deed with HM Treasury pursuant to which, among other matters, the Group agreed to pay HM Treasury an amount of £2,500 million in recognition of the benefits to the Group’s trading operations arising as a result of HM Treasury proposing to make GAPS available to the Group.

2008 COMPARED WITH 2007

Operating expenses were £532 million, or 10 per cent, higher at £6,100 million in 2008 compared to £5,568 million in 2007. Operating expenses in both 2008 and 2007 were, however, impacted by a number of individually significant items. In January 2009, the Group announced that it had reached a settlement with both the US Department of Justice and the New York County District Attorney’s Office in relation to a previously disclosed investigation involving those agencies into certain historic US dollar payment practices; the Group had provided £180 million in respect of this matter in its 2008 results. The arrangements put in place to protect the depositors of Bradford & Bingley and other failed deposit taking institutions involving the Financial Services Compensation Scheme (FSCS) will result in a significant increase in the levies made by the FSCS on the industry. The Group made a provision of £122 million in 2008 in respect of its obligation for the estimated interest cost on the FSCS borrowings. During 2008, the basis of goodwill allocation in parts of the Asset Finance business was changed to treat the consumer finance business as a single cash generating unit encompassing the motor and personal finance operations which provide direct and point of sale finance. The markets in which this unit operated had been affected by the UK economic downturn, which was characterised by falling demand and increasing arrears at that point of that cycle. This, together with uncertainties over the likely short-term macroeconomic environment, resulted in a reassessment of the carrying value of the consumer finance cash generating unit and the recognition of a goodwill impairment charge of £100 million in 2008. The 2007 results included a charge of £76 million relating to the settlement of overdraft claims during that year, together with related costs. If the provision in respect of certain historic US dollar payments, the provision for the Financial Services Compensation Scheme levy and the impairment of goodwill in 2008 and the settlement of overdraft claims in 2007, are excluded, underlying operating expenses were £206 million, or 4 per cent, higher at £5,698 million in 2008 compared to £5,492 million in 2007, for the following reasons.

Staff costs were £73 million, or 3 per cent, higher at £2,978 million in 2008 compared to £2,905 million in 2007. Salaries were £102 million, or 5 per cent, higher at £2,230 million. There was a small increase in staff numbers which, together with the effect of the annual pay awards and an increased charge in respect of share-based compensation, more than offset staff reductions following the sale of businesses during 2007. National insurance costs were £9 million, or 5 per cent, higher at £176 million compared to £167 million in 2007. Pension costs were £3 million, or 1 per cent, lower at £235 million compared to £238 million in 2007; this small reduction arose because an £8 million increase in the cost of contributions to defined contribution pension schemes (which cover all eligible new employees) has been more than offset by an £11 million reduction in the charge in respect of defined benefit schemes (following further increases in asset values and expected returns at the end of 2007). There was a £53 million decrease in redundancy costs as the level of particular restructuring initiatives seen in 2007 was not repeated in 2008. Other staff costs were £18 million, or 6 per cent, higher at £323 million compared to £305 million in 2007 as a result of a further increase in costs for agency staff (used to cover project work).

Premises and equipment costs were £31 million, or 5 per cent, higher at £650 million in 2008 compared to £619 million in 2007. Rent and rates were £14 million higher, as a result of rent reviews and some new properties taken on. Hire of equipment was unchanged at £16 million and repairs and maintenance costs were £3 million lower at £151 million. Other premises and equipment costs were £20 million higher at £165 million, compared to £145 million in 2007, following an increase in losses on disposal of equipment due to the downturn in the used car market and a lower level of profits on disposal of premises as the number of particular transactions in 2007 was not repeated in 2008; there were also increases in premises management charges.

Other costs were £272 million, or 19 per cent, higher at £1,686 million in 2008 compared to £1,414 million in 2007, although excluding the £180 million provision in respect of certain historic US dollar payments and the £122 million provision for the Financial Services Compensation Scheme levy in 2008 and the charge of £76 million in respect of the settlement of overdraft claims in 2007, other costs in 2008 were £46 million, or 3 per cent, higher at £1,384 million compared to £1,338 million in 2007, for the following reasons.

Other costs were £101 million, or 25 per cent, higher at £506 million compared to £405 million in 2007; this increase reflected increased levels of operational losses, partly due to adverse fraud experience, higher insurance costs as a result of a review of the level of insurance cover held at the end of 2007, a further increase in the charge in respect of deferred acquisition costs in the insurance businesses, in part due to restructuring of certain insurance products, and a general increase in miscellaneous expenditure. Advertising and promotion costs were £2 million, or 1 per cent, higher at £194 million compared to £192 million in 2007, as a further increase in expenditure relating to the Group’s sponsorship of the London 2012 Olympics and higher levels of advertising in relation to Corporate business were partly offset by the non-repetition of particular campaigns from 2007. Professional fees were £50 million, or 18 per cent, lower at £229 million compared to £279 million in 2007 as these costs in 2007 included significant expenditure on a number of projects including the transfer of the mortgage lending and deposits of Lloyds TSB Bank plc’s subsidiary, Cheltenham & Gloucester plc, into Lloyds TSB Bank plc, and further mortgage securitisations. Communications and external data processing costs were £7 million, or 2 per cent, lower at £455 million compared to £462 million in 2007 as underlying increases in software and telecommunications charges were more than offset by the effect of the businesses sold in 2007, particularly the company registration business.

Depreciation and amortisation was £56 million, or 9 per cent, higher at £686 million compared to £630 million in 2007. There was a £44 million increase in the charge in respect of operating lease assets, reflecting a change in mix of the portfolio towards shorter lived assets, such as motor vehicles, and an increased charge following a review of aircraft residual values. There was a £12 million increase in depreciation of own-use assets, reflecting the recent increased levels of capital expenditure, partly in relation to software.

The cost: income ratio was 61.8 per cent in 2008 compared to 52.1 per cent in 2007.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS


IMPAIRMENT

	2009 £m			2008 £m		2007 £m
Impairment losses on loans and receivables:
Loans and advances to banks		(3	)		135		(1	)
Loans and advances to customers		15,783			2,584		1,722
Debt securities classified as loans and receivables		248			157		—
Total impairment losses on loans and receivables		16,028			2,876		1,721
Impairment of available-for-sale financial assets		602			130		70
Other credit risk provisions		43			6		5
Total impairment charged to the income statement		16,673			3,012		1,796

2009 COMPARED WITH 2008

Impairment losses increased by £13,661 million to £16,673 million in 2009 compared to £3,012 million in 2008. Excluding the impairment losses of £12,257 million arising on the consolidation of HBOS’s post-acquisition results, impairment losses were £1,404 million, or 47 per cent, higher at £4,416 million in 2009 compared to a £3,012 million in 2008; this increase includes £1,664 million in respect of loans and advances to customers and reflects the substantial deterioration in the credit environment; partly offset by a reduction in the charge in respect of loans and advances to banks and other impairment provisions.

The impairment charge in respect of loans and advances to customers was £13,199 million higher at £15,783 million in 2009 compared to £2,584 million in 2008. Excluding the impairment losses of £11,535 million arising on the consolidation of HBOS’s post-acquisition results, impairment losses in respect of loans and advances to customers were £1,664 million, or 64 per cent, higher at £4,248 million in 2009 compared to £2,584 million in 2008. This reflects the substantial deterioration in the credit environment leading to increased charges in respect of both unsecured personal lending, as rising UK unemployment has impacted the charge in both the retail banking and asset finance operations, and non-personal lending. During 2009, following the acquisition of HBOS, the Group has experienced a significant rise in impairment levels in its lending portfolios. This largely represents falls in the value of commercial real estate and the impact of the economic deterioration during the year, including the effects of rising unemployment and reduced corporate cash flows. In Retail, impairment losses increased, particularly reflecting the impact of increases in UK unemployment during 2009 on the unsecured charge, which was partly offset by a lower secured impairment charge as house prices stabilised. The Wholesale charge increased significantly reflecting the year-on-year decline in commercial property valuations and reduced levels of corporate cash flows; in particular, the real estate related lending exposures in the heritage HBOS portfolios were more sensitive to the downturn in the economic environment. The Group has spent a significant amount of time analysing and addressing the issues in the heritage HBOS portfolios, with the greatest attention paid to the over concentration in real estate related lending and those portfolios that fall outside of the Lloyds TSB risk appetite. As a result of this portfolio review, which applied prudent assumptions to real estate asset expectations, and with the deterioration in the economy translating into lower commercial property valuations, the Group took prudent and material impairment charges in the period following the acquisition. In the Wealth and International business the impairment charge reflected significant provisions against the Irish and Australian commercial real estate portfolios.

The impairment charge in respect of loans and advances to banks improved by £138 million to a credit of £3 million compared to a charge of £135 million in 2008; this reflected a small release in 2009 whereas 2008 included a number of specific charges as a result of the economic conditions faced by some banks at that time.

The impairment charge in respect of debt securities classified as loans and receivables increased by £91 million, or 58 per cent, to £248 million in 2009 compared to £157 million in 2008; £140 million arose from the consolidation of the post-acquisition results of HBOS and there was a reduction of £49 million in respect of heritage Lloyds TSB businesses.

Impairment losses in respect of available-for-sale financial assets were £472 million higher at £602 million in 2009 compared to £130 million in 2008. This increase was principally due to the charge of £577 million arising on the consolidation of the post-acquisition results of HBOS and reflects impairment of certain debt securities taken on as part of the acquisition.

The charge in respect of other credit risk provisions was £43 million in 2009 compared to £6 million in 2008; £5 million of the charge in 2009 relates to the post-acquisition results of HBOS.

2008 COMPARED WITH 2007

The impairment charge in the income statement was £1,216 million, or 68 per cent, higher at £3,012 million in 2008 compared to £1,796 million in 2007. This comprised a charge of £2,876 million, compared to a charge of £1,721 million in 2007, in respect of impairment losses on loans and receivables, a charge of £130 million, compared to a charge of £70 million in 2007, in respect of the impairment of available-for-sale financial assets and a charge of £6 million, compared to a charge of £5 million in 2007, in respect of other credit risk provisions.

The impairment charge in respect of loans and receivables was £1,155 million, or 67 per cent, higher at £2,876 million compared to £1,721 million in 2007.

In UK Retail Banking the charge increased by £248 million, or 20 per cent, to £1,472 million from £1,224 million in 2007, resulting in a charge as a percentage of average lending of 1.22 per cent compared to 1.10 per cent in 2007. This particularly reflected an increase of £149 million in the impairment charge in respect of mortgage lending from £18 million in 2007 to £167 million in 2008 as a result of the impact of reducing house prices and a deterioratiing economic environment in the UK. Increased impairment charges also arose in respect of personal loans and overdrafts (up £100 million, or 15 per cent, from £679 million in 2007 to £779 million in 2008) as a result of higher arrears, resulting in an increase in the impairment charge, expressed as a percentage of average lending, from 5.32 per cent in 2007 to 5.73 per cent in 2008. The impairment charge in respect of credit card outstandings was flat at £526 million in 2008 compared to £527 million in 2007, despite a decrease in average balances, as a result of increased arrears and fraud losses – the impairment charge in respect of card lending, expressed as a percentage of average lending, increased from 7.96 per cent in 2007 to 8.12 per cent in 2008.

A charge of £2 million, compared to £nil in 2007, in Insurance and Investments related to the mortgage lending in Scottish Widows Bank.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

In Wholesale and International Banking the impairment charge in respect of loans and receivables increased by £905 million from £497 million in 2007 to £1,402 million in 2008 and this charge as a percentage of average lending was 1.33 per cent compared to 0.57 per cent in 2007. The charge within Corporate Markets was significantly higher at £939 million in 2008 compared to £165 million in 2007 as a result of a charge of £253 million, compared to a charge of £22 million in 2007, in relation to exposures to assets affected by current capital markets uncertainties, as well as a number of charges in relation to customers affected by the severe economic downturn and to the collapse of certain financial services companies. The impairment charge in Commercial Banking was £89 million, or 90 per cent, higher at £188 million in 2008 compared to £99 million in 2007, again reflecting the impact of the economic downturn; and the charge in Asset Finance was £42 million, or 18 per cent, higher at £270 million in 2008 compared to £228 million in 2007, as a result of higher arrears.

Overall, the Group’s charge in respect of impairment losses on loans and receivables expressed as a percentage of average lending increased to 1.24 per cent compared to 0.84 per cent in 2007.

A charge of £130 million in 2008, compared to a charge of £70 million in 2007, arose in respect of the impairment of available-for-sale financial assets, largely in relation to certain asset-backed security collateralised debt obligations, although £30 million of the charge in 2008 reflected the write-off of the Group’s investment in Bradford & Bingley equity shares.

TAXATION


	2009 £m		2008 £m		2007 £m
UK corporation tax:
– Current tax on profits for the year	(227	)	(667	)	(763	)
– Adjustments in respect of prior years	(310	)	(19	)	30
	(537	)	(686	)	(733	)
Double taxation relief	10		91		60
	(527	)	(595	)	(673	)
Foreign tax:
– Current tax on profits for the year	(221	)	(144	)	(98	)
– Adjustments in respect of prior years	40		4		3
	(181	)	(140	)	(95	)
Current tax charge	(708	)	(735	)	(768	)
Deferred tax	2,619		773		89
Taxation credit (charge)	1,911		38		(679	)

2009 COMPARED WITH 2008

The rate of tax is influenced by the geographic and business mix of profits. The effective rate of tax was negative in both 2009 and 2008 as tax credits arose on the profits in both years; the statutory corporation tax rates were 28 per cent in 2009 and 28.5 per cent in 2008. The tax credit is distorted, in particular, by both the gain on acquisition of £11,173 million in 2009, which does not attract a tax charge, and the goodwill impairment charges of £240 million in 2009 and £100 million in 2008 on which no tax relief can be taken. The effective tax rate is also distorted by the requirement to include, within income tax in the income statement, the tax attributable to UK life insurance policyholder earnings and the Group’s interests in OEICs, being a tax charge of £410 million for 2009 compared to a tax credit of £461 million in 2008. Excluding these items the effective tax rate in 2009 was 22.5 per cent compared to 32.0 per cent in 2008. Of this 9.5 per cent decrease in the effective rate, 7.3 per cent is attributable to the impact in 2009 of losses arising in certain subsidiaries resident in Ireland, for which a deferred tax asset cannot be recognised, and the statutory tax rate is 12.5 per cent; the remainder of the decrease in the effective tax rate in 2009 on this adjusted basis reflects normal fluctuations in disallowed and non-taxable items. The Group does not expect the tax rate, excluding the impact of policyholders’ tax and OEICs, to vary significantly from the average UK corporation tax rate.

2008 COMPARED WITH 2007

The effective rate of tax in 2008 was a negative 4.7 per cent, as a tax credit arose on the profit for the year, compared to an effective rate of tax in 2007 of 17.0 per cent and corporation tax rates of 28.5 per cent in 2008 and 30 per cent in 2007. The effective tax rate is distorted by the requirement to include, within income tax in the income statement, the tax attributable to UK life insurance policyholder earnings and the Group’s interests in OEICs, being a tax credit of £461 million for 2008 compared to a tax credit of £217 million in 2007. The effective rate in 2007 was also particularly distorted by substantial profits on disposal of businesses, on which no tax charge arose, and the impact on the tax charge of the 2007 Finance Act reduction in the corporation tax rate from 30 per cent to 28 per cent (as a result of which the Group’s deferred tax liabilities were remeasured leading to a credit to the Group’s tax charge of £110 million). Excluding these items the effective tax rate in 2008 was 32.0 per cent compared to 28.3 per cent in 2007. Of this 3.7 per cent increase in the effective rate, 3.9 per cent is attributable to the impact of the Group’s £180 million provision in respect of certain historic US dollar payments, on which no tax relief is assumed; the remainder of the increase in the effective tax rate in 2008 on this adjusted basis reflected normal fluctuations in disallowed and non-taxable items.

E CONOMIC PROFIT

In pursuit of its aim to maximise shareholder value over time, the Group has for a number of years used a system of value based management as a framework to identify and measure value creation and has used economic profit, a non-GAAP measure, as a measure of performance. The Group continues to believe that economic profit provides important information for investors, because it captures both growth in investment and return and informs management decision making. In light of the substantial changes to the structure of the Group arising from the acquisition of HBOS and the changes in the quantum and structure of the Group’s capital over 2009, the Group is in the process of determining appropriate economic profit methodologies for the enlarged group.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

INTEGRATION

Annualised cost savings from synergies and other operating efficiencies of £2 billion are now targeted by the end of 2011, an increase from the previously forecast cost savings in excess of £1.5 billion. The increase arises in the main from further efficiency gains leading to role reductions and, to a lesser extent, property and procurement benefits which are now more certain following the application of the Lloyds TSB approach to HBOS.

Total cost reductions from synergies of £534 million are ahead of the target £450 million. They are analysed by division in the table below and relate primarily to reductions in staff numbers and procurement savings.

Integration costs of £1,096 million relating to severance, IT and business costs of implementation were incurred during 2009. The severance provisions are for over 15,000 role reductions announced in the year, of which more than 11,500 relate to 2009, the balance being delivered in 2010. The overwhelming majority of role reductions in 2009 were achieved through redeployment, natural turnover and voluntary redundancy.

The Group’s policy is to use natural turnover and to redeploy people wherever possible to retain their expertise and knowledge within the Group. Where it is necessary for colleagues to leave the Group, this is achieved by offering voluntary severance and by making less use of contractors and agency colleagues. Compulsory redundancies are a last resort.


Savings realised year to 31 December 2009	£m		£m
By division		By expenditure type
Retail	124	People	263
Wholesale	86	Procurement ¹	126
Wealth and International	28	IT	57
Insurance	55	Property	11
Group Operations	221	Other	77
Central items	20
	534		534

¹ Procurement benefits totalling £174 million were achieved, split £126 million against the ongoing cost base and £48 million within the £1,096 million integration costs.

Over the last year, the Group has mobilised its integration programme, building systems integration plans whilst delivering financial benefits and making good progress towards creating a truly integrated organisation. For example, the Group has published proposals to harmonise employee terms and conditions across the Group, launched a single Group Intranet to improve communication and ease contact between colleagues and enhanced the IT infrastructure to allow colleagues full connectivity at the Group’s buildings. A single consistent framework of risk policies is in place, comprising 71 detailed risk policies applicable across the combined Group.

Savings to date have been driven largely from role reductions resulting from deployment of the new Group organisational design adopting the Lloyds TSB approach. The overwhelming majority of role reductions in 2009 were achieved through redeployment, natural turnover and voluntary redundancy. Only a small proportion left via compulsory redundancy. In addition the Group has ceased occupancy of 83 properties during 2009, well ahead of the start of year target of 50.

Procurement benefits in 2009 have also been significant at £174 million with approximately £1.5 billion of spend having gone through e-auctions and the Group has in parallel reviewed and consolidated key supplier contracts with over 90 per cent of spend now being through its top 1,000 suppliers.

The Group has progressed well through the IT design and is now focused on building and delivering an integrated technical infrastructure. Preparations for system integration and data migration are in full flight with the scale up of IT equipment to handle increased volumes. Detailed plans are in place, along with testing requirements that are fully commensurate with an integration of this scale.

In the circular to shareholders regarding the acquisition of HBOS, it was stated that annual cost savings of £1.5 billion (run-rate) were expected to be achieved by the end of 2011 at a cost of approximately 140 per cent. The Group is now expecting £2 billion of savings, analysed by division in the table below, at an implementation cost to synergy ratio of around 155 per cent. The increase in the ratio of implementation costs to annualised cost savings has been driven principally by a recognition of the relative complexity of the HBOS systems and processes.

The synergies achieved in the year of £534 million include a number of one-off savings, which have been excluded from the sustainable run-rate benefits. There has also been an increase in the rate of savings in the year resulting in a sustainable run-rate benefit of £766 million.


	2009		2011
	Synergy run-rate £m		Current view of synergy targets £m		Allocation of Group Operations target to divisions £m			Current view by market facing division £m
Retail		157		378		489			867
Wholesale		157		282		250			532
Wealth and International		115		213		29			242
Insurance		99		162		77			239
Group Operations		209		907		(907	)		—
Central items		29		58		62			120
		766		2,000		—			2,000

This discussion of integration includes certain forward looking statements with respect to management’s expectations for the Group’s financial condition and performance, which by their nature involve risk and uncertainty. See Forward looking statements and Risk factors for a discussion of factors that could cause actual results to differ materially from the expectations expressed in such forward looking statements.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

LINE OF BUSINESS INFORMATION

2009 COMPARED WITH 2008

The requirements for IFRS segmental reporting are set out in IFRS 8 ‘Operating Segments’ which mandates that an entity’s segmental reporting should reflect the way in which its operations are viewed and judged by its chief operating decision maker. As a consequence, the Group’s statutory segmental reporting follows the combined businesses basis as explained below (see also note 4 to the consolidated financial statements).

The Group Executive Committee (GEC) has been determined to be the chief operating decision maker for the Group. The Group’s operating segments reflect its organisational and management structures. GEC reviews the Group’s internal reporting based around these segments in order to assess performance and allocate resources. This assessment includes a consideration of each segment’s net interest revenue and consequently the total interest income and expense for all reportable segments is presented on a net basis. The segments are differentiated by the type of products provided, by whether the customers are individuals or corporate entities and by the geographical location of the customer.

The Group’s activities in 2009 were organised into four financial reporting segments: Retail, Wholesale, Wealth and International and Insurance. The segmental results and comparatives are presented on the basis reviewed by the chief operating decision maker and as a consequence include the pre-acquisition results of HBOS for 2008 and the period from 1 January 2009 to 16 January 2009.

Comparisons of results on a historical consolidated statutory basis are dominated by the impact of the acquisition of HBOS as the 2009 statutory results include the results of HBOS from 16 January 2009, together with the effects of the unwind of fair value adjustments made to the HBOS balance sheet on acquisition, and the 2008 statutory results do not include any results of HBOS. In order to provide more meaningful and relevant comparatives, the results of the Group and divisions are presented on a ‘combined businesses’ basis. The key principles adopted in the preparation of the combined businesses basis of reporting are described below.


•	In order to reflect the impact of the acquisition, the following adjustments have been made:

	–	the 2008 results include the results of HBOS as if it had been acquired on 1 January 2008;

	–	the 2009 results assume HBOS had been owned throughout the year;

	–	the unwind of acquisition-related fair value adjustments is shown as one line in the 2009 combined businesses income statement and has not been back-dated to 2008; and

	–	the gain on acquisition of HBOS and amortisation of purchased intangible assets have been excluded.

•	In order to present better the underlying business performance the following items, not related to the acquisition, have also been excluded:

	–	the results of BankWest and St. Andrews, sold in December 2008, and the related loss on disposal;

	–	insurance and policyholder interests volatility;

	–	integration costs;

	–	goodwill impairment; and

	–	Government Asset Protection Scheme fee.

Readers should be aware that the combined businesses basis has been presented for comparative purposes only and is not intended to provide proforma information or show the results of the Group if the acquisition of HBOS had taken place at an earlier date. Readers should also note that HBOS was not managed by the current management of Lloyds Banking Group in 2008.

The results of the businesses are set out below:


	2009 £m		2008 £m
Retail	1,382		2,542
Wholesale	(4,703	)	(10,479	)
Wealth and International	(2,356	)	277
Insurance	975		1,540
Group Operations and Central items:
Group Operations	(149	)	(76	)
Central items	(1,449	)	(517	)
	(1,598	)	(593	)
Loss before tax – combined businesses	(6,300	)	(6,713	)

The aggregate total of the combined businesses basis segmental results is a non-GAAP measure; further discussion of this measure is set out on page 39.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

RECONCILIATION OF COMBINED BUSINESSES LOSS BEFORE TAX TO STATUTORY PROFIT BEFORE TAX FOR THE YEAR


	Note	2009 £m		2008 £m

Loss before tax – combined businesses		(6,300	)	(6,713	)
Integration costs	1	(1,096	)	—
Volatility	2	478		(2,349	)
Government Asset Protection Scheme fee	3	(2,500	)	—
Negative goodwill credit	4	11,173		—
Amortisation of purchased intangibles and goodwill impairment	5	(993	)	(258	)
Pre-acquisition results of HBOS plc	6	280		10,825
Insurance grossing adjustment	7	—		10
Results of BankWest and St. Andrews	8	—		90
Loss on disposal of businesses	9	—		(845	)

Profit before tax – statutory		1,042		760


1.	Integration costs

One-off integration costs of £1,096 million were incurred in 2009; these relate to severance, IT and other costs of implementation. The severance provisions relate to over 15,000 role reductions announced in 2009, of which more than 11,500 relate to 2009, the balance being delivered in 2010. The overwhelming majority of role reductions in 2009 were achieved through re-deployment, natural turnover and voluntary redundancy.

2.	Volatility

The Group’s statutory profit before tax is significantly affected by two items that impact the underlying financial performance of the Group, namely insurance volatility, caused by movements in financial markets, and policyholder interests volatility, which reflects primarily the gross up of policyholder tax included in the Group tax charge.

During 2009, the Group’s statutory profit before tax included positive insurance and policyholder interests volatility of £478 million compared to negative volatility of £2,349 million in 2008 primarily reflecting the more favourable financial markets in 2009.

Volatility comprises the following:


	2009 £m		2008 £m

Insurance volatility	237		(1,425	)
Policyholder interests volatility	298		(924	)
Group hedge costs	(57	)	—

Total	478		(2,349	)

Management believes that excluding volatility from profit before tax on a combined businesses basis provides useful information for investors on the performance of the business as it excludes amounts included within profit before tax which do not accrue to the Group’s equity holders and excludes the impact of changes in market variables which are beyond the control of management.

The most significant limitations associated with profit before tax excluding volatility are:


(i)	Insurance volatility requires an assumption to be made for the normalised return on equities and other investments; and

(ii)	Insurance volatility impacts on the Group’s regulatory capital position, even though it is not included within profit before tax on a combined businesses basis.

Management compensates for the limitations above by:

(i)	Monitoring closely the assumptions used to calculate the normalised return used within the calculation of insurance volatility; these assumptions are disclosed below; and

(ii)	Producing separate reports on the Group’s current and forecast capital ratios.

Insurance volatility

The Group’s insurance businesses have liability products that are supported by substantial holdings of investments, including equities, property and fixed interest investments, all of which are subject to variations in their value. The value of the liabilities does not move exactly in line with changes in the value of the investments, yet IFRS requires that the changes in the value of both the liabilities and the investments be reflected within the income statement. As these investments are substantial and movements in their value can have a significant impact on the profitability of the Group, management believes that it is appropriate to disclose the results on the basis of an expected return in addition to results based on the actual return.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

The expected sterling investment returns used to determine the normalised profit of the business, which are based on prevailing market rates and published research into historical investment return differentials, are set out below:


United Kingdom (Sterling)	2010 %	2009 %	2008 %

Gilt yields (gross)	4.45	3.74	4.55
Equity returns (gross)	7.45	6.74	7.55
Dividend yield	3.00	3.00	3.00
Property return (gross)	7.45	6.74	7.55
Corporate bonds in unit linked and with-profit funds (gross)	5.05	4.34	5.15
Fixed interest investments backing annuity liabilities (gross)	5.30	5.72	5.52

The impact on the results due to the actual return on these investments differing from the expected return (based upon economic assumptions made at the beginning of the year) is included within insurance volatility. Changes in market variables also affect the realistic valuation of the guarantees and options embedded within the With Profits Funds, the value of the in-force business and the value of shareholders’ funds.

The liabilities in respect of the Group’s annuity business are matched by a portfolio of fixed interest securities, which includes a large proportion of corporate bonds. In accordance with the approach adopted in 2008, the value of in-force business for the annuity business has been calculated after taking into account an estimate of the market premium for illiquidity in respect of these corporate bond holdings. The illiquidity premium is estimated to have reduced to 75 basis points as at 31 December 2009 (31 December 2008: 154 basis points) which has offset the gains on assets backing the annuity liabilities reducing the volatility of the results. Overall, the positive volatility in 2009 of £237 million, reflected a partial recovery in financial markets. During 2009, equities have recovered by 22 per cent and corporate bond spreads have narrowed, offset by a reduction in gilts reflecting an increase in yields and a reduction in property values of 6.6 per cent. This contrasts with 2008 where a 33 per cent reduction in equities was the main driver of the £1,425 million negative volatility in 2008.

Policyholder interests volatility

The application of accounting standards results in the introduction of other sources of significant volatility into the pre-tax profits of the life and pensions business. In order to provide a clearer representation of the performance of the business, and consistent with the way in which it is managed, equalisation adjustments are made to remove this volatility from underlying profits. The effect of these adjustments is separately disclosed as policyholder interests volatility; there is no impact upon profit attributable to equity shareholders over the long term.

The most significant of these additional sources of volatility is policyholder tax. Accounting standards require that tax on policyholder investment returns should be included in the Group’s tax charge rather than being offset against the related income. The impact is, therefore, to either increase or decrease profit before tax with a corresponding change in the tax charge. Over the longer term the charges levied to policyholders to cover policyholder tax on investment returns and the related tax provisions are expected to offset. In practice timing and measurement differences exist between provisions for tax and charges made to policyholders. Consistent with the normalised approach taken in respect of insurance volatility, differences in the expected levels of the policyholder tax provision and policyholder charges are adjusted through policyholder interests volatility. Other sources of volatility include the minorities’ share of the profits earned by investment vehicles which are not wholly owned by the long-term assurance funds.

During the year ended 31 December 2009, the statutory profit before tax in both the Insurance and Wealth and International divisions included credits to other income which relate to the policyholder interests volatility credit of £298 million (2008: policyholder interests volatility charge of £924 million). The market recovery in 2009 increased policyholder tax liabilities and led to a policyholder tax charge of £346 million during the year in the Group’s tax charge. This was partly offset by a credit of £48 million relating to differences in the expected levels of policyholder tax provisions and charges. This compares to 2008 when substantial policyholder tax losses were generated as a result of the fall in property, bond and equity values.

Hedge costs

To protect against further deterioration in equity market conditions, and the consequent negative impact on the value of business in force on the Group balance sheet, the Group purchased put option contracts. The charge booked for 2009 was £57 million. These options expired on 15 January 2010.


3.	Government Asset Protection Scheme fee

The Group entered into an agreement in March 2009 relating to its proposed participation in the Government Asset Protection Scheme (GAPS). However, following its successful rights issue, the Group withdrew from its proposed participation and agreed to pay HM Treasury £2,500 million in recognition of the benefits to the Group’s trading operations arising as a result of HM Treasury proposing to make GAPS available to the Group (see Major shareholders and related party transactions – Information about the Lloyds Banking Group’s relationship with the UK Government – GAPS withdrawal deed ).


4.	Negative goodwill credit

As the fair value of the identifiable net assets acquired was greater than the total consideration paid, negative goodwill of £11,173 million arose on the acquisition. The negative goodwill is recognised as ‘Gain on acquisition’ in the income statement for the year ended 31 December 2009.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

By the time of the recommended offer, it had become increasingly difficult for HBOS to raise funds in wholesale markets and HBOS faced an outflow of customer deposits, reflecting reduced investor and depositor confidence. Subsequent to the announcement of the offer, turbulence in the markets continued, fuelled by concerns about credit risk and worsening economic conditions. For HBOS, confidence continued to deteriorate amid ongoing funding difficulties and concerns over the extent of future credit losses. Measures by national authorities and central banks failed to stem this turbulence and the UK Government decided in October 2008 that it would be appropriate for the UK banking sector to increase its level of capitalisation. The capital raising, underwritten by the UK Government, was made available to HBOS on condition that the acquisition by the Company completed. As a consequence of the capital that HBOS was required to issue and the impact of market conditions on the future prospects of the new group, the terms of the final agreed offer were revised down to a ratio of 0.605. Additionally, the share price of the Company fell from 280p at the date of the announcement to 98.4p on 15 January 2009 reflecting both the dilutive impact of the capital that the Company raised and the turmoil in the banking sector and equity markets in general. These factors combined to reduce the value of the consideration for HBOS.


5.	Amortisation of purchased intangibles and goodwill impairment

A total of £4,650 million of the customer-related intangibles, brands, core deposit intangibles and purchased credit card relationships were recognised on the acquisition of HBOS and these are being amortised over their estimated useful lives, where this has been determined to be finite. This has resulted in a charge of £753 million in the year ended 31 December 2009.

The customer-related intangibles include customer lists and the benefits of customer relationships that generate recurring income. The purchased credit card relationships represent the benefit of recurring income generated from the portfolio of credit cards purchased and the core deposit intangible is the benefit derived from a large stable deposit base that has low interest rates.

The Group reviews goodwill held on its balance sheet for impairment at least annually or when events or changes in economic circumstances indicate that an impairment may have taken place. Goodwill attributable to the Group’s asset finance business, for which an impairment charge of £100 million was recognised in the Group’s financial statements for the year ended 31 December 2008, has again been reviewed for impairment in 2009 due to the continuing uncertainties over the short-term macroeconomic environment. As a consequence, the carrying value of the consumer finance cash generating unit within Asset Finance has been reassessed resulting in an additional goodwill impairment charge of £240 million.

The charge in 2008 of £258 million comprised impairment of goodwill, principally in relation to the heritage Lloyds TSB asset finance operations, the ICC business banking division in Ireland and a specialist area of the HBOS UK credit card business.


6.	Pre-acquisition results of HBOS plc

The acquisition of HBOS plc on 16 January 2009 has had a significant effect on the comparability of the Group’s financial position and results, as a consequence, the combined businesses basis results are prepared as if HBOS had been owned by the Group for the full year 2009 and throughout 2008.


7.	Insurance grossing adjustment

The Group’s insurance businesses’ income statements include income and expenditure which are attributable to the policyholders of the Group’s long-term assurance funds. These items have no impact upon the profit attributable to equity shareholders and, in order to provide a clearer representation of the underlying trends within the business, these items are shown net on a separate line.


8.	Results of BankWest and St. Andrews

As explained below, HBOS sold part of its Australian operations in December 2008, the trading results of these businesses up to the date of sale have been excluded from the combined businesses basis results.


9.	Loss on disposal of businesses

On 19 December 2008, HBOS completed the sale of part of its Australian operations, principally Bank of Western Australia Limited and St. Andrews Australia Pty Limited, to Commonwealth Bank of Australia Limited; this resulted in a pre-tax loss on disposal of £845 million.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

RETAIL

Retail is the largest retail bank in the UK and the leading provider of current accounts, savings, personal loans, credit cards and mortgages. With its strong stable of brands including Lloyds TSB, Halifax, Bank of Scotland, Birmingham Midshires and Cheltenham & Gloucester, at 31 December 2009 Retail served over 30 million customers through one of the largest branch and fee free ATM networks in the UK.

At 31 December 2009, Retail had approximately 22 million current account customers and provided social banking to over 4 million people through basic banking or social banking accounts. It was also the largest provider of personal loans in the UK, as well as being the UK’s leading credit card issuer. Retail provides one in four residential mortgages making it the leading UK mortgage lender as well as being a major provider of home finance for the first time buyer. Retail is the largest private sector savings provider in the UK, with over 21 million savers at 31 December 2009. It is also a major general insurance and bancassurance distributor, selling a wide range of long-term savings, investment and general insurance products.


	2009 £m		2008 £m

Net interest income	7,970		8,454
Other income	1,804		2,739

Total income	9,774		11,193
Operating expenses	(4,566	)	(4,963	)

Trading surplus	5,208		6,230
Impairment	(4,227	)	(3,695	)
Share of results of joint ventures and associates	(6	)	7

Profit before tax and fair value unwind	975		2,542
Fair value unwind	407		—

Profit before tax	1,382		2,542

Profit before tax from Retail was £1,160 million, or 46 per cent, lower at £1,382 million in 2009 compared to £2,542 million in 2008; profit in 2009 included a credit of £407 million in relation to the unwinding of fair value adjustments arising from the acquisition of HBOS plc by the Group. Profit before tax and fair value unwind decreased by £1,567 million, or 62 per cent, to £975 million in 2009 compared to £2,542 million in 2008. This decrease was driven by higher impairment losses and lower income, partly offset by a reduction in operating expenses.

Total income decreased by £1,419 million, or 13 per cent, to £9,774 million in 2009 compared to £11,193 million in 2008, reflecting a reduction in margins, lower payment protection income and non-recurring one-off income in 2008. Total income was analysed as follows:


	2009 £m	2008 £m

Mortgages and Savings	3,667	5,009
Consumer Banking	6,107	6,184

Total income	9,774	11,193

Total income in Mortgages and Savings has decreased by £1,342 million, or 27 per cent, to £3,667 million in 2009 compared to £5,009 million in 2008. The reduction in Mortgage income reflected increased wholesale money market funding costs, which was partly offset by higher asset pricing. Lower income in Savings was the result of margin pressures arising from lower base rates and the competitive environment, the impact of which was partly offset by higher customer deposits.

Income within Consumer Banking (where the principal products are current accounts and unsecured lending) was £77 million, or 1 per cent, lower at £6,107 million in 2009 compared to £6,184 million in 2008. On 1 January 2009 Retail introduced a monthly premium payment protection product and ceased selling single premium products. This new product offers customers the benefit of monthly payments and income is recognised over the life of the loan rather than all being recognised in the first year. This reduction in income, together with the effect of lower loan volumes, was broadly offset by an improved performance across the rest of Consumer Banking, including benefits from asset re-pricing.

Lending to customers in Retail, net of impairment provisions and fair value adjustments arising from the acquisition of HBOS plc by the Group, was £6,019 million, or 2 per cent, lower at £371,058 million in 2009 compared to £377,077 million in 2008; this reflects the impact of customers reducing their personal indebtedness and not taking on new financial commitments in the current difficult economic environment.

Retail continued to build its mortgage business in a contracting market by focusing on the prime mortgage market, particularly through the branch network rather than intermediaries, whilst maintaining a prudent approach to risk. Gross new mortgage lending totalled £34,666 million during 2009, compared to £78,058 million in 2008, representing a market share of 24 per cent. Retail has maintained its commitment to the housing market and first time buyers, with more than 60 per cent of new lending in 2009 being for house purchase rather than for re-mortgage. The average loan-to-value ratio at the end of 2009 was 54.8 per cent compared with 54.9 per cent at the end of 2008, whilst the average loan-to-value ratio on new residential lending in 2009 was 59.3 per cent compared with 63.1 per cent in 2008. Specialist lending balances (self certified and sub-prime) decreased slowly following the decision, at the start of the year, to withdraw from this market. New buy-to-let lending remained broadly flat at 13 per cent of total new mortgage lending; however, redemptions in this book were low.

Buy-to-let mortgage balances have increased by £2,872 million in the year. Retail continued to carefully assess the risks of such lending and as a result the average loan-to-value on new lending in the buy-to-let portfolio has fallen to 65.6 per cent at the end of 2009 compared to 73.1 per cent at the end of 2008.

Customer deposits were £7,867 million, or 4 per cent, higher at £224,149 million in 2009 compared to £216,282 million in 2008 despite the high level of term deposits maturing during the period, as a result of Halifax and Bank of Scotland deposit gathering activities in the first half of 2008. Current account balances have increased by 15 per cent in the year resulting from growth in the number of current accounts and the low interest rate environment.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

Retail’s net interest margin decreased by 18 basis points to 1.97 per cent in 2009 compared to 2.15 per cent in 2008, reflecting higher wholesale funding costs and reduced margins on savings products due to the low base rate environment, partly offset by higher asset pricing which led to a stronger margin in the second half of 2009.

Operating expenses decreased by £397 million, or 8 per cent, to £4,566 million in 2009 compared to £4,963 million in 2008. This decrease was driven primarily by a focus on cost control, cost savings resulting from integrating the two businesses and the benefit of a lower Financial Services Compensation Scheme levy. The reduction in operating expenses resulting from integrating the Lloyds TSB and HBOS retail businesses was delivered through streamlining management structures, consolidating the number of mortgage operational sites, integrating and simplifying the mortgage operating model, procurement savings from the rationalisation of suppliers and property savings through the consolidation of sites.

Impairment losses on loans and advances increased by £532 million, or 14 per cent, to £4,227 million in 2009 compared to £3,695 million in 2008. Impairment losses as a percentage of average advances were 1.11 per cent in 2009 compared to 0.97 per cent in 2008. Higher unemployment and the weak economy drove a significant increase in unsecured impairments which was partly offset by a lower secured impairment charge as house prices stabilised. Unsecured impairment losses are sensitive to economic conditions, particularly unemployment levels; consequently the 2009 impairment charge increased by £1,038 million to £3,438 million. The stabilisation of the housing market, in combination with lower interest rates and prudent risk management, has resulted in the secured impairment charge decreasing in 2009 by £506 million to £789 million.

Arrears levels in the secured portfolios were higher than 2008 but improved in the second half of 2009, and remained below the industry average. The percentage of mortgage cases more than three months in arrears increased to 2.3 per cent at 31 December 2009 compared to 1.8 per cent as at 31 December 2008. The stock of repossessed properties reduced by 32 per cent to 2,720 properties compared to 4,011 properties at the end of 2008 and, as a proportion of total accounts, remains lower than the industry average. Currently, average proceeds from the sale of repossessed properties are in excess of average valuations assumed in Retail’s provisioning models.

Impaired loans in the unsecured lending portfolio, as at 31 December 2009, totalled £3,819 million, or 11.9 per cent of closing advances (after writing off some £2,100 million of loans provided against in earlier years). This compared with £5,350 million, or 14.7 per cent of closing advances at 31 December 2008; however, on an equivalent basis (adjusting for the write-off in 2009) impaired loans at 31 December 2008 totalled some £3,250 million, or 8.9 per cent of advances. The underlying increase in impaired loans which occurred in 2009 reflected the weak economy, particularly rising unemployment. During 2009 a number of actions have been taken which improved delinquency rates on new business.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

WHOLESALE

The Wholesale division serves in excess of a million businesses, ranging from start-ups and small enterprises to global corporations, with a range of propositions fully segmented according to customer need. The enlarged division, following the acquisition of HBOS, comprises Corporate Markets, Treasury and Trading and Asset Finance.

Corporate Markets comprises Corporate, Commercial, Corporate Real Estate, Specialist Finance and Wholesale Markets. Corporate, Commercial and Corporate Real Estate provide relationship-based banking, risk management and advisory services to corporate and commercial customers principally in the UK. Relationships with customers with an annual turnover greater than £15 million are managed within Corporate, and commercial property-based relationships (including hotel, property-based leisure and construction) are generally managed within the Corporate Real Estate business. Commercial provides financial services to business customers ranging from new start-ups to those with a turnover of up to £15 million and invoice discounting and factoring services to a broader range of customers. Specialist Finance includes the acquisition finance and private equity businesses; all new business is being written under the brands of Lloyds Acquisition Finance or Lloyds Development Capital. Wholesale Markets provides risk management solutions, specialised lending, capital markets advisory and multi-product financing solutions to its customers, whilst managing the Group’s own portfolio of structured credit investments and treasury assets.

Treasury and Trading’s role is to provide access to financial markets in order to meet the Group’s balance sheet management requirements, and provides trading infrastructure to support execution of customer-driven risk management transactions, whilst operating within a well controlled and conservative risk appetite.

Asset Finance consists of a number of leasing, hire purchase and speciality lending businesses including Contract Hire (Lex, Autolease and Hill Hire), Specialist Assets and Consumer Finance (Black Horse Motor and Personal Finance). Hire purchase is a form of consumer financing where a customer takes possession of goods on payment of an initial deposit but the legal title to the goods does not pass to the customer until the agreed number of instalments have been paid and the option to purchase has been exercised.


	2009 £m			2008 £m

Net interest income		4,710			5,752
Other income		4,199			(302	)

Total income		8,909			5,450
Operating expenses		(4,106	)		(4,591	)

Trading surplus		4,803			859
Impairment		(15,683	)		(10,394	)
Share of results of joint ventures and associates		(720	)		(944	)

Loss before tax and fair value unwind		(11,600	)		(10,479	)
Fair value unwind		6,897			—

Loss before tax		(4,703	)		(10,479	)

Loss before tax from Wholesale improved by £5,776 million to a loss of £4,703 million in 2009 compared to a loss of £10,479 million in 2008; however, the loss in 2009 included a credit of £6,897 million in relation to the unwinding of fair value adjustments arising from the acquisition of HBOS plc by the Group. Loss before tax and fair value unwind deteriorated by £1,121 million to a loss of £11,600 million in 2009 compared to a loss of £10,479 million in 2008. This deterioration was driven by higher impairment losses, only partly offset by an increase in other operating income and a decrease in operating expenses.

Total income increased by £3,459 million, or 63 per cent, to £8,909 million in 2009 compared to £5,450 million in 2008, driven by a large increase in other income.

Lending to customers in Wholesale, net of impairment provisions and fair value adjustments arising from the acquisition of HBOS plc by the Group, was £42,754 million, or 18 per cent, lower at £191,808 million in 2009 compared to £234,562 million in 2008. Customer deposits were £4,552 million, or 3 per cent, lower at £153,389 million in 2009 compared to £157,941 million in 2008.

Net interest income was £1,042 million, or 18 per cent, lower at £4,710 million in 2009 compared to £5,752 million in 2008. The net interest margin, adjusted to exclude products where either the funding costs or the related revenues are recognised in other income, declined by 33 basis points to 1.52 per cent in 2009 compared to 1.85 per cent in 2008. This reduction in income and margin reflected higher wholesale funding costs partly offset by higher asset pricing.

Other income was £4,501 million higher at £4,199 million in 2009 compared to a deficit of £302 million in 2008. Other income in 2008 had been significantly reduced due to the effect of the dislocation in credit markets which resulted in investment valuation write-downs in the Wholesale business; these factors were not repeated in 2009. Other income in 2009 also benefited from good transaction volumes in capital markets and strong flows of client-driven derivative transactions at improved spreads.

Operating expenses decreased by £485 million, or 11 per cent, to £4,106 million in 2009 compared to £4,591 million in 2008. Operating expenses in 2008 included a £180 million settlement in relation to certain historic US dollar payments; excluding this item from 2008, operating expenses decreased by £305 million, or 7 per cent, to £4,106 million in 2009 compared to £4,411 million in 2008. This decrease reflects reduced levels of operating lease business and cost savings achieved from the integration programme, partly offset by increased investment in Wholesale’s customer focused business support functions.

Impairment losses increased by £5,289 million to £15,683 million in 2009 compared to £10,394 million in 2008. Impairment losses for loans and advances as a percentage of average loans and advances to customers were 5.92 per cent in 2009 compared to 3.32 per cent in 2008. These increased impairment losses reflect the continued weak economic climate, higher levels of corporate failures, and application of prudent Lloyds Banking Group provisioning policy, notably in HBOS Corporate Real Estate and HBOS Corporate (UK and US) transactions. However, total impairment losses are expected to have peaked in the first half of 2009, amounting to £9,738 million, compared to £5,945 million in the second half, a reduction of 39 per cent.

Wholesale’s share of results of joint ventures and associates improved by £224 million, or 24 per cent, to a loss of £720 million in 2009 compared to a loss of £944 million in 2008; there were lower levels of write-offs in 2009 as the majority of the book is fully written-off.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

WEALTH AND INTERNATIONAL

Wealth and International is a new division formed in 2009 to give increased focus and momentum to the private banking and asset management businesses and to closely co-ordinate the management of the Group’s international businesses.

The Wealth business comprises private banking, wealth and asset management businesses in the UK and overseas. The key operations are UK and International Private Banking, which operate under the Lloyds TSB and Bank of Scotland brands, the Channel Islands and Isle of Man offshore businesses, the expatriates business and the Asset Management business which, following the completion of the sale of Insight Investment, is now consolidated within Scottish Widows Investment Partnership. In addition the Group holds a 60 per cent stake in St James’s Place plc and a 55 per cent stake in Invista Real Estate, respectively the UK’s largest independent listed wealth manager and real estate fund management group.

The International business comprises the Group’s other international banking businesses outside the UK, with the exception of corporate business in North America which is managed through the Group’s Wholesale division. These largely comprise corporate, commercial and asset finance businesses in Australia, Ireland and Continental Europe and retail businesses in Ireland, Germany and the Netherlands.


	2009 £m			2008 £m

Net interest income		1,217			1,314
Other income		1,128			1,191

Total Income		2,345			2,505
Operating expenses		(1,544	)		(1,476	)

Trading surplus		801			1,029
Impairment		(4,078	)		(731	)
Share of results of joint ventures and associates		(21	)		(21	)

Profit (loss) before tax and fair value unwind		(3,298	)		277
Fair value unwind		942			—

Profit (loss) before tax		(2,356	)		277

Wealth		198			369
International		(3,496	)		(92	)

Profit (loss) before tax and fair value unwind		(3,298	)		277

Profit before tax from Wealth and International was £2,633 million lower at a loss of £2,356 million in 2009 compared to a profit of £277 million in 2008; the loss in 2009 included a credit of £942 million in relation to the unwinding of fair value adjustments arising from the acquisition of HBOS plc by the Group. Profit before tax and fair value unwind decreased by £3,575 million to a loss of £3,298 million in 2009 compared to a profit of £277 million in 2008. This deterioration was driven by higher impairment losses.

Total income decreased by £160 million, or 6 per cent, to £2,345 million in 2009 compared to £2,505 million in 2008. This decrease reflects lower net interest margins, and the impact of lower global stock markets particularly in the first half of the year, partly offset by favourable foreign exchange movements.

Lending to customers in Wealth and International, net of impairment provisions and fair value adjustments arising from the acquisition of HBOS plc by the Group, was £1,005 million, or 2 per cent, lower at £63,548 million in 2009 compared to £64,553 million in 2008 as net repayments and increased impairment provisions in the International businesses have been offset by the transfer of a European loan portfolio of some £7,000 million from Wholesale division.

Customer deposits were £5,058 million, or 15 per cent, lower at £29,037 million in 2009 compared to £34,095 million in 2008 primarily due to outflows in Ireland reflecting aggressive pricing from competitors who have also benefited from the Irish Government deposit guarantee.

Net interest income was £97 million, or 7 per cent, lower at £1,217 million in 2009 compared to £1,314 million in 2008. The net interest margin, adjusted to exclude earnings on policyholder funds and products where either the funding costs or the related revenues are recognised in other income, declined by 35 basis points to 1.71 per cent in 2009 compared to 2.06 per cent in 2008. This margin reduction reflects higher wholesale funding costs and lower deposit margins in the low base rate environment, partly offset by the impact of strong portfolio management in International and higher asset pricing leading to higher margins.

Other income was £63 million, or 5 per cent, lower at £1,128 million in 2009 compared to £1,191 million in 2008. This decrease was driven by falls in global stock markets, particularly in the first half of 2009, impacting sales volumes and fee income across all Wealth businesses; partly offset by favourable exchange movements in the International operations.

Operating expenses increased by £68 million, or 5 per cent, to £1,544 million in 2009 compared to £1,476 million in 2008. Adverse foreign exchange movements increased operating expenses in both the Wealth and the International businesses and additional costs resulted from investments to increase distribution capacity in Private Banking to support future growth plans, additional costs associated with the transitional services following the disposal by HBOS of BankWest and St. Andrews Australia in December 2008, the development of International’s deposit taking operation in Germany and increased risk management resources to manage impaired asset portfolios in Ireland and Australia. These increases in costs were partly offset by cost savings from integration, particularly in the Asset Management business.

Impairment losses increased by £3,347 million to £4,078 million in 2009 compared to £731 million in 2008. This reflects the significant deterioration in the credit risk environment in Ireland and Australia as well as the impact of the economic environment on the UK Private Banking and Expatriate lending portfolios. Of the total impairment losses in 2009, £2,949 million arose in Ireland which experienced a significant deterioration in asset values driven by the collapse in liquidity and severe decline in the property sector where commercial real estate values fell by over 50 per cent and house prices by over 25 per cent from their peak. A further £849 million of the total impairment losses in 2009 arose in Australia, driven by concentrations in property and in other sectors such as media, printing and transport which have been hardest hit by the downturn. Business Support Units have been established in both Ireland and Australia, supplemented by a divisional sanctioning process, to provide independent divisional oversight and control of the portfolios.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

INSURANCE

The Insurance division consists of three business units:

LIFE, PENSIONS AND INVESTMENTS UK

The UK Life, Pensions and Investments business is the leading bancassurance provider in the UK and has one of the largest intermediary sales forces in the industry. The business includes Scottish Widows which, for a number of years, has been a subsidiary of the Lloyds TSB Group and the provider of long-term savings and investment products distributed through all channels of that group. Following the acquisition of HBOS, the Life, Pensions and Investments business also includes business written through the intermediary and bancassurance channels under the Clerical Medical and Halifax brands respectively.

In common with other life assurance companies in the UK, the life and pensions business of each of the life assurance companies in the Lloyds Banking Group is written in a long-term business fund. The main long-term business funds are divided into With Profit and Non-Profit sub-funds.

With-profits life and pensions products are written from the respective With Profit sub-funds in the Group. The benefits accruing from these policies are designed to provide a smoothed return to policyholders who hold their policies to maturity through a mix of annual and final (or terminal) bonuses added to guaranteed basic benefits. The guarantees generally only apply on death or maturity. The actual bonuses declared will reflect the experience of the With Profit sub-fund.

Other life and pensions products are generally written from Non-Profit sub-funds.

Examples include unit-linked policies, annuities, term assurances and health insurance (under which a predetermined amount of benefit is payable in the event of an insured event such as being unable to work through sickness). The benefits provided by linked policies are wholly or partly determined by reference to a specific portfolio of assets known as unit-linked funds.

LIFE, PENSIONS AND INVESTMENTS EUROPE

The European Life, Pensions and Investments business distributes products primarily in the German market under the Heidelberger Leben and Clerical Medical brands. The business unit was included within the International division of the former HBOS group.

GENERAL INSURANCE

The combined General Insurance business is a leading distributor of home and payment protection insurance in the UK, with products sold through the branch network, direct channels and strategic corporate partners. The business is one of the largest underwriters of personal insurance business in the UK and also has significant brokerage operations for personal and commercial insurances. It operates primarily under the Lloyds TSB, Halifax and Bank of Scotland brands.


		2009 £m			2008 £m

Net interest income			(287	)		(345	)
Other income			2,944			3,493

Total income			2,657			3,148
Insurance claims			(637	)		(481	)

Total income, net of insurance claims			2,020			2,667
Operating expenses			(974	)		(1,129	)
Share of results of joint ventures and associates			(22	)		2

Profit before tax and fair value unwind			1,024			1,540
Fair value unwind			(49	)		—

Profit before tax			975			1,540

Profit before tax and fair value unwind by business unit
Life, Pensions and Investments	– UK business		617			826
	– European business		75			149
General Insurance			367			537
Other			(35	)		28

Profit before tax and fair value unwind			1,024			1,540

Profit before tax from Insurance was £565 million lower at £975 million in 2009 compared to £1,540 million in 2008. The profit in 2009 included a charge of £49 million in relation to the unwinding of fair value adjustments arising from the acquisition of HBOS plc by the Group. Profit before tax and fair value unwind was £516 million lower at £1,024 million in 2009 compared to £1,540 million in 2008. This deterioration in profits followed a reduction in income and an increase in claims, due to factors including demanding market conditions, partly offset by a decrease in operating expenses.

Total income decreased by £491 million, or 16 per cent, to £2,657 million in 2009 compared to £3,148 million in 2008 due to the non-recurrence of £334 million of HBOS legacy one-off benefits, principally in Life, Pensions and Investments, enjoyed in 2008 and the impact of challenging economic conditions driving lower sales and returns, partially offset by significantly lower charges for policyholder lapses.

Net interest income was £58 million, or 17 per cent, better at a deficit of £287 million in 2009 compared to a deficit of £345 million in 2008.

Other income was £549 million, or 16 per cent, lower at £2,944 million in 2009 compared to £3,493 million in 2008. Within the life and pensions activities, new business profit was significantly impacted by the general contraction in the life, savings and investments market and the reduction also reflects the integration of the intermediary sales forces and the withdrawal of a number of legacy HBOS products with poor returns. Existing business profit within the UK life and pensions activities reduced by 10 per cent, this includes a reduction in expected return, reflecting lower asset values resulting from adverse investment markets in 2008, a lower assumed rate of return and the non-recurrence of one-off benefits enjoyed by HBOS in 2008. These impacts have been partly offset by a significant reduction in charges for policyholder lapses in 2009. Within the general insurance activities, income was lower principally due to payment protection insurance income decreasing as a result of the market-wide move to monthly premiums on payment protection, partly offset by lower distribution commission payable to the Retail division.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

Insurance claims were £156 million, or 32 per cent, higher at £637 million in 2009 compared to £481 million in 2008, primarily due to higher payment protection insurance claims related to unemployment. Whilst property claims were impacted by flooding and freeze claims in the final quarter of 2009, benefits from ongoing investments in claims processes continue to be realised.

Operating expenses decreased by £155 million, or 14 percent, to £974 million in 2009 compared to £1,129 million in 2008; this is mainly due to continued focus on cost management and delivering integration synergies.

Insurance’s share of results of joint ventures and associates deteriorated to a loss of £22 million in 2009 compared to a profit of £2 million in 2008.

LIFE, PENSIONS AND INVESTMENTS

UK BUSINESS

		2009 £m			2008 £m

Net interest income			(273	)		(282	)
Other income			1,474			1,758

Total income			1,201			1,476
Operating expenses			(584	)		(650	)

Profit before tax and fair value unwind			617			826

Profit before tax and fair value unwind analysis
New business profit	– insurance business ¹		328			465
	– investment business ¹		(196	)		(247	)

Total new business profit			132			218
Existing business profit			483			534
Expected return on shareholders’ net assets			2			74

Profit before tax and fair value unwind			617			826

As required under IFRS, products are split between insurance and investment contracts depending on the level of insurance risk contained. For insurance contracts, the new business profit includes the net present value of profits expected to emerge over the lifetime of the contract, including profits anticipated in periods after the year of sale; for investment contracts the figure reflects the profit in the year of sale only, after allowing for the deferral of initial income and expenses. Consequently the recognition of profit for investment contracts is deferred relative to insurance contracts.

Profit before tax and fair value unwind decreased by £209 million, or 25 per cent, to £617 million in 2009 compared to £826 million in 2008. New business profit was significantly impacted by the general contraction in the life, savings and investments market but the reduction also reflects the integration of the intermediary sales forces and the withdrawal of a number of legacy HBOS products with poor returns.

Existing business profit reduced by £51 million, or 10 per cent, to £483 million in 2009 compared to £534 million in 2008. This reflects a reduction in expected return, reflecting lower asset values resulting from adverse investment markets in 2008, a lower assumed rate of return and the non-recurrence of one-off benefits in HBOS in 2008, principally relating to a move to a more market consistent basis of embedded value and enhancements to the bond proposition. Those impacts have been partly offset by a significant reduction in charges for policyholder lapses in 2009.

Expected returns on shareholders’ net assets were impacted both by a lower assumed rate of return and by reduced asset values as a result of severe market falls in 2008.

EUROPEAN BUSINESS

Profit before tax and fair value unwind decreased by £74 million, or 50 per cent to £75 million in 2009 compared to £149 million in 2008. New business profits reduced by £32 million driven by lower sales, reflecting economic and market conditions. Existing business profits decreased, primarily due to lower expected returns. In 2008, as a result of moving to a more market consistent basis of embedded value in HBOS, a one-off benefit of £123 million arose. The impact of this was largely offset by a significant reduction in charges for policyholder lapses in 2009.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

NEW BUSINESS

The table below provides an analysis of the present value of new business premiums (PVNBP) for business written by the Insurance division, split between the UK and European Life, Pensions and Investments businesses. PVNBP is the measure of new business premiums for the life and pensions business and OEIC sales that management monitors because it provides an indication of both the performance and the profitability of the business – this is calculated as the value of single premiums plus the discounted present value of future expected regular premiums.


	UK £m		2009 Europe £m		Total £m		UK £m		2008 Europe £m		Total £m

Protection		519		49		568		492		51		543
Payment protection		153		—		153		679		—		679
Savings and investments		2,689		312		3,001		4,149		372		4,521
Individual pensions		2,275		185		2,460		4,216		306		4,522
Corporate and other pensions		2,600		—		2,600		2,940		—		2,940
Retirement income		887		—		887		1,451		—		1,451
Managed fund business		146		—		146		216		—		216

Life and pensions		9,269		546		9,815		14,143		729		14,872
OEICs		3,704		—		3,704		3,303		—		3,303

Total		12,973		546		13,519		17,446		729		18,175


Analysis by channel
Bancassurance excluding payment protection		6,844		—		6,844		7,677		—		7,677
Payment protection		153		—		153		679		—		679

Bancassurance		6,997		—		6,997		8,356		—		8,356
Intermediary		5,639		546		6,185		8,704		729		9,433
Direct		337		—		337		386		—		386

Total		12,973		546		13,519		17,446		729		18,175

The present value of new business premiums reduced by £4,656 million, or 26 per cent, to £13,519 million in 2009 compared to £18,175 million in 2008 reflecting both a general contraction in the UK and European markets as well as the re-positioning of the UK intermediary product range. Sales through the intermediary channel were significantly impacted as the UK intermediary sales forces were integrated and a number of legacy HBOS products with poor returns were withdrawn. As a result, sales in the intermediary channel reduced by 34 per cent. Sales through the bancassurance channel, excluding payment protection, continued to perform relatively robustly with a reduction of 11 per cent. This includes Scottish Widows sales through the bancassurance network which showed good growth of 18 per cent. Sales of OEIC products were strong with an increase of 12 per cent in 2009.

GENERAL INSURANCE


	2009 £m			2008 £m
Home insurance
Underwriting income (net of reinsurance)		897			885
Commission receivable		71			50
Commission payable		(94	)		(70	)
		874			865
Payment protection insurance
Underwriting income (net of reinsurance)		731			860
Commission receivable		13			428
Commission payable		(395	)		(923	)
		349			365
Other
Underwriting income (net of reinsurance)		8			20
Commission receivable		69			71
Commission payable		(28	)		(36	)
Other (including investment income)		(6	)		93
		43			148
Net operating income		1,266			1,378
Claims paid on insurance contracts (net of reinsurance)		(637	)		(481	)
Operating income, net of claims		629			897
Operating expenses		(262	)		(360	)
Profit before tax and fair value unwind		367			537

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

Profit before tax and fair value unwind from General Insurance decreased by £170 million, or 32 per cent, to £367 million in 2009 compared to £537 million in 2008.

Claims were £156 million, or 32 per cent, higher at £637 million compared to £481 million in 2008, primarily due to higher payment protection insurance claims related to unemployment. Whilst property claims were impacted by flooding and freeze claims in the final quarter of 2009, benefits from ongoing investments in claims processes continue to be realised.

Against the background of a particularly competitive market in which the general insurance business has a leading position, home insurance income generated modest growth of £9 million, or 1 per cent to £874 million in 2009 compared to £865 million in 2008. Payment protection insurance income decreased by £16 million, or 4 per cent, to £349 million in 2009 compared to £365 million in 2008 as a result of the market-wide move to monthly premiums on payment protection, partly offset by lower distribution commission payable to the Retail division.

Other income has reduced, primarily reflecting lower interest rates and the allocation of certain charges.

Operating expenses decreased by £98 million, or 27 per cent, to £262 million in 2009 compared to £360 million in 2008. Adjusting for the reclassification of claims handling expenses into claims paid and non-recurring marketing spend in 2008, costs improved by 10 per cent year on year, reflecting continued focus on cost management and cost savings achieved through the integration.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

GROUP OPERATIONS


	2009 £m			2008 £m
Net interest income		(69	)		(59	)
Other income		20			35
Total income		(49	)		(24	)
Direct costs:
Information technology		(1,265	)		(1,347	)
Operations		(555	)		(542	)
Property		(979	)		(1,019	)
Procurement		(166	)		(159	)
Support functions		(101	)		(89	)
		(3,066	)		(3,156	)
Result before recharges to divisions		(3,115	)		(3,180	)
Total net recharges to divisions		2,941			3,100
Share of results of joint ventures and associates		3			4
Loss before tax and fair value unwind		(171	)		(76	)
Fair value unwind		22			—
Loss before tax		(149	)		(76	)

Loss before tax from Group Operations deteriorated by £73 million to £149 million in 2009 compared to £76 million in 2008. The loss in 2009 included a credit of £22 million in relation to the unwinding of fair value adjustments arising from the acquisition of HBOS plc by the Group. Loss before tax and fair value unwind deteriorated by £95 million to £171 million in 2009 compared to £76 million in 2008.

Total income, excluding recharges to divisions, decreased by £25 million, to a deficit of £49 million in 2009 compared to a deficit of £24 million in 2008. Net interest income was £10 million, or 17 per cent, lower at a net expense of £69 million in 2009 compared to a net expense of £59 million in 2008. Other income was £15 million, or 43 per cent, lower at £20 million in 2009 compared to £35 million in 2008.

Direct costs were £90 million, or 3 per cent, lower at £3,066 million in 2009 compared to £3,156 million in 2008; this reflects the impact of integration synergies and a continued focus on cost management.

IT costs decreased due to the early realisation of synergy savings following the consolidation of IT operations across the Group in addition to lower investment spend as project activity was rationalised and replaced by integration activity; property costs were also lower, primarily due to the realisation of synergy savings as a result of the integration and the consolidation of premises (which has been achieved at a faster rate than originally anticipated).

Recharges to divisions were £159m, or 5 per cent, lower at £2,941 million in 2009 compared to £3,100 million in 2008.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

CENTRAL ITEMS


	2009 £m			2008 £m

Net interest income		(815	)		(213	)
Other income		1,780			(223	)

Total income		965			(436	)
Operating expenses		(294	)		(21	)

Trading surplus (deficit)		671			(457	)
Impairment		—			(60	)
Share of results of joint ventures and associates		(1	)		—

Profit (loss) before tax and fair value unwind		670			(517	)
Fair value unwind		(2,119	)		—

Loss before tax		(1,449	)		(517	)


Central items are comprised of three main elements:

1	The residual net interest position arising from the Group’s processes to allocate the following elements of net interest income to the divisions:

	•	interest on the Group’s equity position;

	•	net interest margin cost resulting from central capital activities, primarily arising on the management of senior and subordinated debt and preference shares net of such cost allocated to the divisions; and

	•	cost to the Group of funding wholesale and liquidity balances.

2	The charge for payments to the Lloyds TSB Foundations: the four independent Lloyds TSB Foundations support registered charities throughout the UK that enable people, particularly the disabled and disadvantaged, to play a fuller role in society.

3	Central costs and other unallocated items: these relate to the on-going costs of central group activities including those of group corporate treasury (including the central hedge function), internal group audit, group risk, group compliance, group finance and group IT and operations.

Loss before tax from Central items deteriorated by £932 million to £1,449 million in 2009 compared to £517 million in 2008. The loss in 2009 included a charge of £2,119 million in relation to the unwinding of fair value adjustments arising from the acquisition of HBOS plc by the Group. Profit before tax and fair value unwind was £670 million in 2009 compared to a loss of £517 million in 2008.

Total income increased by £1,401 million, to £965 million in 2009 compared to a deficit of £436 million in 2008. Net interest income was £602 million lower at a net expense of £815 million in 2009 compared to a net expense of £213 million in 2008. Other income was £2,003 million higher at £1,780 million in 2009 compared to a deficit of £223 million in 2008; this was primarily as a result of gains arising when the Group exchanged certain existing subordinated debt securities for new securities. These exchanges resulted in a gain on extinguishment of the existing liability of £1,498 million (of which £1,468 million is reflected in Central items), being the difference between the carrying amount of the securities extinguished and the fair value of the new securities together with related fees and costs.

Operating expenses were £273 million higher at £294 million in 2009 compared to £21 million in 2008; this was due in part to higher professional fees and other costs associated with a number of group-wide projects, including the proposed participation in the Government Asset Protection Scheme, and an increase in the amount of pension costs held centrally.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

COMBINED BUSINESSES BASIS SUMMARY – 2009 COMPARED WITH 2008

Readers should be aware that the combined businesses basis has been presented for comparative purposes only and is neither intended to provide proforma information nor to show the results of the Group as if the acquisition of HBOS had taken place at an earlier date. Readers should also note that HBOS was not managed by the current management of Lloyds Banking Group in 2008.

As noted on page 2, the combined businesses basis segmental results for 2009 and 2008 are presented in accordance with IFRS. However, the aggregated total of the combined businesses segmental results constitutes a non-GAAP measure as defined by the SEC.

The acquisition of HBOS plc on 16 January 2009 has had a significant impact on the results of the Group. Comparisons of the Group’s performance on a statutory basis are, therefore, dominated by the impact of the acquisition of HBOS; the 2009 statutory results include the results of HBOS from 16 January 2009, together with the effects of the unwind of fair value adjustments made to the HBOS balance sheet on acquisition, and the 2008 statutory results do not include any results of HBOS.

Management uses the aggregated total of the combined businesses segmental results, a non-GAAP measure, as a measure of performance, and believes that it provides important information for investors, because it is a comparable representation of the Group’s performance. Profit before tax is the comparable GAAP measure to profit before tax on a combined businesses basis; a reconciliation of the Group’s statutory income statement to its combined businesses income statement is shown below. Readers should be aware that the combined businesses basis excludes certain items, as indicated in the tables below, reflected in the Group’s statutory results and includes certain items, also indicated in the tables below, not reflected in the Group’s statutory results. The Group refers readers to the discussion of its statutory results on pages 14 to 23.

Set out below is a reconciliation from the Group’s statutory results to the combined businesses basis, together with a brief commentary.


				Removal of:

2009	Lloyds Banking Group statutory £m			Pre-acquisition results of HBOS £m			GAPS fee and acquisition related items ¹ £m			Volatility £m			Insurance gross up £m			Fair value unwind £m			Combined businesses £m

Net interest income		9,026			243			—			11			1,280			2,166			12,726
Other income		36,271			(1,123	)		—			(479	)		(21,659	)		(1,135	)		11,875

Total income		45,297			(880	)		—			(468	)		(20,379	)		1,031			24,601
Insurance claims		(22,019	)		1,349			—			—			20,318			(285	)		(637	)

Total income, net of insurance claims		23,278			469			—			(468	)		(61	)		746			23,964
Operating expenses		(15,984	)		(293	)		4,589			—			61			18			(11,609	)

Trading surplus (deficit)		7,294			176			4,589			(468	)		—			764			12,355
Impairment		(16,673	)		(456	)		—			—			—			(6,859	)		(23,988	)
Share of results of joint ventures
and associates		(752	)		—			—			(10	)		—			(5	)		(767	)
Gain on acquisition		11,173			—			(11,173	)		—			—			—			—
Fair value unwind					—			—			—			—			6,100			6,100

Profit (loss) before tax		1,042			(280	)		(6,584	)		(478	)		—			—			(6,300	)


¹	Includes the GAPS fee (£2,500 million), integration costs (£1,096 million), amortisation of purchased intangibles (£753 million), goodwill impairment (£240 million) and gain on acquisition.


										Removal of:

2008	Lloyds TSB statutory ¹ £m			HBOS statutory £m			Reclass- ifications £m			BankWest and St. Andrews £m			Volatility £m			Amortisation of purchased intangibles and goodwill impairment £m		Insurance gross up £m			Combined businesses £m

Net interest income		7,718			8,171			1,906			(524	)		(9	)		—		(2,359	)		14,903
Other income		(709	)		(4,559	)		(234	)		(148	)		2,358			—		10,225			6,933

Total income		7,009			3,612			1,672			(672	)		2,349			—		7,866			21,836
Insurance claims		2,859			6,192			(1,570	)		—			—			—		(7,962	)		(481	)

Total income, net of insurance claims		9,868			9,804			102			(672	)		2,349			—		(96	)		21,355
Operating expenses		(6,100	)		(6,880	)		—			400			—			258		86			(12,236	)

Trading surplus		3,768			2,924			102			(272	)		2,349			258		(10	)		9,119
Impairment		(3,012	)		(12,050	)		—			182			—			—		—			(14,880	)
Share of results of joint ventures and associates		4			(956	)		—			—			—			—		—			(952	)
Non-operating income		—			(743	)		(102	)		845			—			—		—			—

Profit (loss) before tax		760			(10,825	)		—			755			2,349			258		(10	)		(6,713	)


¹	Restated for IFRS 2 (Revised).

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

Profit before tax on a combined businesses basis improved by £413 million to a loss of £6,300 million in 2009 compared to a loss of £6,713 million in 2008; however, the loss in 2009 included a credit of £6,100 million in relation to the unwinding of fair value adjustments arising from the acquisition of HBOS plc by the Group. Loss before tax and fair value unwind deteriorated by £5,687 million to a loss of £12,400 million in 2009 compared to a loss of £6,713 million in 2008. This deterioration was driven by higher impairment losses, only partly offset by an increase in other operating income and a decrease in operating expenses.

Total income increased by £2,765 million, or 13 per cent, to £24,601 million in 2009 compared to £21,836 million in 2008, driven by a large increase in other income.

Lending to customers, net of impairment provisions and fair value adjustments arising from the acquisition of HBOS plc by the Group, was £50,277 million, or 7 per cent, lower at £626,969 million in 2009 compared to £677,246 million in 2008.

Customer deposits were £2,421 million lower at £406,741 million in 2009 compared to £409,162 million in 2008.

Net interest income was £2,177 million, or 15 per cent, lower at £12,726 million in 2009 compared to £14,903 million in 2008. The net interest margin, adjusted to exclude products where either the funding costs or the related revenues are recognised in other income, declined by 24 basis points to 1.77 per cent in 2009 compared to 2.01 per cent in 2008.

Other income was £4,942 million, or 71 per cent, higher at £11,875 million in 2009 compared to £6,933 million in 2008. Other income in 2008 had been significantly reduced due to the effect of the dislocation in credit markets which resulted in investment valuation write-downs of £3,452 million in the Wholesale business; these factors were not repeated in 2009.

Operating expenses decreased by £627 million, or 5 per cent, to £11,609 million in 2009 compared to £12,236 million in 2008. Operating expenses in 2008 included a £180 million settlement in relation to certain historic US dollar payments; excluding this item from 2008, operating expenses decreased by £447 million, or 4 per cent, to £11,609 million in 2009 compared to £12,056 million in 2008.

Impairment losses increased by £9,108 million, or 61 per cent, to £23,988 million in 2009 compared to £14,880 million in 2008. Impairment losses on loans and advances to customers as a percentage of average loans and advances to customers were 3.25 per cent in 2009 compared to 1.81 per cent in 2008.

The Group’s share of results of joint ventures and associates improved by £185 million, or 19 per cent, to a loss of £767 million in 2009 compared to a loss of £952 million in 2008; there were lower levels of write-offs in 2009 as the majority of the book is fully written-off.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

LINE OF BUSINESS INFORMATION

2008 COMPARED WITH 2007

The requirements for IFRS segmental reporting are set out in IFRS 8 ‘Operating Segments’ which mandates that an entity’s segmental reporting should reflect the way in which its operations are viewed and judged by its chief operating decision maker. As a consequence, the Group’s statutory segmental reporting for comparing 2008 with 2007 follows the continuing businesses basis as explained below (see also note 4 to the consolidated financial statements).

The Group’s activities in 2008 were organised into three financial reporting segments: UK Retail Banking, Insurance and Investments and Wholesale and International Banking.

The continuing businesses basis excluded the following items:


•	insurance and policyholder interests volatility

•	a provision in respect of certain historic US dollar payments

•	a provision in respect of the Financial Services Compensation Scheme levy

•	impairment charge in respect of goodwill

•	the results of discontinued businesses

•	profit on sale of businesses

•	the settlement of overdraft claims.

The results of the businesses are set out below:


	2008 ¹ £m		2007 ¹ £m

UK Retail Banking	1,793		1,720
Insurance and Investments	911		748
Wholesale and International Banking	274		1,300
Central group items	(599	)	(13	)

Profit before tax – continuing businesses	2,379		3,755


A reconciliation from the continuing businesses basis to the statutory results is set out below:

	Note	2008 ¹ £m		2007 ¹ £m

Profit before tax – continuing businesses		2,379		3,755
Volatility	1
– Insurance		(746	)	(277	)
– Policyholder interests		(471	)	(222	)
Discontinued businesses	2	—		162
Profit on sale of businesses	3	—		657
Provision in respect of certain historic US dollar payments	4	(180	)	—
Provision for Financial Services Compensation Scheme levy	5	(122	)	—
Goodwill impairment	6	(100	)	—
Settlement of overdraft claims	7	—		(76	)

Profit before tax– statutory		760		3,999


¹	Restated for IFRS 2 (Revised).


1.	Volatility

		2008 £m		2007 £m

Insurance volatility		(746	)	(277	)
Policyholder interests volatility		(471	)	(222	)

Total volatility		(1,217	)	(499	)

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

Insurance volatility

The Group’s insurance businesses have liability products that are supported by substantial holdings of investments, including equities, property and fixed interest investments, all of which are subject to variations in their value. The value of the liabilities does not move exactly in line with changes in the value of the investments, yet IFRS requires that the changes in both the value of the liabilities and investments be reflected within the income statement. As these investments are substantial and movements in their fair value can have a significant impact on the profitability of the Insurance and Investments division, management believes that it is appropriate to disclose the division’s results on the basis of an expected return in addition to the actual return. The difference between the actual return on these investments and the expected return based upon economic assumptions made at the beginning of the year is included within insurance volatility.

Changes in market variables also affect the realistic valuation of the guarantees and options embedded within products written in the Scottish Widows With Profit Fund, the value of the in-force business and the value of shareholders’ funds. Fluctuations in these values caused by changes in market variables, including market spreads reflecting credit risk premia, are also included within insurance volatility. These market credit spreads represent the gap between the yield on corporate bonds and the yield on government bonds, and reflect the market’s assessment of credit risk. Changes in the credit spreads affect the value of the in-force business asset in respect of the annuity portfolio.

The expected investment returns used to determine the normalised profit of the business, which are based on prevailing market rates and published research into historic investment return differentials, are set out below:


	2008 %		2007 %

Gilt yield (gross)		4.55		4.62
Equity return (gross)		7.55		7.62
Dividend yield		3.00		3.00
Property return (gross)		7.55		7.62
Corporate bonds in unit-linked and with-profits funds (gross)		5.15		5.22
Fixed interest instruments backing annuity liabilities (gross)		5.56		5.09

During 2008, profit before tax included negative insurance volatility of £746 million, being a credit of £9 million to net interest income and a charge of £755 million to other income. During 2007, profit before tax included negative insurance volatility of £277 million, being a credit of £7 million to net interest income and a charge of £284 million to other income. The charge in 2008 mainly reflected the significant falls in global equity markets during the year, which resulted in total returns some 33 percentage points lower than the expected investment returns set out above. These lower than expected returns reduced the value of in-force business asset in respect of life insurance and participating investment contracts held on the balance sheet. The impact of the widening corporate bond credit spreads more than offset the inclusion of an allowance for the illiquidity premium, and resulted in a net reduction in the value of the annuity portfolio. Lower equity and bond prices also affected the valuation of the Group’s investment held within the funds attributable to the shareholders. During 2007, the effect of widening credit risk spreads and falling gilt values more than offset the favourable impact of a modest increase in equity values and changes in market consistent assumptions.

Policyholder interests volatility

The application of accounting standards results in the introduction of other sources of significant volatility into the pre-tax profits of the life and pensions business. In order to provide a clearer representation of the performance of the business and consistent with the way in which it is managed, equalisation adjustments are made to remove this volatility from underlying profits. The effect of these adjustments is separately disclosed as policyholder interests volatility; there is no impact upon profit attributable to equity shareholders.

During 2008, profit before tax included negative policyholder interests volatility of £471 million, being a charge to other income. During 2007, profit before tax included negative policyholder interests volatility of £222 million, being a charge to other income. In both 2007 and 2008, substantial policyholder tax losses were generated as a result of a fall in property, bond and equity values. These losses reduce future policyholder tax liabilities and led to a policyholder tax credit in both years.

2. Discontinued businesses

As explained below, the Group disposed of Lloyds TSB Registrars, Abbey Life and Dutton-Forshaw during 2007. Trading results of these businesses up to the date of sale have been excluded from the continuing businesses basis results.

3. Profit on sale of businesses

During 2007, the Group disposed of Lloyds TSB Registrars, its share registration business; Abbey Life, the UK life operation which was closed to new business in 2000; and Dutton-Forshaw, its medium-size car dealership. In addition, provision was made for payments under an indemnity given in relation to a business sold in an earlier year. Together, these transactions resulted in a profit of £657 million.

4. Provision in respect of certain historic US dollar payments

In January 2009, the Group announced that it had reached a settlement with both the US Department of Justice and the New York County District Attorney’s Office in relation to a previously disclosed investigation involving those agencies into certain historic US dollar payment practices; the Group provided £180 million in respect of this matter in its 2008 results.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

5. Provision for Financial Services Compensation Scheme levy

The arrangements put in place to protect the depositors of Bradford & Bingley and other failed deposit taking institutions involving the Financial Services Compensation Scheme (FSCS) will result in a significant increase in the levies made by the FSCS on the industry. The Group made a provision of £122 million in respect of its then obligation for the estimated interest cost on the FSCS borrowings in its 2008 results.

6. Goodwill impairment

During 2008, the basis of goodwill allocation in parts of the Asset Finance business was changed to treat the consumer finance business as a single cash generating unit encompassing the motor and personal finance operations which provide direct and point of sale finance. The markets in which this unit operates had been affected by the UK economic downturn, which had been characterised by falling demand and increasing arrears at that point of the cycle. This, together with uncertainties over the likely short-term macroeconomic environment, resulted in a reassessment of the carrying value of the consumer finance cash generating unit and the recognition of a goodwill impairment charge of £100 million in 2008.

7. Settlement of overdraft claims

Along with a number of other UK banks, during 2007 the Group had received a number of customer claims for the repayment of overdraft fees. On 27 July 2007, several banks, together with the Office of Fair Trading, had asked the High Court of England and Wales to clarify the legal position regarding personal current account fees. The 2007 results included a charge of £76 million relating to the settlement of claims during that year, together with related costs.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

UK RETAIL BANKING

During 2008, UK Retail Banking provided banking, financial services, mortgages and private banking to some 16 million personal customers through the Group’s multi-channel distribution capabilities.

The Group provided wide-reaching geographic branch coverage in England, Scotland and Wales, through over 1,950 branches of Lloyds TSB Bank, Lloyds TSB Scotland plc (Lloyds TSB Scotland) and C&G; internet banking provided online banking facilities for personal customers and telephone banking continued to grow, at the end of 2008 some 5.7 million customers had registered to use the services of PhoneBank and the automated voice response service, PhoneBank Express. The Group had one of the largest cash machine networks of any leading banking group in the UK and, at 31 December 2008, personal customers of Lloyds TSB Bank and Lloyds TSB Scotland were able to withdraw cash and check balances through over 4,200 ATMs at branches and external locations around the UK.

Lloyds TSB Bank and Lloyds TSB Scotland offered a wide range of current accounts, including interest-bearing current accounts and a range of added-value accounts; savings accounts and retail investments; and personal loans.

The Group provided a range of card-based products and services, including credit and debit cards and card transaction processing services for retailers.

In 2008 C&G was UK Retail Banking’s specialist residential mortgage arranger, offering a range of mortgage products to personal customers through its own branches and those of Lloyds TSB Bank in England and Wales, as well as through the telephone, internet and postal service, Mortgage Direct; mortgages were also offered through Lloyds TSB Scotland.

UK Wealth Management provided financial planning and advice for the Group’s affluent customers, providing financial solutions across investments, retirement planning and income, trusts, tax and estate planning as well as share dealing.


	2008 £m			2007 £m

Net interest income		4,110			3,695
Other income		1,766			1,797

Total income		5,876			5,492
Operating expenses		(2,611	)		(2,548	)

Trading surplus		3,265			2,944
Impairment		(1,472	)		(1,224	)

Profit before tax		1,793			1,720

Cost:income ratio		44.4	%		46.4	%
Total assets (year end)		£127,502	m		£115,012	m

Profit before tax from UK Retail Banking increased by £73 million, or 4 per cent, to £1,793 million in 2008 compared to £1,720 million in 2007.

Net interest income was £415 million, or 11 per cent, higher at £4,110 million in 2008 compared with £3,695 million in 2007, reflecting both an increase in average interest-earning assets and an improvement in the net interest margin. Average interest-earning assets were £9,234 million, or 8 per cent, higher at £120,128 million in 2008 compared to £110,894 million in 2007 as a result of lending growth, particularly within the mortgage business. Average mortgage balances were £8,652 million higher in 2008. Gross new mortgage lending for the Group totalled £27,767 million, compared to £29,431 million in 2007; net new lending totalled £10,914 million, compared to £6,647 million in 2007, resulting in a market share of net new mortgage lending of 27.5 per cent, compared to 6.2 per cent in 2007. Average balances in respect of other personal lending were £20,138 million compared with £19,426 million in 2007. Average credit card balances in 2008 were 2 per cent lower at £6,477 million compared to £6,619 million in 2007, whilst balances on personal loans and overdrafts were 7 per cent higher at £13,661 million in 2008. Overall margins in UK Retail Banking improved by 9 basis points as a result of wider margins within the unsecured personal lending business and on new mortgages.

Other income was £31 million, or 2 per cent, lower at £1,766 million compared to £1,797 million in 2007. Higher fees and commissions receivable as a result of growth in added-value current accounts and card services were more than offset by lower creditor insurance commissions and the impact of changes in product design leading to a greater proportion of earnings being recognised as net interest income rather than other income.

Operating expenses were £63 million, or 2 per cent, higher at £2,611 million in 2008 compared with £2,548 million in 2007. The Group had continued to benefit from the recent investment in reducing the levels of administration and processing work carried out in branches. This had enabled the Group to increase its focus on meeting the needs of its customers and had supported further improved productivity in the branch network sales effort. These initiatives supported a further improvement in the retail banking cost:income ratio to 44.4 per cent from 46.4 per cent in 2007.

The impairment charge on loans and advances of £1,472 million in 2008 was £248 million, or 20 per cent, higher than the £1,224 million impairment charge in 2007. The charge in respect of personal loans and overdrafts was £100 million, or 15 per cent, higher at £779 million compared to £679 million in 2007 and represented 5.73 per cent of average lending, compared to 5.32 per cent in 2007; and the charge in respect of card balances was £1 million lower at £526 million compared with £527 million in 2007. The impairment charge in Mortgages was £167 million, compared to £18 million in 2007, or 17 basis points of average mortgage lending. The most significant factors in the increase in the mortgage impairment charge during 2008 were the fall in the house price index and the deterioration in economic conditions in the UK.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

INSURANCE AND INVESTMENTS

During 2008, Insurance and Investments offered life assurance, pensions and investment products, general insurance and fund management services.

In 2008, Scottish Widows was the Group’s specialist provider of life assurance, pensions and investment products, which were distributed through Lloyds TSB Bank’s branch network, through independent financial advisors and directly via the telephone and the internet. The Scottish Widows brand was the main brand for new sales of the Group’s life, pensions, Open Ended Investment Companies (OEICs) and other long-term savings products.

Lloyds TSB General Insurance provided general insurance through retail branches of Lloyds TSB Bank and C&G, a direct telephone operation, the internet and through third party panel or other distribution channels. Lloyds TSB General Insurance was one of the leading distributors of home insurance in the UK.

Scottish Widows Investment Partnership managed funds for the Group’s retail life, pensions and investment products. Clients also included corporate pension schemes, local authorities and other institutions in the UK and overseas.


	2008 £m			2007 £m

Net interest income		(62	)		(106	)
Other income		1,749			1,741

Total income		1,687			1,635
Insurance claims		(193	)		(302	)

Total income, net of insurance claims		1,494			1,333
Operating expenses		(591	)		(611	)

Trading surplus		903			722
Impairment		(2	)		—

Profit before tax, excluding insurance grossing		901			722
Insurance grossing adjustment ¹		10			26

Profit before tax		911			748

The Insurance and Investment division’s income statement includes income and expenditure which are attributable to the policyholders of the Group’s long-term assurance funds. These items have no impact upon the profit attributable to equity shareholders and, in order to provide a clearer representation of the underlying trends within the Insurance and Investments segment, these items are shown net on a separate line in the segmental analysis above.


Analysis by area of business of profit before tax	2008 £m		2007 £m

Life, pensions and OEICs		635		597
General insurance		234		110
Scottish Widows Investment Partnership		42		41

Profit before tax		911		748

Profit before tax from the Group’s Insurance and Investments business was £163 million, or 22 per cent, higher at £911 million in 2008 compared to £748 million in 2007 for the reasons discussed below.

Net interest income improved by £44 million to a net expense of £62 million in 2008 compared to a net expense of £106 million in 2007.

Other income was £8 million higher at £1,749 million in 2008 compared to £1,741 million in 2007.

Other income from Life, pensions and OEICs was flat as growth in new business profit, reflecting sales growth in insurance-accounted products, was offset by reduced existing business profits principally reflecting the adverse effect of changes made to the economic assumptions used to calculate the value of in-force business included in the balance sheet and the impact of weaker investment markets.

Other income from Scottish Widows Investment Partnership was £13 million lower; but other income from general insurance was £21 million, or 4 per cent, higher at £582 million in 2008 compared to £561 million in 2007. Insurance broking commissions receivable were £99 million, or 15 per cent, lower at £549 million in 2008 compared to £648 million in 2007; home insurance commissions were flat but creditor commissions fell in line with reduced new loan volumes. Underwriting income, net of reinsurance, was £21 million, or 4 per cent, higher at £612 million in 2008 compared to £591 million in 2007 and fees and commissions payable were £87 million, or 13 per cent, lower at £605 million in 2008 compared to £692 million in 2007.

Operating expenses were £20 million, or 3 per cent, lower at £591 million in 2008 compared to £611 million in 2007. A decrease in professional and other fees related to project work was partly offset by increased staff costs.

The performances of the life, pensions and OEICs business and the general insurance business are discussed separately below, on pages 46 and 47.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

LIFE, PENSIONS AND OEICS

The table below shows the Present Value of New Business Premiums (PVNBP) which is the measure of new business premiums for the life and pensions business and OEIC sales that management monitors because it provides an indication of both the performance and the profitability of the business – this is calculated as the value of single premiums plus the discounted present value of future expected regular premiums. There are three main distribution channels for the sale of the Group’s life, pension and OEIC products and the tables below show the relative importance of each.


Present value of new business premiums (PVNBP)	2008 £m		2007 £m

Life and pensions:
Protection		997		960
Savings and investments		437		913
Individual pensions		2,125		2,073
Corporate and other pensions		2,482		2,141
Retirement income		939		1,044
Managed fund business		217		486

Life and pensions		7,197		7,617
OEICs		2,897		2,807

Life, pensions and OEICs		10,094		10,424


Single premium business		7,346		8,375
Regular premium business		2,748		2,049

Life, pensions and OEICs		10,094		10,424


Bancassurance		4,247		4,096
Independent financial advisers		5,367		5,817
Direct		480		511

Life, pensions and OEICs		10,094		10,424

Overall life, pensions and OEICs sales were £330 million, or 3 per cent, lower at £10,094 million in 2008 compared to £10,424 million in 2007, for the following reasons.

Life and pension sales (including Managed fund business) were £420 million, or 6 per cent, lower at £7,197 million in 2008 compared with £7,617 million in 2007. Protection sales were £37 million, or 4 per cent, higher at £997 million compared to £960 million in 2007, but Savings and investment sales were £476 million lower at £437 million compared to £913 million in 2007, partly due to decreased Flexible Option Bond sales following changes in tax legislation which made such bonds less attractive to investors. Individual pension sales were £52 million higher at £2,125 million in 2008 compared to £2,073 million in 2007 as the negative impact of difficult market conditions were more than offset by the sales of the Retirement Account product. Corporate and other pension sales were £341 million higher at £2,482 million compared to £2,141 million in 2007 as continued product development has helped Scottish Widows to attract a number of large corporate pension schemes. Retirement income sales are £105 million lower at £939 million in 2008 compared to £1,044 million in 2007, as current market conditions have made annuity products unattractive; and Managed fund business sales were £269 million lower at £217 million compared to £486 million in 2008, again as a result of adverse market conditions.

OEICs sales increased by £90 million, or 3 per cent, to £2,897 million in 2008 compared to £2,807 million in 2007 as sales growth through the Wealth Management business has more than offset a decrease in sales elsewhere within the Bancassurance channel, as a result of a fall in consumer confidence in the investment market.

By distribution channel, Bancassurance sales were £151 million, or 4 per cent, higher at £4,247 million in 2008 compared to £4,096 million in 2007 whereas sales via independent financial advisers were £450 million, or 8 per cent, lower at £5,367 million in 2008 compared to £5,817 million in 2007.

Profit before tax from life, pensions and OEICs was £38 million, or 6 per cent, higher at £635 million in 2008 compared to £597 million in 2007, as growth in new business profit, reflecting sales growth in insurance-accounted products, has been partly offset by reduced existing business profits principally reflecting the adverse effect of changes made to the economic assumptions used to calculate the value of in-force business included in the balance sheet and the impact of weaker investment markets.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

GENERAL INSURANCE

The results of the general insurance business are set out below.


	2008 £m			2007 £m

Net interest income		6			5
Other income		582			561

Total income		588			566
Insurance claims		(193	)		(302	)

Total income, net of insurance claims		395			264
Operating expenses		(161	)		(154	)

Profit before tax		234			110


	2008 £m		2007 £m

Premium income from underwriting (net of reinsurance):
Home		441		418
Creditor		163		164
Other		8		9

		612		591

Commissions from insurance broking:
Creditor		428		510
Home		50		50
Other		71		88

		549		648

Profit before tax from the Group’s general insurance operations was £124 million, or 113 per cent, higher at £234 million in 2008 compared to £110 million in 2007.

Net interest income was £1 million, or 20 per cent, higher at £6 million in 2008 compared to £5 million in 2007.

Other income was £21 million, or 4 per cent, higher at £582 million in 2008 compared to £561 million in 2007. Insurance broking commissions receivable were £99 million, or 15 per cent, lower at £549 million in 2008 compared to £648 million in 2007; home insurance commissions were flat but creditor commissions fell in line with reduced new loan volumes. Underwriting income, net of reinsurance, was £21 million, or 4 per cent, higher at £612 million in 2008 compared to £591 million in 2007; home insurance premiums were 6 per cent higher reflecting the success of the Home Solutions product. Fees and commissions payable were £87 million, or 13 per cent, lower at £605 million in 2008 compared to £692 million in 2007; this largely reflected reduced creditor insurance sales volumes.

Insurance claims expense was £109 million, or 36 per cent, lower at £193 million in 2008 compared to £302 million in 2007 largely as a result of the non-repetition of the £113 million increase in weather related claims in 2007, resulting from storms in January 2007 and severe flooding in June and July 2007 in the UK.

Operating expenses were £7 million, or 5 per cent, higher at £161 million in 2008 compared to £154 million in 2007 reflecting increases in staff costs and other administration charges.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

WHOLESALE AND INTERNATIONAL BANKING

In 2008, Wholesale and International Banking provided banking and related services for major UK and multinational corporates and financial institutions, and small and medium-sized UK businesses. It also provided asset finance to personal and corporate customers, managed the Group’s activities in financial markets through its treasury function and provided banking and financial services overseas.

Combining the respective strengths of some 3,000 employees, Corporate Markets played an integral role in leveraging and expanding the customer franchise and building deep, long-lasting relationships with around 26,000 corporate customers at 31 December 2008. Corporate Banking managed the Group’s core corporate customer franchise, providing a relationship-based financial and advisory service to the corporate market place through dedicated regional teams throughout the UK and key strategic locations abroad, including New York. Customers had access to expert advice and a broad range of financial solutions. Products and Markets was where the specialist product capability resided for transactions undertaken by the corporate customers of the Group. It offered customers a comprehensive range of finance and capital solutions, and also provided tailored risk management solutions and structured solutions across all areas of risk, including foreign exchange, interest rates, credit, inflation and commodities on behalf of the Group.

At 31 December 2008, Commercial Banking served nearly one million customers across the UK from one-person start-ups to large, established enterprises. The business focused on providing banking facilities and solutions to customers with business turnover up to £15 million per annum, and additionally provided specialised working capital finance for its customers through its Commercial Finance subsidiary, and long-term finance to the agricultural sector through the Agricultural Mortgage Corporation.

The Group’s asset finance businesses provided individuals and companies with specialist personal lending, store credit and finance through leasing, hire purchase and contract hire packages. Altogether, at 31 December 2008, Asset Finance had over 1.5 million individual customers and relationships with some 22,000 companies and small businesses.

The Group had continued to shape its international network to support its UK operations. Its overseas banking operations included offices in the UK, the Channel Islands, the Isle of Man, Dubai, Hong Kong, Spain, France, Switzerland, Luxembourg, Belgium, Netherlands, Monaco, Gibraltar, Cyprus, South Africa, Japan, Singapore, Malaysia, China and the US. The business provided a wide range of private and retail banking, wealth management and expatriate services to local residents, UK expatriates, foreign nationals and to other customers and also served the corporate and institutional markets in a number of these locations.


	2008 £m		2007 £m

Net interest income	3,303		2,380
Other income	829		1,644

Total income	4,132		4,024
Operating expenses	(2,350	)	(2,152	)

Trading surplus	1,782		1,872
Impairment	(1,508	)	(572	)

Profit before tax	274		1,300

Cost:income ratio	56.9	%	53.5	%
Total assets (year end)	£238,832	m	£163,294	m

In 2008 Wholesale and International Banking recorded a profit before tax of £274 million which was £1,026 million, or 79 per cent, lower than £1,300 million in 2007, for the following reasons.

Net interest income was £923 million, or 39 per cent, higher at £3,303 million compared to £2,380 million in 2007. This increase reflected growth in interest-earning assets in Corporate Markets, Commercial Banking and International Banking. Average interest-earning assets were £22,547 million, or 17 per cent, higher at £158,254 million. Excluding the fine margin reverse repurchase agreement balances from both years, the increase was £24,891 million. The net interest margin, again excluding the fine margin reverse repurchase agreement balances, increased by 27 basis points, as a widening of margins within Corporate Markets, in part as a result of changes in funding arrangements, and Asset Finance was partly offset by decreased margins in Commercial Banking, where growth has been in lower margin secured products.

Other income was £815 million, or 50 per cent, lower at £829 million compared to £1,644 million in 2007; the significant reduction in Corporate Market’s other income (£936 million lower), primarily as a result of the recent market turmoil, was partially offset by increases in Commercial Banking (£34 million, or 8 per cent, higher), Asset Finance (£40 million, or 9 per cent, higher) and International Banking (£22 million, or 12 per cent, higher).

Operating expenses were £198 million, or 9 per cent, higher at £2,350 million in 2008 compared to £2,152 million in 2007. This increase reflects the continued investment in the Group’s people and infrastructure, particularly within Corporate Markets.

The impairment charge in 2008 totalled £1,508 million, compared to £572 million in 2007, an increase of £936 million. The charge in respect of loans and receivables increased by £905 million, from £497 million in 2007 to £1,402 million in 2008 and the charge as a percentage of average lending was 1.33 per cent compared to 0.57 per cent in 2007. In Corporate Markets the charge was £774 million higher, at £939 million compared to £165 million in 2007; the significant increase reflects the economic slowdown in the UK and the impact of a number of high profile financial services company collapses. In Commercial Banking the charge was £89 million, or 90 per cent, higher, at £188 million; in Asset Finance the charge was £42 million, or 18 per cent, higher, at £270 million; and in International Banking there was a charge of £6 million compared with a release of £2 million in 2007. In addition, a charge of £100 million in 2008 (2007: £70 million) arose in respect of the impairment of available-for-sale financial assets.

At 31 December 2008, Lloyds Banking Group’s Corporate Markets’ exposure to certain categories of assets the values of which had been affected by the ongoing capital markets uncertainties was as described below:

OPERATING AND FINANCIAL REVIEW AND PROSPECTS


•	Asset Backed Security CDOs (ABS CDOs) and monoline Credit Default Swap (CDS) exposure: Corporate Markets had no direct exposure to US sub-prime ABS and limited indirect exposure through ABS CDOs. During 2008, the market value of the Group’s holdings in ABS CDOs reduced and, as a result, Corporate Markets took an income statement charge of £92 million. Corporate Markets had no exposure to mezzanine ABS CDOs. In addition, Corporate Markets had £1,867 million, compared to £1,861 million at 31 December 2007, of ABS CDOs which remained fully cash collateralised by major global financial institutions.

•	At 31 December 2008, Corporate Markets had fair value exposure to one monoline financial guarantor in the form of CDS protection bought against a £256 million collateralised loan obligation. The exposure on this CDS was £10 million, following a £28 million adverse credit valuation adjustment. A restructuring of the Group’s other monoline hedged ABS CDO had eliminated any reliance on the financial guarantor and had resulted in a much improved risk profile on a reduced holding of £128 million included in loans and receivables. Credit valuation adjustments and restructuring costs related to the cancelled CDS in the amount of £275 million were recognised in the income statement.

•	Structured Investment Vehicles (SIV): During 2008 Corporate Markets wrote down the value of its SIV exposures by £95 million. Corporate Markets had no residual exposure to SIV Capital Notes. Additionally, at 31 December 2008 Corporate Markets had a commercial paper back up liquidity facility totalling £22 million, compared to £370 million at 31 December 2007.

•	Financial instruments held at fair value through profit or loss: During 2008, Corporate Markets also saw a reduction in profit before tax of £653 million (excluding the £303 million described above due to valuation and restructuring costs relating to CDS) as a result of the impact of mark-to-market adjustments in certain legacy trading portfolios, reflecting the marketwide repricing of liquidity and credit.

•	At 31 December 2008 the trading portfolio contained £33 million of indirect exposure to US sub-prime mortgages and ABS CDOs. This super senior exposure remained protected by note subordination.

•	Available-for-sale financial assets: At 31 December 2008, the Group’s portfolio of available-for-sale financial assets totalled £55,707 million, compared to £20,196 million at 31 December 2007, of which £55,364 million, compared to £19,662 million at 31 December 2007, were held in Corporate Markets. This increase largely reflected the Group’s decision to substantially increase, for liquidity purposes, its holdings of treasury and Government guaranteed securities over the HBOS acquisition period. The available-for-sale financial assets comprised £6,273 million ABS in Cancara, the Group’s hybrid Asset-Backed Commercial Paper conduit, £2,917 million Student Loan ABS, predominantly guaranteed by the US Government, £11,747 million Government bonds and short-dated bank commercial paper, £29,142 million treasury bills and other eligible bills and £5,285 million major bank senior paper and high quality ABS. Temporary mark-to-market adjustments are required to be taken through reserves. During 2008, a net £2,023 million reserves adjustment, which had no impact on the Group’s capital ratios, had been made to reflect a reduction in the value of available-for-sale financial assets.

•	Impairment of available-for-sale financial assets: Gross impairment losses in respect of available-for-sale financial assets transferred from reserves to the income statement during 2008 totalled £130 million, compared to £70 million during 2007, of which £100 million related to Corporate Markets, compared to £70 million during 2007.

•	Cancara: Total exposures in Cancara were £12,615 million at 31 December 2008, comprising £6,273 million of ABS in available-for-sale financial assets and £6,342 million in loans and advances to customers. Cancara is fully consolidated in the Group’s accounts. At 31 December 2008, the ABS in Cancara were 91.8 per cent and 94.2 per cent Aaa/AAA rated by Moody’s and Standard & Poor’s respectively, and there was no exposure either directly or indirectly to sub-prime US mortgages within the ABS portfolio. All non AAA rated ABS had been funded by the Group. At 31 December 2008 loans and advances to customers included no US sub-prime mortgage exposure.

•	Leveraged finance – underwriting commitments: At 31 December 2008, Corporate Markets’ not yet syndicated leveraged loan underwriting commitments amounted to £931 million, compared to £756 million at 31 December 2007, of which £438 million were originated before the current market uncertainties. All of the underlying assets were performing satisfactorily.

The Group’s exposures to categories of assets, the value of which has been affected by the ongoing capital markets uncertainties, increased significantly following the acquisition of HBOS.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

CENTRAL GROUP ITEMS


	2008 ¹ £m			2007 ¹ £m

Net interest income		(293	)		(368	)
Other income		(203	)		352

Total income		(496	)		(16	)
Operating expenses		(77	)		(7	)

Trading surplus		(573	)		(23	)
Impairment		(30	)		—
Share of results of joint ventures and associates		4			10

Loss before tax		(599	)		(13	)


1	Restated for IFRS 2 (Revised).

Central group items are comprised of three main elements:


1	The funding cost of acquisitions less earnings on capital:

	•	interest costs on central balances, which principally arise from the cost of centrally funded acquisitions net of the proceeds of any subsequent disposals, together with the funding cost of dividend flows;

	•	net interest margin cost resulting from central capital activities, primarily arising on the management of senior and subordinated debt and preference shares net of such cost allocated to the divisions; and

	•	earnings allocated to the UK banking businesses on equity required to support their current activities offset by the income on actual equity held in those businesses.

2	The charge for payments to the Lloyds TSB Foundations: The four independent Lloyds TSB Foundations support registered charities throughout the UK that enable people, particularly the disabled and disadvantaged, to play a fuller role in society.

3	Central costs and other unallocated items: these relate to the on-going costs of central group activities including those of group corporate treasury (including the central hedge function), internal group audit, group risk, group compliance, group finance and group IT and operations.

Loss before tax from Central group items was £599 million in 2008 compared to £13 million in 2007. Total income was a deficit of £496 million compared to a deficit of £16 million in 2007; income in 2008 was significantly affected by the impact of yield curve volatility on the fair value of derivatives entered into for risk management purposes, after taking into account the effect of hedge accounting adjustments. Operating expenses were £77 million, compared to £7 million in 2007, reflecting increased central costs that were not recharged to the divisions in connection with professional advice received during 2008 and other items; the charge for payments to the Lloyds TSB Foundations was £27 million compared to £37 million in 2007. An impairment charge of £30 million, compared to £nil in 2007, reflected the write-off of the Group’s investment in Bradford & Bingley equity shares.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

CONTINUING BUSINESSES BASIS SUMMARY – 2008 COMPARED WITH 2007

The continuing businesses segmental results for 2008 and 2007 are prepared in accordance with IFRS. However, the aggregated total of the continuing businesses segmental results constitutes a non-GAAP measure, as defined by the SEC.

Management used the aggregated total of the continuing businesses segmental results, a non-GAAP measure of performance, and believes that it provides important information for investors, because it provides a clearer representation of the Group’s underlying business performance. Profit before tax is the comparable GAAP measure to profit before tax on a continuing businesses basis; a reconciliation of the Group’s statutory income statement to its continuing businesses basis income statement is shown below. Readers should be aware that the continuing businesses basis excludes certain items, as indicated in the tables below, reflected in the Group’s statutory results.

Set out below is a reconciliation from the Group’s statutory results to the continuing businesses basis, together with a brief commentary.


				Removal of

2008	Statutory ¹ £m			Volatility £m			Provision for historic US dollar payments £m		Financial Services Compensation Scheme levy £m		Goodwill impairment £m		Continuing businesses ¹ £m			Removal of insurance gross up £m			Continuing businesses excluding insurance gross up ¹ £m

Net interest income		7,718			(9	)		—		—		—		7,709			(651	)		7,058
Other income		(709	)		1,226			—		—		—		517			3,624			4,141

Total income		7,009			1,217			—		—		—		8,226			2,973			11,199
Insurance claims		2,859			—			—		—		—		2,859			(3,052	)		(193	)

Total income, net of insurance claims		9,868			1,217			—		—		—		11,085			(79	)		11,006
Operating expenses		(6,100	)		—			180		122		100		(5,698	)		69			(5,629	)

Trading surplus		3,768			1,217			180		122		100		5,387			(10	)		5,377
Impairment		(3,012	)		—			—		—		—		(3,012	)		—			(3,012	)
Share of results of joint ventures and associates		4			—			—		—		—		4			—			4

Profit before tax		760			1,217			180		122		100		2,379			(10	)		2,369


1	Restated for IFRS 2 (Revised).


				Removal of

2007	Statutory ¹ £m			Volatility £m			Discontinued businesses £m			Profit on sale of businesses £m			Settlement of overdraft claims £m		Continuing businesses ¹ £m			Removal of insurance gross up £m			Continuing businesses excluding insurance gross up ¹ £m

Net interest income		6,099			(7	)		(70	)		—			—		6,022			(421	)		5,601
Other income		12,119			506			(858	)		—			—		11,767			(6,233	)		5,534

Total income		18,218			499			(928	)		—			—		17,789			(6,654	)		11,135
Insurance claims		(7,522	)		—			605			—			—		(6,917	)		6,615			(302	)

Total income, net of insurance claims		10,696			499			(323	)		—			—		10,872			(39	)		10,833
Operating expenses		(5,568	)		—			161			—			76		(5,331	)		13			(5,318	)

Trading surplus		5,128			499			(162	)		—			76		5,541			(26	)		5,515
Impairment		(1,796	)		—			—			—			—		(1,796	)		—			(1,796	)
Share of results of joint ventures and associates		10			—			—			—			—		10			—			10
Profit on sale and closure of businesses		657			—			—			(657	)		—		—			—			—

Profit before tax		3,999			499			(162	)		(657	)		76		3,755			(26	)		3,729


1	Restated for IFRS 2 (Revised).

Profit before tax on a continuing businesses basis decreased by £1,376 million, or 37 per cent, to £2,379 million in 2008 compared to £3,755 million in 2007; this deterioration in profit reflected a £990 million increase in the adverse impact of market dislocation and a significant increase in impairment losses.

Total income, excluding insurance gross up, was £64 million higher at £11,199 million in 2008 compared to £11,135 million in 2007. However, excluding the negative impact on income of the market dislocation of £925 million (2007: £188 million), total income, excluding insurance gross up, was £801 million, or 7 per cent, higher at £12,124 million in 2008 compared to £11,323 million in 2007.

This growth reflected increased income from both new and existing customers, with growth in both assets and liabilities leading to higher net interest income, as well as an increase in fee-related income.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

Net interest income, excluding insurance grossing, increased by £1,457 million, or 26 per cent, to £7,058 million. During 2008, total assets increased by £82,687 million, or 23 per cent to £436,033 million, with a £30,530 million, or 15 per cent, increase in loans and advances to customers to £240,344 million compared to £209,814 million at 31 December 2007, reflecting customer lending growth in both corporate banking and mortgages. Customer deposits increased by £14,383 million, or 9 per cent, to £170,938 million compared to £156,555 million at 31 December 2007, supported by good growth in savings balances in the retail bank, where bank savings increased by 12 per cent and wealth management balances by 20 per cent.

The net interest margin was largely flat, as improved product margins were offset by an adverse mix effect. There were increased new business product margins in the mortgage and corporate businesses; however, higher growth in finer margin corporate and mortgage lending than in the wider margin unsecured consumer lending contributed to the negative mix effect which offset the increase in product margins.

Other income, excluding insurance grossing, decreased by £1,393 million, or 25 per cent, to £4,141 million, compared to £5,534 million in 2007, largely reflecting the impact of market dislocation. In the retail bank, higher fees and commissions receivable as a result of growth in added value current accounts and card services were offset by lower creditor insurance commissions and the impact of changes in product design leading to a greater proportion of earnings being recognised as net interest income rather than fee income. In addition, growth was achieved in fee-based product sales to commercial banking customers.

The Group continued to invest in improving processing efficiency, resulting in control over day-today operating costs. During 2008, operating expenses excluding the insurance grossing adjustment increased by £311 million, or 6 per cent, to £5,629 million compared to £5,318 million in 2007.

Impairment losses increased by £1,216 million, or 68 per cent, to £3,012 million in 2008 compared to £1,796 million in 2007. Excluding the impact of market dislocation of £345 million (2007: £92 million), impairment losses increased by £963 million, or 57 per cent, to £2,667 million in 2008 compared to £1,704 million in 2007.

In UK Retail Banking, impairment losses increased by £248 million, or 20 per cent, to £1,472 million, particularly reflecting the impact of lower house prices on the mortgage impairment charge. The Wholesale and International Banking charge for impairment losses increased significantly by £936 million to £1,508 million, including the £345 million impairment charge relating to the impact of market dislocation during 2008. The remaining charge reflected an increase in the level of impairments as a result of the economic slowdown in the UK and the impact of a number of high profile financial services company collapses.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

A VERAGE BALANCE SHEET AND NET INTEREST INCOME


	2009 Average balance £m		2009 Interest income £m	2009 Yield %	2008 Average balance £m		2008 Interest income £m	2008 Yield %	2007 Average balance £m		2007 Interest income £m	2007 Yield %

Assets
Loans and receivables:
Loans and advances to banks	65,440		769	1.18	39,004		1,847	4.74	39,381		2,025	5.14
Loans and advances to customers	675,092		24,171	3.58	218,220		13,808	6.33	191,802		13,209	6.89
Debt securities	39,911		1,469	3.68	2,419		61	2.52	—		—	—
Lease and hire purchase receivables	14,165		852	6.01	9,266		706	7.62	9,488		602	6.34
Available-for-sale financial assets	54,926		977	1.78	25,058		1,147	4.58	21,473		1,038	4.83

Total interest-earning assets of banking book	849,534		28,238	3.32	293,967		17,569	5.98	262,144		16,874	6.44
Total interest-earning trading securities and other financial assets at fair value through profit or loss	59,849		2,224	3.72	24,292		1,577	6.49	28,524		1,542	5.41

Total interest-earning assets	909,383		30,462	3.35	318,259		19,146	6.02	290,668		18,416	6.34
Allowance for impairment losses on
loans and advances	(9,551	)			(2,838	)			(2,268	)
Non-interest earning assets	164,056				60,939				66,202

Total average assets and interest income	1,063,888		30,462	2.86	376,360		19,146	5.09	354,602		18,416	5.19


	2009 Average interest earning assets £m	2009 Net interest income £m	2009 Net interest margin %	2008 Average interest earning assets £m	2008 Net interest income £m	2008 Net interest margin %	2007 Average interest earning assets £m	2007 Net interest income £m	2007 Net interest margin %

Average interest-earning assets and
net interest income:
– Banking business	849,534	9,026	1.06	293,967	7,718	2.63	262,144	6,099	2.33
– Trading securities and other financial assets at fair value through profit or loss	59,849	1,706	2.85	24,292	1,151	4.74	28,524	1,179	4.13

	909,383	10,732	1.18	318,259	8,869	2.79	290,668	7,278	2.50

OPERATING AND FINANCIAL REVIEW AND PROSPECTS


	2009 Average balance £m	2009 Interest expense £m	2009 Cost %	2008 Average balance £m	2008 Interest expense £m	2008 Cost %	2007 Average balance £m	2007 Interest expense £m	2007 Cost %

Liabilities and shareholders’ funds
Deposits by banks	93,234	883	0.95	42,150	1,540	3.65	38,406	1,919	5.00
Liabilities to banks under sale and repurchase agreements	42,794	1,399	3.27	5,643	253	4.48	3,127	153	4.89
Customer deposits	357,323	4,410	1.23	151,013	4,932	3.27	142,048	5,085	3.58
Liabilities to customers under sale and repurchase agreements	41,890	256	0.61	106	3	2.83	95	2	2.11
Debt securities in issue	247,079	6,318	2.56	54,359	2,227	4.10	52,743	2,680	5.08
Other interest-bearing liabilities	10,865	1,621	14.92	4,239	—	—	4,551	195	4.28
Subordinated liabilities	43,033	4,325	10.05	15,400	896	5.82	13,126	741	5.65

Total interest-bearing liabilities of banking book	836,218	19,212	2.30	272,910	9,851	3.61	254,096	10,775	4.24
Total interest-bearing liabilities of trading book	28,639	518	1.81	11,769	426	3.62	9,971	363	3.64

Total interest-bearing liabilities	864,857	19,730	2.28	284,679	10,277	3.61	264,067	11,138	4.22
Interest-free liabilities
Non-interest bearing customer accounts	6,902			3,793			3,899
Other interest-free liabilities	158,881			76,584			74,628
Minority interests and shareholders’ funds	33,248			11,304			12,008

Total average liabilities and interest expense	1,063,888	19,730	1.85	376,360	10,277	2.73	354,602	11,138	3.14

Loans and advances to banks and customers include impaired lending; interest on this lending has been recognised using the effective interest rate method, as required by IAS 39.

Average balances are based on daily averages for the principal areas of the Lloyds Banking Group’s banking activities with monthly or less frequent averages used elsewhere. Management believes that the interest rate trends are substantially the same as they would be if all balances were averaged on the same basis.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

The analysis of average balances and interest for 2009 between domestic and international offices is as follows:

Domestic

Foreign

Total

Average
Balance
£m

Interest
income
£m

Yield
%

Average
balance
£m

Interest
income
£m

Yield
%

Average
balance
£m

Interest
income
£m

Yield
%

Assets

Loans and receivables:

Loans and advances to banks

57,500

594

1.03

7,940

175

2.20

65,440

769

1.18

Loans and advances to customers

619,856

22,092

3.56

55,236

2,079

3.76

675,092

24,171

3.58

Debt securities

38,189

1,439

3.77

1,722

1.74

39,911

1,469

3.68

Lease and hire purchase receivables

13,673

836

6.11

492

3.25

14,165

852

6.01

Available-for-sale financial assets

46,787

896

1.92

8,139

1.00

54,926

977

1.78

Total interest-earning assets of banking book

776,005

25,857

3.33

73,529

2,381

3.24

849,534

28,238

3.32

Total interest-earning trading securities and other financial assets at fair value through profit or loss

59,571

2,213

3.71

278

3.96

59,849

2,224

3.72

Total interest-earning assets

835,576

28,070

3.36

73,807

2,392

3.24

909,383

30,462

3.35

Allowance for impairment losses on loans and advances

(5,740

)

(3,811

)

(9,551

)

Non-interest earning assets

159,516

4,540

164,056

Total average assets and interest income

989,352

28,070

2.84

74,536

2,392

3.21

1,063,888

30,462

2.86

Percentage of assets applicable to foreign activities (%)

7.01

Domestic

Foreign

Total

Average
balance
£m

Interest
expense
£m

Cost
%

Average
balance
£m

Interest
expense
£m

Cost
%

Average
balance
£m

Interest
expense
£m

Cost
%

Liabilities and shareholders’ funds

Deposits by banks

63,207

653

1.03

30,027

230

0.77

93,234

883

0.95

Liabilities to banks under sale and repurchase agreements

42,794

1,399

3.27

—

42,794

1,399

3.27

Customer deposits

349,709

4,255

1.22

7,614

155

2.04

357,323

4,410

1.23

Liabilities to customers under sale and repurchase agreements

41,827

256

0.61

—

41,890

256

0.61

Debt securities in issue

222,212

6,099

2.74

24,867

219

0.88

247,079

6,318

2.56

Other interest-bearing liabilities

10,865

1,621

14.92

—

10,865

1,621

14.92

Subordinated liabilities

42,183

4,276

10.14

850

5.76

43,033

4,325

10.05

Total interest-bearing liabilities of banking book

772,797

18,559

2.40

63,421

653

1.03

836,218

19,212

2.30

Total interest-bearing liabilities of trading book

28,639

518

1.81

—

28,639

518

1.81

Total interest-bearing liabilities

801,436

19,077

2.38

63,421

653

1.03

864,857

19,730

2.28

Interest-free liabilities

Non-interest bearing customer accounts

6,253

649

6,902

Other interest-free liabilities

157,426

1,455

158,881

Minority interests and shareholders’ funds

24,237

9,011

33,248

Total average liabilities and interest expense

989,352

19,077

1.93

74,536

653

0.88

1,063,888

19,730

1.85

Percentage of liabilities applicable to foreign activities (%)

6.36

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

C HANGES IN NET INTEREST INCOME – VOLUME AND RATE ANALYSIS

The following table allocates changes in net interest income between volume and rate for 2009 compared with 2008 and for 2008 compared with 2007. Where variances have arisen from both changes in volume and rate these are allocated to volume.


	2009 compared with 2008 Increase/(decrease)					2008 compared with 2007 Increase/(decrease)
	Total change £m		Volume £m	Rate £m		Total change £m		Volume £m		Rate £m

Interest receivable and similar income
Loans and receivables:
Loans and advances to banks	(1,078	)	311	(1,389	)	(178	)	(18	)	(160	)
Loans and advances to customers	10,363		16,358	(5,995	)	599		1,672		(1,073	)
Debt securities	1,408		1,380	28		61		61		—
Lease and hire purchase receivables	146		295	(149	)	104		(17	)	121
Available-for-sale financial assets	(170	)	531	(701	)	109		164		(55	)

Total banking book interest receivable and similar income	10,669		18,875	(8,206	)	695		1,862		(1,167	)
Total interest receivable and similar income on trading securities and other financial assets at fair value through profit or loss	647		1,321	(674	)	35		(275	)	310

Total interest receivable and similar income	11,316		20,196	(8,880	)	730		1,587		(857	)

Interest payable
Deposits by banks	(657	)	484	(1,141	)	(379	)	137		(516	)
Liabilities to banks under sale and repurchase agreements	1,146		1,215	(69	)	100		113		(13	)
Customer deposits	(522	)	2,546	(3,068	)	(153	)	293		(446	)
Liabilities to customers under sale and repurchase agreements	253		255	(2	)	1		—		1
Debt securities in issue	4,091		4,928	(837	)	(453	)	66		(519	)
Other interest bearing liabilities	1,621		989	632		(195	)	—		(195	)
Subordinated liabilities	3,429		2,777	652		155		132		23

Total banking book interest payable	9,361		13,194	(3,833	)	(924	)	741		(1,665	)
Total interest payable on trading and other liabilities at fair value through profit or loss	92		305	(213	)	63		65		(2	)

Total interest payable	9,453		13,499	(4,046	)	(861	)	806		(1,667	)


OPERATING AND FINANCIAL REVIEW AND PROSPECTS	AUDITED INFORMATION

R ISK MANAGEMENT

THE GROUP’S APPROACH TO RISK

The Group’s approach to risk is founded on robust corporate governance practices and a risk management culture which guides the way all employees approach their work, the way they behave and the decisions they make. The board takes the lead by establishing the ‘tone at the top’ and approving professional standards and corporate values for itself, senior management and other colleagues. The board ensures that senior management implements strategic policies and procedures designed to promote professional behaviour and integrity. The board also ensures that senior management implements risk policies and risk appetites that either limit, or where appropriate, prohibit activities, relationships, and situations that could diminish the quality of corporate governance. All colleagues including the group chief executive are assessed against a balanced scorecard that explicitly addresses their risk performance.

This board level engagement, coupled with the direct involvement of senior management in group-wide risk issues at group executive committee level, ensures that issues are escalated on a timely basis and appropriate remediation plans are put in place. The interaction of the executive and non-executive governance structures relies upon a culture of transparency and openness that is encouraged by senior management. Key decisions are always taken by more than one person.

The group business risk committee and the group asset and liability committee are chaired by the group chief executive and include all members of the group executive committee. The aggregate group wide risk profile and portfolio appetite are discussed at these monthly meetings. The risk oversight committee, chaired by the deputy group chairman, comprises non-executive directors and oversees the Group’s risk exposures. This second-line-of-defence committee is supported by the chief risk officer, who is independent of the front line business units, is a full member of the group executive committee and reports to the group chief executive. The chief risk officer regularly informs the risk oversight committee of the aggregate risk profile and has direct access to the deputy group chairman and the members of the risk oversight committee.

The Group has a conservative business model embodied by a risk culture founded on prudence and accountability, where everyone understands that they are accountable for the risks they take and that the needs of customers are paramount. The focus has been and remains on building and sustaining long-term relationships with customers, through good and bad economic times. The approach is supported by a ‘through the cycle’ approach to risk with strong central control and monitoring.

RISK AS A STRATEGIC DIFFERENTIATOR

The maintenance of a strong control framework remains a priority for the new Lloyds Banking Group and is the foundation for the delivery of effective risk management. The Group optimises performance by allowing divisions and business units to operate within approved capital, liquidity and risk parameters and within the Group’s policy framework. The Group’s approach to risk management ensures that business units remain accountable for risk whilst realising individual strategies to meet business performance targets. The combination of divisional and group risk management maintains effective independent oversight.

The Group continues to enhance its capabilities by providing to the board both qualitative and quantitative data including stress testing analysis on risks associated with strategic objectives to facilitate more informed and effective decision making. The Group’s ability to take risks which are well understood, consistent with its strategy and plans and which are appropriately remunerated, is a key driver of shareholder return.

As part of its integration initiative, the Group has been rolling out the methodology and financial control framework that was used by heritage Lloyds TSB; this includes compliance with the requirements of the US Sarbanes Oxley Act. This project is due to complete in time for reporting in February 2011.

Risk analysis and reporting capabilities support the identification of opportunities as well as risks and it provides an aggregate view of the overall risk portfolio. Risk mitigation strategies clearly aligned with responsibilities and timescales are monitored at group and divisional level.

Reflecting the importance the Group places on risk management, risk is included as one of the five principal criteria within the Group’s balanced scorecard on which individual staff performance is judged. Business executives have specified risk management objectives, and incentive schemes take account of performance against these.

STATE AID

The Group is subject to European state aid obligations as a result of the aid it received from HM Treasury. In November 2009 the European Commission, through its College of Commissioners, approved the Group’s restructuring plan, which is designed to address any competition distortions arising from the benefits of state aid. The Group agreed with HM Treasury in the deed relating to its withdrawal from GAPS that it will comply with the terms of the European Commission’s decision. This has placed a number of requirements on the Group including the disposal of certain portions of its business over the course of the next four years, including in particular the disposal of some parts of its retail banking business. This will require the Group to work closely with EU and UK authorities to demonstrate that it is complying with the terms of the European Commission’s decision.

HM Treasury holds approximately 41.3 per cent of the Group’s ordinary share capital. There is a risk that this shareholding could in future be used to seek to exercise influence over the affairs or strategic business plans of the Group, particularly if other Government priorities or HM Treasury’s interests as a major shareholder in other financial institutions do not align with their interests purely as a shareholder in the Group.

United Kingdom Financial Investments has been appointed manager of HM Treasury’s shareholding and the framework document between UKFI and HM Treasury states that UKFI will manage the UK financial institutions in which HM Treasury holds an interest ‘on a commercial basis and will not intervene in day-to-day management decisions of the Investee Companies (as defined therein)’. This document also makes it clear that such institutions will continue to be separate economic units with independent powers of decision and ‘will continue to have their own independent boards and management teams, determining their own strategies and commercial policies including business plans and budgets’.

In addition, the Group has made a number of undertakings to HM Treasury associated with the state aid it has received, including the provision of additional lending to certain mortgage and business sectors, and other matters relating for instance to corporate governance and staff remuneration. These commitments could limit the operational flexibility of the Group or lead HM Treasury to seek to influence the strategy of the Group in other ways.


OPERATING AND FINANCIAL REVIEW AND PROSPECTS	AUDITED INFORMATION

RISK GOVERNANCE

The Group has rolled out the heritage Lloyds TSB approach to risk appetite, policies, delegations and risk committee structure and has continued to embed these across all risk disciplines and into the business. Having achieved alignment of all high level group principles and appetites on the date of acquisition, the Group has continued to embed these at all levels.

The risk governance structure is intended to strengthen risk evaluation and management, whilst also positioning the Group to manage the changing regulatory environment in an efficient and effective manner. The risk governance structure for Lloyds Banking Group is shown in the table on page 59.

BOARD AND COMMITTEES

The board, assisted by its key risk committees (risk oversight committee and group audit committee), approves the Group’s overall risk management framework. The board also reviews the Group’s aggregate risk exposures and concentrations of risk to seek to ensure that these are consistent with the board’s appetite for risk. The role of the board, audit committee and risk oversight committee are shown in the corporate governance section on pages 123 to 128, and further key risk oversight roles are described below.

In particular, the risk oversight committee , which comprises non-executive directors, oversees the development, implementation and maintenance of the group’s overall risk management framework and its risk appetite, strategy, principles and policies, to ensure they are in line with emerging regulatory, corporate governance and industry best practice. The risk oversight committee regularly reviews the Group’s risk exposures across the primary risk drivers and the detailed risk types.

The group executive committee assisted by the group business risk committee and the group asset and liability committee, supports the group chief executive in ensuring the effectiveness of the Group’s risk management framework and the clear articulation of the Group’s risk policies, whilst also reviewing the Group’s aggregate risk exposures and concentrations of risk. The GEC’s duties are described in greater detail on page 125.

The group asset and liability committee is responsible for the strategic management of the Group’s assets and liabilities and the profit and loss implications of balance sheet management actions. It is also responsible for the risk management framework for market risk, liquidity risk, capital risk and earnings volatility. The group asset and liability committee is supported by the senior asset and liability committee , which is responsible for the review of documentation relating to the management of assets and liabilities in the Group’s balance sheet and the escalation of issues of group level significance to the group asset and liability committee.

The group business risk committee reviews and recommends the Group’s risk appetite and risk management framework, high-level group policies and the allocation of risk appetite. The group business risk committee periodically reviews risk exposures and risk/reward returns and monitors the development, implementation and effectiveness of the Group’s risk governance framework. Within the scope of its work the committee also considers reputational risk and any issues which could have a materially adverse impact on the Group.

The group business risk committee is supported by the following committees:


–	The group compliance and operational risk committee , which is responsible for proactively identifying current and emerging significant compliance and operational risks or accumulation of risks and control deficiencies across the Group and reviewing associated oversight plans to ensure pre-emptive risk management action. The committee also seeks to ensure that adequate divisional engagement occurs to develop, implement and maintain the Group’s compliance and operational risk management framework.

–	The group credit risk committee , which is responsible for the development and effectiveness of the Group’s credit risk management framework, clear description of the Group’s credit risk appetite, setting of high level Group credit policy, and compliance with regulatory credit requirements. On behalf of the group business risk committee, the group credit risk committee monitors and reviews the Group’s aggregate credit risk exposures and concentrations of risk.

–	The group model governance and approvals committee , which is responsible for setting the control framework and standards for models across the Group, including establishing appropriate levels of delegated authority, the approval of models that are considered to be material to the Group (including credit risk rating systems), and the principles underlying the Group’s economic capital framework.

–	The group insurance risk committee , which is responsible for the development and effectiveness of the Group’s insurance risk management framework, clear articulation of the Group’s insurance risk appetite, setting of high level insurance risk policy, and ensuring compliance with regulatory insurance requirements. On behalf of the group business risk committee, the group insurance risk committee monitors and reviews the Group’s aggregate insurance risk exposures and provides proactive and robust challenge around insurance risk and business activities giving rise to insurance risk.

–	During the year, the Group has created divisional financial control committees to provide governance over financial statements. The meetings provide review and challenge as to the veracity of the results, press release and supporting analyst information addressing the processes that have been followed in drawing them up. Items of focus are key assumptions and areas of subjectivity in the results and ensuring proper remediation of control issues that impact internal controls over financial reporting, the Group’s auditors also report findings from their audit work.

The group risk directors and divisional risk officers meet on a regular basis under the chairmanship of the chief risk officer to review and challenge the risk profile of the Group and seek to ensure that mitigating actions are appropriate. Aggregate risk reports are reviewed by this group before submission to group business risk committees and then to risk oversight committee.

Group executive directors have primary responsibility for measuring, monitoring and controlling risks within their areas of accountability and are required to establish control frameworks for their businesses that are consistent with the Group’s high level policies and within the parameters set by the board, group executive committee and group risk. Compliance with policies and parameters is overseen by the risk oversight committee, the group business risk committee, the group asset and liability committee, group risk and the divisional risk officers.

RISK MANAGEMENT OVERSIGHT

The chief risk officer oversees and promotes the development and implementation of a consistent group-wide risk management framework. The chief risk officer, supported by the group risk directors and the divisional risk officers, provides objective challenge to the Group’s senior management. The group executive committee and the board receive regular briefings and guidance from the chief risk officer to ensure awareness of the overarching risk management framework and a clear understanding of their accountabilities for risk and internal control.


OPERATING AND FINANCIAL REVIEW AND PROSPECTS	AUDITED INFORMATION

RISK GOVERNANCE STRUCTURES

(FLOW CHART)

Group risk directors who report directly to the chief risk officer, are allocated responsibility for certain specific risk types and are responsible for ensuring the adequacy of the framework for their risk types as well as the oversight of the risk profile across the Group. Divisional risk officers have dual reporting lines to their own divisional executive and also to the chief risk officer and are responsible for the risk profile within their own divisions. This matrix approach enables the group executive committee members to fulfil their risk management accountabilities.

Divisional risk officers provide oversight of risk management activity for all risks within each of the Group’s divisions. Reporting directly to the group executive directors responsible for the divisions and to the chief risk officer, their day-to-day contact with business management, business operations and risk initiatives seeks to provide an effective risk oversight mechanism.

The director of group audit provides independent assurance to the audit committee and the board that risks within the Group are recognised, monitored and managed within acceptable parameters. Group audit is fully independent of group risk, seeking to ensure objective challenge to the effectiveness of the risk governance framework.

RISK MANAGEMENT IN THE BUSINESS

Line management are directly accountable for the management of risks arising in their individual businesses. A key objective is to ensure that business decisions strike an appropriate balance between risk and reward, consistent with the Group’s risk appetite.

All business units, divisions and group functions complete a control self assessment annually (see page 127), reviewing the effectiveness of their internal controls and putting in place a programme of enhancements where appropriate. Managing directors of each business and each group executive committee member certify the accuracy of their assessment.

Risk management in the business forms part of a tiered risk management model, as shown above, with the divisional risk officers and group risk providing oversight and challenge, as described above, and the chief risk officer and group committees establishing the group-wide perspective.

This approach seeks to provide the Group with an effective mechanism for developing and embedding risk policies and risk management strategies which are aligned with the risks faced by its businesses. It also seeks to facilitate effective communication on these matters across the Group.


OPERATING AND FINANCIAL REVIEW AND PROSPECTS	AUDITED INFORMATION

RISK MANAGEMENT FRAMEWORK

(FLOW CHART)

RISK MANAGEMENT FRAMEWORK

The Group’s risk management principles and risk management framework cover the full spectrum of risks that a group, which encompasses both banking and insurance businesses, would encounter.

The Group uses an enterprise-wide risk management framework for the identification, assessment, measurement and management of risk. It seeks to maximise value for shareholders over time by aligning risk management with the corporate strategy, assessing the impact of emerging risks from legislation, new technologies or the market, and developing risk tolerances and mitigating strategies. The framework seeks to: strengthen the Group’s ability to identify and assess risks, aggregate group-wide risks and define the group risk appetite, develop solutions for reducing or transferring risk, and where appropriate, exploit risks to gain competitive advantage, thereby seeking to increase shareholder value. The principal elements of the risk management framework are shown in the table above. The framework above comprises 11 interdependent activities which map to the components of the internal control integrated framework issued by the Committee of Sponsoring Organisations of the Treadway Commission.

The framework is dynamic and allows for proportionate adjustment of policies and controls where business strategy and risk appetite is amended in response to changes in market conditions.

The Lloyds Banking Group business strategy and objective is used to determine the Group’s high level risk principles and risk appetite measures and metrics for the primary risk drivers (see the table on page 63). The risk appetite is proposed by the group chief executive and reviewed by various governance bodies including the group executive committee and the risk oversight committee. Responsibility for the approval of risk appetite rests with the board. The approved high level appetite and limits are delegated to individual group executive committee members by the group chief executive.

The more detailed description of the risk principles and distribution of the risk appetite measures amongst the divisions and businesses are determined by the group chief executive, in consultation with the group business risk committee and the group asset and liability committee.

The risk principles are executed through the policy framework and accountabilities. These principles are supported by the policy levels below:

Principles – high level principles for the six primary risk drivers

High level group policy – policy statements for each of the main risk types aligned to the risk drivers

Detailed group policy – detailed policy that applies across the Group

Divisional policy – local policy that specifically applies to a division

Business unit policy – local policy that specifically applies to a business unit

Divisional and business unit policy is only produced by exception and is not necessary unless there is a specific area for which a particular division or business unit requires a greater level of detail than is appropriate for group level policy. The governance arrangements for development of, and compliance with, group, divisional and business unit policy and the associated accountabilities are clearly outlined to all colleagues. Colleagues are expected to be aware of policies and procedures which apply to them and their work and to observe the relevant policies and procedures. Line management in each business area has primary responsibility for ensuring that group policies and the relevant local policies and procedures are known and observed by all colleagues within that area.

Group and divisional risk functions have responsibility for overseeing effective implementation of policy. Group audit provides independent assurance to the board about the effectiveness of the Group’s control framework and adherence to policy. Policies are reviewed annually to ensure they remain fit for purpose.

Execution of the Group’s risk management framework is dependent upon a clear and consistent risk identification using a common language to define risks and to categories them (see the table on page 63).

Proportionate control activities are in place to design mitigating controls, to transfer risk where appropriate and to seek to ensure executives are content with the residual level of risk accepted.

Risk and control assessments are undertaken to assess the effectiveness of current mitigations and whether risks taken are consistent with the Group’s risk appetite (this includes the annual control self-assessment exercise).


OPERATING AND FINANCIAL REVIEW AND PROSPECTS	AUDITED INFORMATION

The impact of risks and issues (including financial, reputation and regulatory capital) are determined through effective risk measurement including modelling, stress testing and scenario analysis.

The outcomes of independent reviews (including internal and external audit and regulatory reviews) are integrated into risk management activities and action plans.

Risk reporting is standardised through the use of standard definitions to enable risk aggregation. Divisions monitor their risk levels against their risk appetite, seeking to ensure effective mitigating action is being taken where appropriate. Divisional risk reports are reviewed by each divisional executive committee to ensure that respective senior management are satisfied with the overall risk profile, risk accountabilities and progress on any necessary action plans and tracking . Reporting, including that of performance against relevant limits or policies, is in place to provide a level of detail appropriate to the exposures concerned and regular information is provided to group risk for review and aggregate reporting. Any significant issues identified in the monitoring process are appropriately reported, and an escalation process is in place to report significant losses to appropriate levels of management. Regular reports are prepared by group risk on risk exposures and material issues for the group asset and liability committee, group business risk committee, group executive committee, risk oversight committee and the board.

At group level, a consolidated risk report is produced which is reviewed and debated by the group business risk committee, group executive committee, audit committee, risk oversight committee and the board to ensure that they are satisfied with the overall risk profile, risk accountabilities and mitigating actions. The consolidated risk report provides a regular assessment of the aggregate residual risk for the primary risk drivers, comparing the assessment with the previous quarter and providing a forecast for the next 12 months.

PRINCIPAL RISKS

At present the most significant risks faced by the Group, which are derived from the primary risk drivers detailed in the table on page 63, include:



Risk: Definition		Features

Credit: The risk of reductions in earnings and/or value, through Financial loss, as a result of the failure of the party with whom the Group has contracted to meet its obligations (both on and off balance sheet).		Arising in the Retail, Wholesale and Wealth and International divisions, reflecting the risks inherent in the Group’s lending activities and in the Insurance division in respect of investment of own funds. Over the last two years the deteriorating economic outlook, both in the UK and overseas, brought about by the banking crisis has impacted the financial services industry resulting in further high profile losses and writedowns. The Group is impacted by the economic downturn and a further worsening of the business environment could adversely impact earnings.

		This poses a major risk to the Group and its lending to:

		– Retail customers (including those in Wealth and International): where reducing affordability and/or asset values arising from a combination of house price falls, continuing high, or increasing levels of unemployment, consumer over-indebtedness, and rising interest rates impacts both secured and unsecured retail exposures.

		– Wholesale customers (including those in Wealth and International): where companies are facing increasingly difficult business conditions, resulting in corporate default levels rising and leading to increases in corporate impairment. The Group has high levels of exposure in both the UK and internationally, including Ireland, USA, Australia and Spain. There are particular concentrations to: financial institutions, commercial real estate, and joint ventures, with high leverage and exposures through capital structure.

		The Group follows a through the economic cycle, relationship based, business model with risk management processes, appetites and experienced staff in place.

Legal and regulatory: The risk of regulatory action leading to fine and/or public censure and/or successful legal action being taken against the Group as a result of failure to meet one or more legal and/or regulatory requirements either in the UK or overseas.		The industry is currently subject to a wide range of international and UK consultations on proposals to change the regulatory requirements. For example the Basel Committee on Banking Supervision has issued proposals with respect to capital and liquidity requirements for banks (‘Strengthening the resilience of the banking sector’ and ‘International framework for liquidity risk measurement, standards and monitoring’) and draft proposals have also been issued for new capital requirements for insurers (Solvency II). In the UK we have seen the Turner review and more recently, proposals have been issued for governance, recovery and resolution (‘Living Wills’) arrangements and also, potentially conduct of business requirements, which could have significant implications for past business as well as future product offerings for customers. There is a high level of uncertainty both as to the financial outcome in terms of specific requirements and the speed of implementation in the UK and internationally.

		The Group is currently assessing the impacts of these regulatory proposals, and will participate in the consultation and calibration processes to be undertaken by the various regulatory bodies during 2010. The Group currently meets and exceeds its regulatory capital requirements and expects to continue to do so. However, the FSA could impose more stringent capital and liquidity requirements, and/or introduce new ratios and/or change the manner in which it applies existing requirements to recapitalised banks, including those within the Group. Any one or combination of these events could result in the Group being forced to raise further capital or to divest assets.

		The Group has made good preparations for the FSA’s new liquidity regime (ILAS) and is ready to meet the reporting implications later in the year.

		Lloyds Banking Group’s policy is to maintain high levels of compliance with regulatory requirements and it will organise its business to maintain this level of compliance as the requirements become clearer, being mindful of maintaining an appropriate balance between risk and reward.


OPERATING AND FINANCIAL REVIEW AND PROSPECTS	AUDITED INFORMATION



Risk: Definition		Features

Liquidity and funding: Liquidity risk is defined as the risk that the Group has insufficient financial resources to meet its commitments as they fall due, or can only secure them at excessive cost.		Arising in the banking business of the Group and impacting the Retail, Wholesale and Wealth and International divisions reflecting the risk that the Group is unable to attract and retain either retail, wholesale or corporate deposits or issue debt securities. Like all major banks, the Group is dependent on confidence in the short and longer term wholesale funding markets; should the Group, due to exceptional circumstances, be unable to continue to source sustainable funding and provide liquidity when necessary, it could impact its ability to fund its financial obligations.

Funding risk is defined as the risk that the Group does not have sufficiently stable and diverse sources of funding or the funding structure is inefficient.		The key dependencies for successfully funding the Group’s balance sheet include the continued functioning of the money and capital markets at their current levels; successful right sizing of the Group’s balance sheet; the continuation of HM Treasury facilities in accordance with the terms agreed; limited further deterioration in the UK’s and the Group’s credit rating and no significant or sudden withdrawal of deposits resulting in increased reliance on money markets or UK Government support schemes. A return to the extreme market conditions of 2008 would place a strain on the Group’s ability to meet its financial commitments.

		Liquidity risk is managed within a board approved framework using a range of metrics to monitor the Group’s Profile against its stated appetite and potential market conditions.

Customer treatment: The risk of regulatory censure and/or a reduction in earnings/value, through financial or reputational loss, from inappropriate or poor customer treatment.		Customer treatment and how the Group manages its customer relationships affects all aspects of Lloyds Banking Group’s operations and is closely aligned with achievement of Lloyds Banking Group’s strategic aim – to create deep long lasting relationships with its customers. There is currently a high level of scrutiny regarding the treatment of customers by financial institutions from the press, politicians and regulatory bodies.

		The Office of Fair Trading’s (OFT) investigation and legal test case in respect of unarranged overdraft charges on personal current accounts concluded in 2009, for further details see note 52 to the consolidated financial statements. The OFT is however continuing to discuss its concerns in relation to the personal current account market with the banks, consumer groups and other organisations under the auspices of its Market Study into personal current accounts. In October 2009, the OFT published voluntary initiatives agreed with the industry and consumer groups to improve transparency of the costs and benefits of personal current accounts and improvements to the switching process. The OFT aims to report on progress in respect of further changes it believes are required to make the market work in the best interest of bank customers by the end of March 2010.

		The Group regularly reviews its product range to ensure that it meets regulatory requirements and is competitive in the market place. Treating Customers Fairly remains the key principle underpinning the FSA’s consumer protection objective. An additional challenge for Lloyds Banking Group is ensuring the fair treatment of customers during integration of the two heritage businesses. As a result the customer relationship management risks posed by integration are carefully considered through the integration governance process in place. If Lloyds Banking Group is unable to demonstrate the fair treatment of its customers there is the risk of increased complaints from customers, the potential for regulatory action (which could include reviews of past business and/or the payment of fines and compensation) and adverse media coverage (leading to reputational damage in the marketplace). The Group has policies, procedures and governance arrangements in place to facilitate the fair treatment of customers.

People: The risk of reduction in earnings and/or value, through financial or reputational loss, from failure to retain, train, reward, recruit and incentivise appropriately skilled staff, inappropriate staff behaviour or industrial action.		The delivery of Lloyds Banking Group’s objectives is underpinned by the ability to attract, retain and develop the best talent in the industry. The challenges to the people agenda have never been greater with increased regulatory and public interest in remuneration practices, the effects of the Government shareholding and the impacts of integration. Lloyds Banking Group welcomes the regulation of remuneration provided there is an international consensus and will comply with the FSA Code. The Group has managed the initial stages of integration, working to establish control by defining and implementing the new organisational structures and continues to manage the relationship with colleagues during this period of change. The Group has policies, procedures and governance arrangements in place to ensure the effective management of people risk as the Group integrates and grows its business. The Group has published proposals to harmonise employee terms and conditions across the Group and is consulting with the various representative unions. The Group actively manages its relationships with unions, but is aware of the danger of industrial action, business disruption and reputational impact arising from union behaviour and communications. People risk is closely monitored as a key risk indicator, as well as being subject to oversight by the board.

Integration: The risk that Lloyds Banking Group fails to realise the business growth opportunities, revenue benefits, cost synergies, operational efficiencies and other benefits anticipated from, or incurs unanticipated costs and losses associated with, the acquisition of HBOS plc.		The integration of the two legacy organisations presents one of the largest integration challenges that has been seen in the UK financial services industry. There is a risk that the Group may fail to realise the business growth opportunities, revenue benefits, cost synergies, operational efficiencies and other benefits anticipated from the acquisition of HBOS plc by Lloyds TSB Group plc, or may incur unanticipated costs and losses associated as a result. As a consequence, the Group results may suffer as a result of operational, financial management and other integration risks. The risk of failure to deliver synergy benefits or to meet publicly stated targets could potentially result in a loss of shareholder or market confidence with negative perceptions of the Group’s integration strategy. As the Group goes through the integration process there is a danger of losing key staff potentially impacting upon integration plans.

		The Group has created an integration execution board, chaired by the group operations director, to oversee the integration process. The Group is now one year into the integration programme and has a fully developed and functioning governance framework to manage these risks, with clear understanding of the dependencies and phased deliverables through to 2012. The programme is ahead of plan.


OPERATING AND FINANCIAL REVIEW AND PROSPECTS	AUDITED INFORMATION

RISK DRIVERS

(FLOW CHART)

RISK DRIVERS

The Group’s risk language is designed to capture the Group’s ‘primary risk drivers’. A description of each ‘primary risk driver’, including definition, appetite, control and exposures, is included below. These are further sub divided into 29 more granular risk types to enable more detailed review and facilitate appropriate reporting and monitoring, as set out in the table above.

Through the Group’s risk management processes, these risks are assessed on an ongoing basis and seek to ensure optimisation of risk and reward and that, where required, appropriate mitigation is in place. Both quantitative and qualitative factors are considered in assessing the Group’s current and potential future risks.

BUSINESS RISK

DEFINITION

Business risk is defined as the risk that the Group’s earnings are adversely impacted by a sub optimal business strategy or the sub optimal implementation of the strategy. In assessing business risk, consideration is given to internal and external factors.

RISK APPETITE

Business risk appetite is encapsulated in the Group’s budget and medium-term plan, which are sanctioned by the board on an annual basis. Divisions and business units plans are aligned to the Group’s overall business risk appetite.

EXPOSURES

The Group’s portfolio of businesses exposes it to a number of internal and external factors:


–	internal factors: resource capability and availability, customer treatment, service level agreements, products and funding and the risk appetite of other risk categories; and

–	external factors: economic, technological, political, social and ethical, environmental, legal and regulatory, market expectations, reputation and competitive behaviour.

MEASUREMENT

An annual business planning process is conducted at group, divisional and business unit level which includes a quantitative and qualitative assessment of the risks that could impact the Group’s plans. Within the planning round, the Group conducts both scenario analysis and stress tests to assess risks to future earning streams. Stress testing and scenario analysis are fully embedded in the Group’s risk management practice. The Group assesses a wide array of scenarios including economic recessions, regulatory action and scenarios specific to the operations of each part of the business.

MITIGATION

As part of the annual business planning process, the Group develops a set of management actions to prevent or mitigate the impact on earnings in the event that business risks materialise. Additionally, business risk monitoring, through regular reports and oversight, results in corrective actions to plans and reductions in exposures where necessary.

Revenue and capital investment decisions require additional formal assessment and approval. Formal risk assessment is conducted as part of the financial approval process. Significant mergers and acquisitions by business units require specific approval by the board. In addition to the standard due diligence conducted during a merger or acquisition, group risk conducts, where appropriate, an independent risk assessment of the target company.

MONITORING

The Group’s strategy is reviewed and approved by the board. Reputational risk is covered at a number of levels throughout the organisation, which includes the group executive committee and the group business risk committee. Regular reports are provided to the group executive committee and the board on the progress of the Group’s key strategies and plans. Group risk conducts oversight to seek to ensure that business plans remain consistent with the Group’s strategy.

APPROACH

The Group has adapted the heritage Lloyds TSB business risk approach which includes stress testing the medium term plan to changes in economic assumptions. The output of this stress testing is used to determine investment decisions.


OPERATING AND FINANCIAL REVIEW AND PROSPECTS	AUDITED INFORMATION

C REDIT RISK

DEFINITION

The risk of reductions in earnings and/or value, through financial or reputational loss, as a result of the failure of the party with whom the Group has contracted to meet its obligations (both on and off balance sheet).

RISK APPETITE

Credit risk appetite is set by the board and is described and reported through a suite of metrics derived from a combination of accounting and credit portfolio performance measures which in turn use the various credit risk rating systems as inputs. These metrics are supported by a comprehensive suite of policies, sector caps, product and country limits to manage concentration risk and exposures within the Group’s approved risk appetite.

This statement of the Group’s overall appetite for credit risk is reviewed and approved annually by the board. With the support of the group credit risk committee and group business risk committee, the group chief executive allocates this risk appetite across the Group. Individual members of the group executive committee ensure that credit risk appetite is further delegated to an appropriate level within their areas of responsibility.

EXPOSURES

The principal sources of credit risk within the Group arise from loans and advances to retail customers, financial institutions and corporate clients. The credit risk exposures of the Group are set out in note 54 to the consolidated financial statements. Credit risk exposures are categorised as ‘retail’ arising in the Retail and Wealth and International Divisions and ‘wholesale’ arising in the Wholesale and Wealth and International Divisions.

In terms of loans and advances, credit risk arises both from amounts lent and commitments to extend credit to a customer as required. These commitments can take the form of loans and overdrafts, or credit instruments such as guarantees and standby, documentary and commercial letters of credit. With respect to commitments to extend credit, the Group is potentially exposed to loss in an amount equal to the total unused commitments. However, the likely amount of loss is less than the total unused commitments, as most retail commitments to extend credit can be cancelled and the credit worthiness of customers is monitored frequently. In addition, most wholesale commitments to extend credit are contingent upon customers maintaining specific credit standards, which are regularly monitored.

Credit risk can also arise from debt securities, private equity investments, derivatives and foreign exchange activities. Note 18 to the consolidated financial statements shows the total notional principal amount of interest rate, exchange rate, credit derivative and equity and other contracts outstanding at 31 December 2009. The notional principal amount does not, however, represent the Group’s credit risk exposure, which is limited to the current cost of replacing contracts with a positive value to the Group. Such amounts are reflected in note 54 on page F-103.

Credit risk exposures in the insurance businesses arise primarily from holding investments and from exposure to reinsurers. A significant proportion of the investments are held in unit linked and with profit funds where the shareholder risk is limited, subject to any guarantees given.

MEASUREMENT

In measuring the credit risk of loans and advances to customers and to banks at a counterparty level, the Group reflects three components: (i) the ‘probability of default’ by the client or counterparty on its contractual obligations; (ii) current exposures to the counterparty and their likely future development, from which the Group derives the ‘exposure at default’; and (iii) the likely loss ratio on the defaulted obligations (the ‘loss given default’).

The Group assesses the probability of default of individual counterparties using internal rating models tailored to the various categories of counterparty. In its principal retail portfolios and a growing number of wholesale lending portfolios, exposure at default and loss given default models are also in use. They have been developed internally and use statistical analysis, combined, where appropriate, with external data and subject matter expert judgement. Each rating model is subject to a rigorous validation process, undertaken by independent risk teams, which includes benchmarking to externally available data, where possible. All material rating models are authorised by the group model governance committee.

Each probability of default model segments counterparties into a number of rating grades, each representing a defined range of default probabilities. Exposures migrate between classifications if the assessment of the obligor probability of default changes. Each rating system is required to map to a master scale, which supports the consolidation of credit risk information across portfolios through the adoption of a common rating scale. Given the differing risk profiles and credit rating considerations, the underlying risk reporting has been split into two distinct master scales, a retail master scale and a wholesale master scale. (Note 54 on page F-104 provides an analysis of the portfolio).

The rating systems described above assess probability of default, exposure at default and loss given default, in order to derive an expected loss. In contrast, impairment allowances are recognised for financial reporting purposes only for losses that have been incurred at the balance sheet date based on objective evidence of impairment (see note 2(H) to the consolidated financial statements on page F-14). Due to the different methodologies applied, the amount of incurred credit losses provided for in the financial statements differs from the amount determined from the expected loss models that are used for internal operational management and banking regulation purposes.

MITIGATION

The Group uses a range of approaches to mitigate credit risk.

INTERNAL CONTROL


–	Credit principles and policy: group risk sets out the Group credit principles and policy according to which credit risk is managed, which in turn is the basis for divisional and business unit credit policy. Principles and policy are reviewed regularly and any changes are subject to a review and approval process. Divisional and business unit policy includes lending guidelines, which define the responsibilities of lending officers and provide a disciplined and focused benchmark for credit decisions.

–	Counterparty limits: Limits are set against all types of exposure in a counterparty name, in accordance with an agreed methodology for each exposure type. This includes credit risk exposure on individual derivative transactions, which incorporates potential future exposures from market movements. Aggregate facility levels by counterparty are set and limit breaches are subject to escalation procedures.

–	Credit scoring: In its principal retail portfolios, the Group uses statistically-based decisioning techniques (primarily credit scoring). Divisional risk departments review scorecard effectiveness and approve changes, with material changes being subject to group risk approval.


OPERATING AND FINANCIAL REVIEW AND PROSPECTS	AUDITED INFORMATION


–	Individual credit assessment and sanction: Credit risk in wholesale portfolios is subject to individual credit assessments, which consider the strengths and weaknesses of individual transactions and the balance of risk and reward. Exposure to individual counterparties, groups of counterparties or customer risk segments is controlled through a tiered hierarchy of delegated sanctioning authorities. Approval requirements for each decision are based on the transaction amount, the customer’s aggregate facilities, credit risk ratings and the nature and term of the risk. The Group’s credit risk appetite criteria for counterparty underwriting are the same as that for assets intended to be held over the period to maturity.

–	Controls over rating systems: The Group has established an independent team in group risk that sets common minimum standards, designed to challenge the discriminatory powers of systems, accuracy of calibration and seeks to ensure consistency over time and across obligors. Internal rating systems are developed and implemented by independent risk functions either in the business units or divisions with the business unit managing directors having ownership of the systems. Line management takes responsibility for ensuring the validation of the respective internal rating systems, supported and challenged by specialist functions in their respective division.

–	Cross-border and cross-currency exposures: Country limits are authorised by the Country Limits Panel taking into account economic and political factors.

–	Concentration risk: Credit risk management includes portfolio controls on certain industries, sectors and product lines to reflect risk appetite. Credit policy is aligned to the Group’s risk appetite and restricts exposure to certain high risk and more vulnerable sectors and segments. Note 20 to the consolidated financial statements provides an analysis of loans and advances to customers by industry (for wholesale customers) and product (for retail customers). Exposures are monitored to prevent excessive concentration of risk. These concentration risk controls are not necessarily in the form of a maximum limit on lending but may instead require new business in concentrated sectors to fulfil additional hurdle requirements. The Group’s large exposures are reported in accordance with regulatory reporting requirements.

–	Stress testing and scenario analysis: The credit portfolio is also subjected to stress-testing and scenario analysis, to simulate outcomes and calculate their associated impact. Events are modelled at a group wide level, at divisional and business unit level and by rating model and portfolio, for example, for a specific industry sector.

–	Specialist expertise: Credit quality is maintained by specialist units providing, for example: intensive management and control; security perfection, maintenance and retention; expertise in documentation for lending and associated products; sector-specific expertise; and legal services applicable to the particular market place and product range offered by the business.

–	Daily settlement limits: Settlement risk arises in any situation where a payment in cash, securities or equities is made in the expectation of a corresponding receipt in cash, securities or equities. Daily settlement limits are established for each counterparty to cover the aggregate of all settlement risk arising from the Group’s market transactions on any single day.

–	Risk assurance and oversight: Divisional and group level oversight teams monitor credit performance trends, review and challenge exceptions to planned outcomes and test the adequacy of credit risk infrastructure and governance processes throughout the Group. This includes tracking portfolio performance against an agreed set of key risk indicators. Risk assurance teams are engaged where appropriate to conduct further credit reviews if a need for closer scrutiny is identified.

COLLATERAL

The principal collateral types for loans and advances are:


–	mortgages over residential and commercial real estate;

–	charges over business assets such as premises, inventory and accounts receivable;

–	charges over financial instruments such as debt securities and equities; and

–	guarantees received from third parties.

The Group maintains guidelines on the acceptability of specific classes of collateral.

Collateral held as security for financial assets other than loans and advances is determined by the nature of the instrument. Debt securities, treasury and other eligible bills are generally unsecured, with the exception of asset-backed securities and similar instruments, which are secured by portfolios of financial assets. Collateral is generally not held against loans and advances to financial institutions, except where securities are held as part of reverse repurchase or securities borrowing transactions or where a collateral agreement has been entered into under a master netting agreement. Collateral or other security is also not usually obtained for credit risk exposures on derivative instruments, except where the Group requires margin deposits from counterparties.

It is the Group’s policy that collateral should always be realistically valued by an appropriately qualified source, independent of the customer, at the time of borrowing. Collateral is reviewed on a regular basis in accordance with business unit credit policy, which will vary according to the type of lending and collateral involved. In order to minimise the credit loss, the Group may seek additional collateral from the counterparty as soon as impairment indicators are identified for the relevant individual loans and advances.

The Group considers risk concentrations by collateral providers and collateral type, as appropriate, with a view to ensuring that any potential undue concentrations of risk are identified and suitably managed by changes to strategy, policy and/or business plans.

MASTER NETTING AGREEMENTS

Where it is efficient and likely to be effective (generally with counterparties with which it undertakes a significant volume of transactions), the Group enters into master netting agreements. Although master netting agreements do not generally result in an offset of balance sheet assets and liabilities, as transactions are usually settled on a gross basis, they do reduce the credit risk to the extent that, if an event of default occurs, all amounts with the counterparty are terminated and settled on a net basis. The Group’s overall exposure to credit risk on derivative instruments subject to master netting agreements can change substantially within a short period since it is affected by each transaction subject to the agreement.

OTHER CREDIT RISK TRANSFERS

The Group also undertakes asset sales, securitisations and credit derivative based transactions as a means of mitigating or reducing credit risk, taking into account the nature of assets and the prevailing market conditions.


OPERATING AND FINANCIAL REVIEW AND PROSPECTS	AUDITED INFORMATION

MONITORING


–	Portfolio monitoring and reporting: In conjunction with group risk, businesses and divisions identify and define portfolios of credit and related risk exposures and the key benchmarks, behaviours and characteristics by which those portfolios are managed in terms of credit risk exposure. This entails the production and analysis of regular portfolio monitoring reports for review by senior management. Group risk in turn produces an aggregated review of credit risk throughout the Group, including reports on significant credit exposures, which are presented to both the group credit risk committee and to the group business risk committee.

–	The performance of all rating models is comprehensively monitored on a regular basis, to seek to ensure that models continue to provide optimum risk differentiation capability, the generated ratings remain as accurate and robust as possible and the models assign appropriate risk estimates to grades/pools. All models are monitored against a series of agreed key performance indicators. In the event that monthly monitoring identifies material exceptions or deviations from expected outcomes, these will be escalated to the group model governance committee.

APPROACH

The Group has largely adopted the heritage Lloyds TSB credit risk approach, including governance structure, sanctioning processes and risk appetite controls and framework. Integrated, prudent through the cycle credit policies and procedures have mostly all been established and implemented across the Group, supported by robust early warning indicators and triggers.

Following a prioritised appointment process an integrated credit risk management structure is in place throughout the Group, using the most experienced and skilled resources from both heritages. Substantial work has been undertaken to analyse portfolios and where necessary the Group has taken actions to manage effectively its exposure through the economic downturn. These actions have included revised credit criteria for key products and a withdrawal from those business sectors that are outside of the Group’s risk appetite.

The Group has formed a group level Credit Risk Assurance function with experienced credit professionals from both heritages. Together with Divisional Risk senior management, this team has carried out an independent risk-based review of the high risk wholesale and retail books. Nearly £150 billion of high risk wholesale assets, primarily HBOS commercial real estate and corporate exposures, have been reviewed by the team. This has required a detailed file by file review of the original credit application, subsequent management papers and an understanding of the supporting collateral. In addition, portfolio level analysis and investigation, together with statistically robust sampling of accounts, have been carried out for over £300 billion of retail assets. These comprehensive reviews have greatly enhanced the Group’s knowledge and understanding of the legacy portfolios and have enabled the Group to assess and manage these exposures confidently and effectively.

To support corporate customers that encounter difficulties during the current economic downturn the Group has continued to expand its dedicated Business Support Unit (BSU) model. Teams have been strengthened in both Wholesale and Wealth and International to deal with the rise in work loads experienced during the year as the recessionary conditions took hold both in the UK and overseas. In Wholesale three teams have been created to cover Corporate Real Estate, Corporate and Commercial, and Specialist Finance customers experiencing difficulties. In Wealth and International teams have been created in Ireland and Australia. Under this model, relationship management passes early and fully to BSU; because the BSU specialists receive the customers at an earlier stage in the process they have more time to develop effective solutions. The strategy is to work alongside management teams and key stakeholders to turn around businesses in distress and re-establish these as viable entities. Where a turnaround is not feasible, exposure is minimised through a combination of appropriate asset sales, restructuring and work out strategies.

To support UK Retail customers who are encountering financial difficulties the Group has launched a cross-channel support programme. Lloyds TSB branches and telephony units have at least one trained Financial Health Specialist providing customers with budgeting and money management advice. In the Group’s Halifax and Bank of Scotland businesses, customers have a dedicated telephone support line with trained specialists able to guide them through any financial difficulties. Support is also available for all customers online, and via a specially developed support brochure. For those customers requiring more intensive help, assistance is provided through dedicated support units where tailored repayment programmes can be agreed. Customers are actively supported and referred to free money advice agencies where they have multiple credit facilities that require restructuring.

Within Collections and Recoveries the sharing of best practice and alignment of policies across the Group, has helped to drive more effective customer outcomes and achieve operational efficiencies. The Group has strengthened resources in Collections and Recoveries to help customers in distress by offering advice and access to a wider range of options such as short-term repayment plans or the government backed Homeowners’ Mortgage Support and Mortgage Rescue schemes. A core element of our relationship management approach is to contact customers showing signs of financial distress, discussing with them their circumstances and offering solutions to prevent their accounts falling into arrears. This year, nearly a quarter of a million customers have been contacted who were not yet in arrears.

The Group follows a through the economic cycle, relationship-based, business model with robust risk management processes, appropriate appetites and experienced staff in place. These robust policies and procedures define chosen target market and risk acceptance criteria. These have been, and will continue to be, tightened and fine tuned as appropriate and include the use of early warning indicators to help anticipate future areas of concern and allow us to take early and proactive mitigating actions.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

L OAN PORTFOLIO

ANALYSIS OF LOANS AND ADVANCES TO BANKS AND CUSTOMERS

The following table analyses loans to banks and customers by category of loan at 31 December for each of the five years listed.


	2009 £m			2008 £m			2007 £m			2006 £m			2005 £m

Loans and advances to banks		35,510			38,868			34,845			40,639			31,656
Loans and advances to customers:
– Mortgages		362,667			114,643			102,739			95,601			88,895
– Other personal lending		42,958			25,318			22,988			23,025			23,280
– Agriculture, forestry and fishing		5,130			3,969			3,226			2,905			2,451
– Energy and water supply		3,031			2,598			2,102			2,024			1,592
– Manufacturing		14,912			12,057			8,385			7,513			7,923
– Construction		10,830			3,016			2,871			2,332			2,222
– Transport, distribution and hotels		31,820			14,664			11,573			10,490			9,465
– Postal and telecommunications		1,662			1,060			946			831			546
– Financial, business and other services		66,923			33,319			29,707			22,999			21,261
– Property companies		83,820			23,318			17,576			12,896			8,713
– Lease financing		9,307			4,546			4,686			4,802			5,815
– Hire purchase		8,710			5,295			5,423			5,060			4,853

Total loans		677,280			282,671			247,067			231,117			208,672
Allowance for impairment losses		(14,950	)		(3,594	)		(2,408	)		(2,194	)		(2,073	)

Total loans and advances net of allowance for impairment losses		662,330			279,077			244,659			228,923			206,599

The analysis of loans and advances as at 31 December 2009 between domestic and international offices is as follows:


	Domestic £m			Foreign £m			Total £m

Loans and advances to banks		29,475			6,035			35,510
Loans and advances to customers:
– Mortgages		344,151			18,516			362,667
– Other personal lending		40,790			2,168			42,958
– Agriculture, forestry and fishing		4,829			301			5,130
– Energy and water supply		1,141			1,890			3,031
– Manufacturing		11,480			3,432			14,912
– Construction		6,554			4,276			10,830
– Transport, distribution and hotels		22,713			9,107			31,820
– Postal and telecommunications		973			689			1,662
– Financial, business and other services		58,132			8,791			66,923
– Property companies		64,069			19,751			83,820
– Lease financing		8,426			881			9,307
– Hire purchase		7,671			1,039			8,710

Total loans		600,404			76,876			677,280
Allowance for impairment losses		(9,995	)		(4,955	)		(14,950	)

Total loans and advances net of allowance for impairment losses		590,409			71,921			662,330

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

SUMMARY OF LOAN LOSS EXPERIENCE

The following table analyses the movements in the allowance for impairment losses on loans and advances to banks and customers for each of the five years listed.


	2009 £m			2008 £m			2007 £m			2006 £m			2005 £m
Balance at beginning of year before transition to IAS 39														1,663
Adjustment to reflect transition to IAS 39 on 1 January 2005														256
Balance at beginning of year after transition to IAS 39		3,594			2,408			2,194			2,073			1,919
Exchange and other adjustments		112			43			2			(13	)		1
Reclassifications		—			—			—			—			43
Acquisition and disposal of businesses and portfolios		—			—			—			(27	)		(27	)
Advances written off:
Loans and advances to customers:
– Mortgages		(77	)		(23	)		(25	)		(9	)		(6	)
– Other personal lending		(3,063	)		(1,206	)		(1,256	)		(1,195	)		(904	)
– Agriculture, forestry and fishing		(5	)		(2	)		(1	)		(1	)		(1	)
– Energy and water supply		(28	)		(24	)		(11	)		(17	)		(20	)
– Manufacturing		(148	)		(34	)		(13	)		(24	)		(27	)
– Construction		(336	)		(11	)		(4	)		(7	)		(8	)
– Transport, distribution and hotels		(80	)		(50	)		(24	)		(50	)		(37	)
– Postal and telecommunications		(9	)		—			—			—			—
– Financial, business and other services		(308	)		(169	)		(95	)		(142	)		(151	)
– Property companies		(51	)		(6	)		—			(4	)		—
– Lease financing		(26	)		(2	)		(26	)		(1	)		(5	)
– Hire purchase		(69	)		(59	)		(87	)		(39	)		(77	)
Loans and advances to banks		—			—			—			—			—
Total advances written off		(4,200	)		(1,586	)		(1,542	)		(1,489	)		(1,236	)
Recoveries of advances written off:
Loans and advances to customers:
– Mortgages		1			1			2			2			2
– Other personal lending		107			102			121			158			125
– Energy and water supply		—			—			—			1			2
– Manufacturing		—			—			1			3			4
– Construction		—			—			—			1			1
– Transport, distribution and hotels		—			1			1			4			5
– Financial, business and other services		2			3			3			12			14
– Hire purchase		—			5			9			9			5
Total recoveries of advances written off		110			112			137			190			158
Total net advances written off		(4,090	)		(1,474	)		(1,405	)		(1,299	)		(1,078	)

OPERATING AND FINANCIAL REVIEW AND PROSPECTS


	2009 £m			2008 £m			2007 £m			2006 £m			2005 £m
Effect of unwinding of discount recognised through interest income		(446	)		(102	)		(104	)		(100	)		(87	)
Allowances for impairment losses charged against income for the year:
Loans and advances to customers:
– Mortgages		368			171			18			12			18
– Other personal lending		3,779			1,455			1,313			1,349			1,192
– Agriculture, forestry and fishing		29			2			4			1			—
– Energy and water supply		55			35			18			4			2
– Manufacturing		737			122			19			12			(1	)
– Construction		842			61			8			5			(3	)
– Transport, distribution and hotels		1,783			66			39			29			20
– Postal and telecommunications		14			—			—			—			—
– Financial, business and other services		2,193			491			151			53			7
– Property companies		5,528			73			1			—			—
– Lease financing		241			1			35			4			(3	)
– Hire purchase		214			107			116			91			70
Loans and advances to banks		(3	)		135			(1	)		—			—
Total allowances for impairment losses charged against income for the year		15,780			2,719			1,721			1,560			1,302
Total balance at end of year		14,950			3,594			2,408			2,194			2,073
Ratio of net write-offs during the year to average loans outstanding during the year		0.6	%		0.6	%		0.7	%		0.7	%		0.6	%

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

The analysis of movements in the allowance for impairment losses on loans and advances to banks and customers for the year ended 31 December 2009 between domestic and international offices is as follows:


	Domestic £m			Foreign £m			Total £m
Balance at beginning of year		3,575			19			3,594
Exchange and other adjustments		171			(59	)		112
Advances written off:
Loans and advances to customers:
– Mortgages		(77	)		—			(77	)
– Other personal lending		(3,062	)		(1	)		(3,063	)
– Agriculture, forestry and fishing		(5	)		—			(5	)
– Energy and water supply		(28	)		—			(28	)
– Manufacturing		(147	)		(1	)		(148	)
– Construction		(336	)		—			(336	)
– Transport, distribution and hotels		(80	)		—			(80	)
– Postal and telecommunications		(9	)		—			(9	)
– Financial, business and other services		(308	)		—			(308	)
– Property companies		(51	)		—			(51	)
– Lease financing		(25	)		(1	)		(26	)
– Hire purchase		(69	)		—			(69	)
Loans and advances to banks		—			—			—
Total advances written off		(4,197	)		(3	)		(4,200	)
Recoveries of advances written off:
Loans and advances to customers:
– Mortgages		1			—			1
– Other personal lending		107			—			107
– Agriculture, forestry and fishing		—			—			—
– Energy and water supply		—			—			—
– Manufacturing		—			—			—
– Construction		—			—			—
– Transport, distribution and hotels		—			—			—
– Postal and telecommunications		—			—			—
– Financial, business and other services		1			1			2
– Hire purchase		—			—			—
Total recoveries of advances written off		109			1			110
Total net advances written off		(4,088	)		(2	)		(4,090	)

OPERATING AND FINANCIAL REVIEW AND PROSPECTS


	Domestic £m		Foreign £m	Total £m

Effect of unwinding of discount recognised through interest income	(446	)	—	(446	)
Allowances for impairment losses charged against income for the year:
Loans and advances to customers:
– Mortgages	120		248	368
– Other personal lending	3,659		120	3,779
– Agriculture, forestry and fishing	2		27	29
– Energy and water supply	24		31	55
– Manufacturing	544		193	737
– Construction	533		309	842
– Transport, distribution and hotels	507		1,276	1,783
– Postal and telecommunications	9		5	14
– Financial, business and other services	1,840		353	2,193
– Property companies	3,325		2,203	5,528
– Lease financing	88		153	241
– Hire purchase	135		79	214
Loans and advances to banks	(3	)	—	(3	)

Total allowances for impairment losses charged against income for the year	10,783		4,997	15,780

Total balance at end of year	9,995		4,955	14,950

The following table analyses the coverage of the allowance for loan losses by category of loans.


	2009 Allowance £m		2009 Percentage of loans in each category to total loans %		2008 Allowance £m		2008 Percentage of loans in each category to total loans %		2007 Allowance £m		2007 Percentage of loans in each category to total loans %		2006 Allowance £m		2006 Percentage of loans in each category to total loans %		2005 Allowance £m		2005 Percentage of loans in each category to total loans %

Balance at year end applicable to:
Loans and advances to banks		149		5.2		135		13.8		—		14.1		1		17.6		1		15.2
Loans and advances to
customers:
– Mortgages		489		53.6		186		40.5		37		41.5		42		41.3		36		42.5
– Other personal lending		2,884		6.3		2,047		9.0		1,795		9.3		1,720		9.9		1,533		11.2
– Agriculture, forestry and fishing		33		0.8		5		1.4		5		1.3		2		1.3		2		1.2
– Energy and water supply		70		0.4		33		0.9		22		0.9		14		0.9		32		0.8
– Manufacturing		699		2.2		119		4.3		29		3.4		25		3.3		33		3.8
– Construction		527		1.6		60		1.1		10		1.2		6		1.0		8		1.1
– Transport, distribution and hotels		1,621		4.7		75		5.2		58		4.7		45		4.5		64		4.5
– Postal and telecommunications		5		0.2		—		0.4		—		0.4		—		0.4		—		0.3
– Financial, business and other services		2,388		9.9		596		11.7		232		12.0		166		9.9		250		10.1
– Property companies		5,504		12.4		70		8.2		4		7.1		5		5.6		11		4.2
– Lease financing		224		1.4		15		1.6		16		1.9		7		2.1		4		2.8
– Hire purchase		357		1.3		253		1.9		200		2.2		161		2.2		99		2.3

Total balance at year end		14,950		100.0		3,594		100.0		2,408		100.0		2,194		100.0		2,073		100.0

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

The analysis of the coverage of the allowance for loan losses at 31 December 2009 between domestic and international offices is as follows:

Domestic

Foreign

Total

Allowance
£m

Percentage of
loans in each
category to
total loans
%

Allowance
£m

Percentage of
loans in each
category to
total loans
%

Allowance
£m

Percentage of
loans in each
category to
total loans
%

Balance at year end applicable to:

Loans and advances to banks

149

4.9

—

7.9

149

5.2

Loans and advances to customers:

– Mortgages

243

57.2

246

24.0

489

53.6

– Other personal lending

2,767

6.8

117

2.8

2,884

6.3

– Agriculture, forestry and fishing

0.8

0.4

0.8

– Energy and water supply

0.2

2.5

0.4

– Manufacturing

504

1.9

195

4.5

699

2.2

– Construction

217

1.1

310

5.6

527

1.6

– Transport, distribution and hotels

396

3.8

1,225

11.8

1,621

4.7

– Postal and telecommunications

—

0.2

0.9

0.2

– Financial, business and other services

2,012

9.7

376

11.4

2,388

9.9

– Property companies

3,306

10.7

2,198

25.7

5,504

12.4

– Lease financing

1.4

152

1.1

224

1.4

– Hire purchase

281

1.3

1.4

357

1.3

Total

9,995

100.0

4,955

100.0

14,950

100.0

RISK ELEMENTS IN THE LOAN PORTFOLIO

The Group’s credit risk elements analysed by categories reflecting US lending and accounting practices, which differ from those employed in the UK, are detailed below:

NON-PERFORMING LENDING

In the US, it is the normal practice to stop accruing interest when payments are 90 days or more past due or when recovery of both principal and interest is doubtful. When the loans are transferred to non-accrual status, accrued interest is reversed from income and no further interest is recognised until it becomes probable that the principal will be repaid in full. Loans on which interest has been accrued but suspended would be included in risk elements as loans accounted for on a non-accrual basis.

In the US non-performing loans and advances are typically written off more quickly than in the UK. Consequently a UK bank may appear to have a higher level of non-performing loans and advances than a comparable US bank although the reported income may be similar in both the US and the UK.

2005

In 2005, the Group adopted IAS 39, which requires that interest is accrued and recognised on all outstanding loans. The interest recognised is based on the net carrying value of the loan and is, therefore, less than that that would be recognised on a similar performing loan. Accordingly, it is no longer possible to classify non-performing lending as being accounted for on a non-accruals basis. A provision is established if there is objective evidence that impairment has occurred and the carrying value of the loan exceeds the present value of its estimated future cash flows discounted at the loan’s original effective interest rate.

As a result of the changes, the Group analysed its 2005 non-performing lending between impaired loans with a provision and impaired loans contractually past due 90 days or more without a provision.


			2005
			£m

Impaired lending against which provisions are held			4,122
Loans contractually past due 90 days or more as to principal or interest, but against which no provisions have been made			1,210

Total non-performing lending*			5,332


*	There were no troubled debt restructurings in 2005.

2006 AND LATER YEARS

In 2007, the Group adopted IFRS 7, which requires more detailed qualitative and quantitative disclosures about its loan portfolios. Accordingly, for 2006 and later years, the table below shows separately those loans that are (i) neither past due nor impaired, (ii) past due but not impaired, (iii) impaired, not requiring a provision and (iv) impaired with a provision.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS


						Loans and advances designated at fair value through profit or loss £m

	Loans and advances to banks £m	Loans and advances to customers

		Retail – mortgages £m	Retail – other £m	Wholesale £m	Total £m

31 December 2009
Neither past due nor impaired	35,333	347,292	48,429	185,872	581,593	19,082
Past due but not impaired	—	12,587	1,873	5,118	19,578	—
Impaired – no provision required	—	2,034	449	6,603	9,086	—
– provision held	153	5,918	5,902	37,927	49,747	—

Gross	35,486	367,831	56,653	235,520	660,004	19,082

31 December 2008
Neither past due nor impaired	38,716	110,148	33,571	86,707	230,426	608
Past due but not impaired	17	3,134	1,146	555	4,835	—
Impaired – no provision required	—	479	150	1,253	1,882	—
– provision held	135	882	4,327	1,451	6,660	—

Gross	38,868	114,643	39,194	89,966	243,803	608

31 December 2007
Neither past due nor impaired	34,845	99,828	29,850	73,475	203,153	1,189
Past due but not impaired	—	2,153	966	639	3,758	—
Impaired – no provision required	—	415	100	293	808	—
– provision held	—	343	3,600	560	4,503	—

Gross	34,845	102,739	34,516	74,967	212,222	1,189

31 December 2006
Neither past due nor impaired	40,638	92,873	29,364	60,005	182,242	835
Past due but not impaired	—	1,943	1,005	374	3,322	—
Impaired – no provision required	—	658	92	158	908	—
– provision held	1	127	3,580	299	4,006	—

Gross	40,639	95,601	34,041	60,836	190,478	835

The analysis of lending between retail and wholesale has been prepared based upon the type of exposure and not the business segment in which the exposure is recorded. Included within retail are exposures to personal customers and small businesses, whilst included within wholesale are exposures to corporate customers and other large institutions.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

The loans that are past due but not impaired are further analysed in the table below according to the number of days that have elapsed since the last payment was due from the borrower.


											Loans and advances designated at fair value through profit or loss £m


	Loans and advances to banks £m		Loans and advances to customers

			Retail – mortgages £m		Retail – other £m		Wholesale £m		Total £m

31 December 2009
0-30 days		—		6,018		1,316		2,347		9,681		—
30-60 days		—		2,649		376		825		3,850		—
60-90 days		—		1,702		74		825		2,601		—
90-180 days		—		2,216		48		560		2,824		—
Over 180 days		—		2		59		561		622		—

Total		—		12,587		1,873		5,118		19,578		—

31 December 2008
0-30 days		—		1,527		853		289		2,669		—
30-60 days		—		633		259		90		982		—
60-90 days		17		424		32		70		526		—
90-180 days		—		549		2		77		628		—
Over 180 days		—		1		—		29		30		—

Total		17		3,134		1,146		555		4,835		—

31 December 2007
0-30 days		—		1,123		781		266		2,170		—
30-60 days		—		445		155		107		707		—
60-90 days		—		260		29		129		418		—
90-180 days		—		325		1		67		393		—
Over 180 days		—		—		—		70		70		—

Total		—		2,153		966		639		3,758		—

31 December 2006
0-30 days		—		1,104		797		156		2,057		—
30-60 days		—		341		182		60		583		—
60-90 days		—		216		26		38		280		—
90-180 days		—		280		—		70		350		—
Over 180 days		—		2		—		50		52		—

Total		—		1,943		1,005		374		3,322		—

A financial asset is ‘past due’ if a counterparty has failed to make a payment when contractually due.

POTENTIAL PROBLEM LOANS

Potential problem loans are loans where known information about possible credit problems causes management to have concern as to the borrower’s ability to comply with the present loan repayment terms.

2005

There were no similar disclosure requirements in the UK for the year ended 31 December 2005.

The following table discloses for 2005 lendings which were current as to payment of interest and principal but where concerns existed about the ability of the borrowers to comply with loan repayment terms in the near future:


			2005 £m

Potential problem lending			1,800

The figures shown for potential problem lending are not indicative of the losses that might arise should the credit quality of this lending deteriorate since they do not take into account security held.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

2006 AND LATER YEARS

IFRS 7 requires, for 2006 and later years, the disclosure of information about the credit quality of loans and advances that are neither past due nor impaired. The Group’s disclosures analyse these loans between those that the Group believes are of good quality, satisfactory quality, and lower quality and those that are below standard but not impaired.


											Loans and advances designated at fair value through profit or loss £m

	Loans and advances to banks £m		Loans and advances to customers

			Retail – mortgages £m		Retail – other £m		Wholesale £m		Total £m

31 December 2009
Good quality		34,434		335,482		30,743		61,810				18,702
Satisfactory quality		135		9,614		12,654		59,752				267
Lower quality		15		746		1,480		45,986				90
Below standard, but not impaired		749		1,450		3,552		18,324				23

Total		35,333		347,292		48,429		185,872		581,593		19,082

31 December 2008
Good quality		38,283		109,815		21,373		49,349				129
Satisfactory quality		215		264		9,192		31,042				411
Lower quality		204		—		900		5,831				56
Below standard, but not impaired		14		69		2,106		485				12

Total		38,716		110,148		33,571		86,707		230,426		608

31 December 2007
Good quality		34,647		99,407		18,157		46,240				191
Satisfactory quality		190		378		8,964		25,013				670
Lower quality		7		1		665		2,034				327
Below standard, but not impaired		1		42		2,064		188				1

Total		34,845		99,828		29,850		73,475		203,153		1,189

31 December 2006
Good quality		40,418		92,472		16,940		35,659				513
Satisfactory quality		201		359		9,667		21,797				314
Lower quality		17		—		663		2,249				3
Below standard, but not impaired		2		42		2,094		300				5

Total		40,638		92,873		29,364		60,005		182,242		835

For further details see page F-104.

INTEREST FOREGONE ON NON-PERFORMING LENDING

The table below summarises the interest foregone on impaired lending.


	2009 £m

Interest income that would have been recognised under original contract terms	1,830
Interest income included in profit	(971	)

Interest foregone	859

TROUBLED DEBT RESTRUCTURINGS

In the US, loans whose terms have been modified due to problems with the borrower are required to be separately disclosed. If the new terms were in line with market conditions at the time of the restructuring and the restructured loan remains current as to repayment of principal and interest then the disclosure can be discontinued at the end of the first year.

As noted above, the Group adopted IFRS 7 in 2007; IFRS 7 requires the disclosure of loans that were renegotiated and that would otherwise have been past due or impaired (2009: £3,919 million; 2008: £144 million; 2007: £579 million; 2006: £342 million); see also page F-106.

FORBEARANCE

Forbearance or repayment arrangements allow a mortgage customer to repay a monthly amount which is lower than their contractual monthly payment for a short period. This period is usually for no more than 12 months and is negotiated with the customer by the mortgage collectors. During the period of forbearance, there is no clearing down of arrears such that unless the customer is paying more than their contractual minimum payment, arrears balances will remain. When customers come to the end of their arrangement period they will continue to be managed as a mainstream collections case and if unable to recover then will move toward possession.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

not however able to recapitalise more than twice in a five year period. Recapitalised mortgages will return to the non-impaired book and will be managed in accordance with the recapitalised terms of the mortgage.

ASSETS ACQUIRED IN EXCHANGE FOR ADVANCES

In most circumstances in the US, title to property securing residential real estate transfers to the lender upon foreclosure. The loan is written off and the property acquired in this way is reported in a separate balance sheet category with any recoveries recorded as an offset to the provision for loan losses recorded in the year. Upon sale of the acquired property, gains or losses are recorded in the income statement as a gain or loss on acquired property.

In the UK, although a bank is entitled to enforce a first charge on a property held as security, it typically does so only to the extent of enforcing its power of sale. In accordance with IFRS and industry practice, Lloyds Banking Group usually takes control of a property held as collateral on a loan at repossession without transfer of title. Loans subject to repossession continue to be reported as loans in the balance sheet. Any gains or losses on sale of the acquired property are recorded within the provision for loan losses during the reporting period.

The difference in practices has no effect on net income reported in the UK compared to that reported in the US but it does result in a difference in classification of losses and recoveries in the income statement. It also has the effect of causing UK banks to report an increased level of non-performing loans compared with US banks.

In certain circumstances the Group takes physical possession of assets held as collateral against wholesale lending. In such cases, the assets are carried on the Group’s balance sheet and are classified according to the Group’s accounting policies.

CROSS BORDER OUTSTANDINGS

The business of Lloyds Banking Group involves significant exposures in non-local currencies. These cross border outstandings comprise loans (including accrued interest), acceptances, interest-bearing deposits with other banks, other interest-bearing investments and any other monetary assets which are denominated in non-local currency. The following table analyses, by type of borrower, foreign outstandings which individually represent in excess of 1 per cent of Lloyds Banking Group’s total assets.


	% of assets		Total £m		Governments and official institutions £m		Banks and other financial institutions £m		Commercial, industrial and other £m

As at 31 December 2009:
United States of America		1.9		19,033		3,266		2,548		13,219
France		1.4		14,126		768		2,932		10,426
As at 31 December 2008:
United States of America		2.0		8,928		253		1,843		6,832
France		1.1		4,735		69		2,904		1,762
Netherlands		1.0		4,449		4		1,658		2,787
As at 31 December 2007:
Netherlands		1.8		6,245		1		3,806		2,438
United States of America		1.3		4,520		38		1,098		3,384

As at 31 December 2009, United States of America had commitments of £491 million, and France had commitments of £624 million.

As at 31 December 2009, there were no countries with cross border outstandings of between 0.75 per cent and 1 per cent of assets.

As at 31 December 2008, the countries with cross border outstandings of between 0.75 per cent and 1 per cent of assets, amounting to £8,130 million in total, were Belgium and Germany.

As at 31 December 2007, the countries with cross border outstandings of between 0.75 per cent and 1 per cent of assets, amounting to £8,505 million in total, were Germany, Republic of Ireland and Belgium.


OPERATING AND FINANCIAL REVIEW AND PROSPECTS	AUDITED INFORMATION

M ARKET RISK

DEFINITION

The risk of reductions in earnings, value and/or reserves, through financial or reputational loss, arising from unexpected changes in financial prices, including interest rates, inflation rates, exchange rates, credit spreads and prices for bonds, commodities, equities, property and other instruments. It arises in all areas of the Group’s activities and is managed by a variety of different techniques.

RISK APPETITE

Market risk appetite is defined with regard to the quantum and composition of market risk that exists currently in the Group and the direction in which the Group wishes to manage this.

This statement of the Group’s overall appetite for market risk is reviewed and approved annually by the board. With the support of the group asset and liability committee, the group chief executive allocates this risk appetite across the Group. Individual members of the group executive committee ensure that market risk appetite is further delegated to an appropriate level within their areas of responsibility.

EXPOSURES

The Group’s banking activities expose it to the risk of adverse movements in interest rates, credit spreads, exchange rates and equity prices, with little or no exposure to commodity risk. The volatility of market values can be affected by both the transparency of prices and the amount of liquidity in the market for the relevant asset.

Most of the Group’s trading activity is undertaken to meet the requirements of wholesale and retail customers for foreign exchange and interest rate products. However, some interest rate, exchange rate and credit spread positions are taken using derivatives and other on-balance sheet instruments with the objective of earning a profit from favourable movements in market rates.

Market risk in the Group’s retail portfolios and in the Group’s capital and funding activities arises from the different repricing characteristics of the Group’s non-trading assets and liabilities. Interest rate risk arises predominantly from the mismatch between interest rate insensitive liabilities and interest rate sensitive assets.

Foreign currency risk also arises from the Group’s investment in its overseas operations.

The Group’s insurance activities also expose it to market risk, encompassing interest rate, exchange rate, property, credit spreads and equity risk:


–	With Profit Funds are managed with the aim of generating rates of return consistent with policyholders’ expectations and this involves the mismatch of assets and liabilities.

–	Unit-linked liabilities are matched with the same assets that are used to define the liability but future fee income is dependent upon the performance of those assets. (This forms part of the Value of in-Force Business (ViF) see note 28 to the consolidated financial statements.)

–	For other insurance liabilities the aim is to invest in assets such that the cash flows on investments will match those on the projected future liabilities. It is not possible to eliminate risk completely as the timing of insured events is uncertain and bonds are not available at all of the required maturities. As a result, the cash flows cannot be precisely matched and so sensitivity tests are used to test the extent of the mismatch.

–	Surplus assets are held primarily in four portfolios: (a) in the long term funds of Scottish Widows plc, Clerical Medical Investment Group Limited and their subsidiaries; (b) in the shareholder funds of life assurance companies; (c) investment portfolios within the general insurance business and (d) within the main fund of Heidelberger Lebensversicherung AG.

The Group’s defined benefit staff pension schemes are exposed to significant risks from the constituent parts of their assets and from the present value of their liabilities, primarily equity and real interest rate risk. For further information on pension scheme assets and liabilities please refer to note 41 to the consolidated financial statements.

MEASUREMENT

The primary market risk measure used within the Group is the Value at Risk (VaR) methodology, which incorporates the volatility of relevant market prices and the correlation of their movements. This is used for determining the Group’s overall market risk appetite and for the high level allocation of risk appetite across the Group.

Although an important measure of risk, VaR has limitations as a result of its use of historical data, assumed distribution, holding periods and frequency of calculation. In addition, the use of confidence levels does not convey any information about potential loss when the confidence level is exceeded. Where VaR models are less well suited to the nature of positions, the Group recognises these limitations and supplements its use with a variety of other techniques. These reflect the nature of the business activity, and include interest rate repricing gaps, open exchange positions and sensitivity analysis. Stress testing and scenario analysis are also used in certain portfolios and at group level, to simulate extreme conditions to supplement these core measures.

BANKING – TRADING ASSETS AND OTHER TREASURY POSITIONS

Based on the commonly used 95 per cent confidence level, assuming positions are held overnight and using observation periods of the preceding 300 business days, the VaR for the years ended 31 December 2009 and 2008 based on the Group’s global trading positions was as detailed in the table Banking – Trading Assets and Other Treasury Positions on page 78.

The risk of loss measured by the VaR model is the potential loss in earnings given the confidence level and assumptions noted above. The total and average trading VaR does not assume any diversification benefit across the four risk types, with the exception of the 2008 HBOS comparatives. VaR is a statistical measure and the trading book exposures for the two independently managed heritage banks arose from different management strategies and were measured against differing risk appetites. Separate disclosures have therefore been made for each heritage trading book for 2008 as this is considered to be a more informative approach. The 2008 HBOS comparatives have also been converted from 99 per cent 1-day to 95 per cent 1-day VaR numbers. The maximum and minimum VaR reported for each risk category did not necessarily occur on the same day as the maximum and minimum VaR reported as a whole. The Group internally uses VaR as the primary measure for all treasury positions arising from short term market facing activity, whether trading or banking book. Therefore the numbers below will include some risks which are also included in Banking non-trading, primarily those relating to the funding of lending activities.


OPERATING AND FINANCIAL REVIEW AND PROSPECTS	AUDITED INFORMATION

BANKING – TRADING ASSETS AND OTHER TREASURY POSITIONS

Lloyds Banking Group

31 December 2009

Close
£m

Average ¹
£m

Maximum ¹ £m

Minimum ¹ £m

Interest rate risk

12.0

20.2

31.4

11.8

Foreign exchange risk

1.1

1.7

9.3

0.2

Equity risk

1.8

1.4

3.3

0.0

Credit spread risk

16.7

17.4

21.0

13.6

Total VaR

31.6

40.7

53.3

31.6

Lloyds TSB

31 December 2008

Average

Maximum

Minimum

£m

Interest rate risk

6.7

3.4

14.7

1.0

Foreign exchange risk

3.0

1.2

4.1

0.1

Equity risk

0.0

0.3

2.7

0.0

Credit spread risk

8.0

4.9

8.1

4.1

Total VaR

17.7

9.8

25.0

5.4

HBOS (unaudited)

31 December 2008

Average

Maximum

Minimum

£m

Interest rate risk

5.9

3.9

6.4

2.0

Foreign exchange risk

4.3

5.8

11.4

0.9

Equity risk

0.1

0.8

0.0

Credit spread risk

Suspended

Total VaR

5.9

8.5

12.8

3.5

¹ For this table the average, minimum and maximum positions reflect the period from 19 January 2009 to 31 December 2009.

BANKING – NON-TRADING

Market risk in non-trading books consists almost entirely of exposure to changes in interest rates. This is the potential impact on earnings and value that could occur when, if rates fall, liabilities cannot be re-priced as quickly or by as much as assets; or when, if rates rise, assets cannot be re-priced as quickly or by as much as liabilities.

Risk exposure is monitored monthly using, primarily, market value sensitivity. This methodology considers all re-pricing mismatches in the current balance sheet and calculates the change in market value that would result from a set of defined interest rate shocks. Where re-pricing maturity is based on assumptions about customer behaviour these assumptions are also reviewed monthly.

A limit structure exists to ensure that risks stemming from residual and temporary positions or from changes in assumptions about customer behaviour remain within the Group’s risk appetite.

The following table shows, split by material currency, Lloyds Banking Group sensitivities as at 31 December 2009 to an immediate up and down 25 basis points change to all interest rates.


BANKING – NON-TRADING

	2009						2008 (unaudited)

	Up 25bps			Down 25bps			Up 25bps			Down 25bps
	£m			£m			£m			£m

Sterling		66.6			(66.4	)		(132.5	)		135.1
US Dollar		(5.5	)		5.6			(15.5	)		15.6
Euro		4.4			(4.4	)		(0.4	)		0.4
Australian Dollar		2.2			(2.3	)		0.0			0.0
Other		(0.2	)		0.2			0.2			(0.3	)

		67.5			(67.3	)		(148.2	)		150.8

Base case market value is calculated on the basis of the Lloyds Banking Group current balance sheet with re-pricing dates adjusted according to behavioural assumptions. The above sensitivities show how this projected market value would change in response to an immediate parallel shift to all relevant interest rates – market and administered.

This is a risk based disclosure and the amounts shown would be amortised in the income statement over the duration of the portfolio.

The measure, however, is simplified in that it assumes all interest rates, for all currencies and maturities, move at the same time and by the same amount.

PENSION SCHEMES

Management of the assets of the Group’s defined benefit pension schemes is the responsibility of the Scheme Trustees, who also appoint the Scheme Actuaries to perform the triennial valuations. The Group monitors its pensions exposure holistically using a variety of metrics including accounting and economic deficits and contribution rates. These and other measures are regularly reviewed by the Pensions Strategy Committee and used in discussions with the Trustees, through whom any risk management and mitigation activity must be conducted.


OPERATING AND FINANCIAL REVIEW AND PROSPECTS	AUDITED INFORMATION

INSURANCE PORTFOLIOS

The Group’s market risk exposure in respect of insurance activities described above is measured using EEV as a proxy for economic value. The pre-tax sensitivity of EEV to standardised stresses is shown below for the years ended 31 December 2009 and 2008. The 2008 comparatives are based on a post acquisition basis assuming the legacy businesses were combined at the year end and are unaudited. During 2009, the credit spread sensitivity was changed from a 25 basis point increase to a 30 per cent widening of the spread between corporate bonds and the swap curve, including an allowance for the assumed change in the illiquidity premium. Therefore no 2008 comparative is available. Foreign exchange risk arises predominantly from overseas holdings of equities. Impacts have only been shown in one direction but can be assumed to be reasonably symmetrical. Opening and closing numbers only have been provided as this data is not volatile and consequently is not tracked on a daily basis.


INSURANCE PORTFOLIOS

As at 31 December	2009 £m			2008 (unaudited) £m

Equity risk (impact of 10% fall pre-tax)		(383.6	)		(429.4	)
Interest rate risk (impact of 25 basis point reduction pre-tax)		64.0			59.7
Credit spread risk (impact of 30% widening)		(156.4	)		n/a

MITIGATION

Various mitigation activities are undertaken across the Group to manage portfolios and seek to ensure they remain within approved limits.

BANKING – NON-TRADING ACTIVITIES

Interest rate risk arising from the different repricing characteristics of the Group’s non-trading assets and liabilities, and from the mismatch between interest rate insensitive liabilities and interest rate sensitive assets, is managed centrally. Matching assets and liabilities are offset against each other and internal interest rate swaps are also used.

INSURANCE ACTIVITIES

Investment holdings are diversified across markets and, within markets, across sectors. Holdings are diversified to minimise specific risk and the relative size of large individual exposures is monitored closely. For assets held outside unit-linked funds, investments are only permitted in countries and markets which are sufficiently regulated and liquid.

MONITORING

The group asset and liability committee regularly reviews high level market risk exposure including, but not limited to, the data described above. It also makes recommendations to the group chief executive concerning overall market risk appetite and market risk policy. Exposures at lower levels of delegation are monitored at various intervals according to their volatility, from daily in the case of trading portfolios to monthly or quarterly in the case of less volatile portfolios. Levels of exposures compared to approved limits are monitored locally by independent risk functions and at a high level by group risk. Where appropriate, escalation procedures are in place.

BANKING ACTIVITIES

Trading is restricted to a number of specialist centres, the most important centre being the treasury and trading business in London. These centres also manage market risk in the wholesale non-trading portfolios, both in the UK and internationally. The level of exposure is strictly controlled and monitored within approved limits. Active management of the wholesale portfolios is necessary to meet customer requirements and changing market circumstances.

Market risk in the Group’s retail portfolios and in the Group’s capital and funding activities is managed within limits defined in the detailed Group policy for interest rate risk in the banking book, which is reviewed and approved annually.

INSURANCE ACTIVITIES

Market risk exposures from the insurance businesses are controlled via approved investment policies and triggers set with reference to the Group’s overall risk appetite and regularly reviewed by the group asset and liability committee:


–	The With Profit Funds are managed in accordance with the relevant fund’s principles and practices of financial management and legal requirements.

–	The investment strategy for other insurance liabilities is determined by the term and nature of the underlying liabilities and asset/liability matching positions are actively monitored. Actuarial tools are used to project and match the cash flows.

–	Investment strategy for surplus assets held in excess of liabilities takes account of the legal, regulatory and internal business requirements for capital to be held to support the business now and in the future.

The Group also agrees strategies for the overall mix of pension assets with the pension scheme trustees.


OPERATING AND FINANCIAL REVIEW AND PROSPECTS	AUDITED INFORMATION

I NSURANCE RISK

DEFINITION

The risk of reductions in earnings and/or value, through financial or reputational loss, due to fluctuations in the timing, frequency and severity of insured/underwritten events and to fluctuations in the timing and amount of claim settlements. This includes fluctuations in profits due to customer behaviour.

RISK APPETITE

Insurance risk appetite is defined with regard to the quantum and composition of insurance risk that exists currently in the Group and the direction in which the Group wishes to manage this. It takes account of the need for each entity in the Group to maintain solvency in excess of the minimum level required by the entity’s jurisdictional legal or regulatory requirements.

The Group’s overall appetite for insurance risk is reviewed and approved annually by the board.

EXPOSURES

The major sources of insurance risk within the Group are the insurance businesses and the Group’s defined benefit staff pension schemes. The nature of insurance business involves the accepting of insurance risks which relate primarily to mortality, longevity, morbidity, persistency, expenses, property damage and unemployment. The prime insurance risk carried by the Group’s staff pension schemes is related to longevity.

MEASUREMENT

Insurance risks are measured using a variety of techniques including stress and scenario testing; and, where appropriate, stochastic modelling.

Current and potential future insurance risk exposures are assessed and aggregated using risk measures based on 1-in-20 year stresses and other supporting measures where appropriate, for example those set out in note 37 to the consolidated financial statements.

MITIGATION

A key element of the control framework is the consideration of insurance risk by a suitable combination of high level committees/boards. For the life assurance businesses the key control bodies are the board of Scottish Widows Group Limited and the board of HBOS Financial Services Limited with the more significant risks also being subject to approval by the group executive committee and/or Lloyds Banking Group board. For the general insurance businesses the key control bodies are the boards of the legal entities including Lloyds TSB General Insurance Limited, St. Andrew’s Insurance plc and the Irish subsidiaries, with the more significant risks again being subject to group executive committee and/or Lloyds Banking Group board approval. All Group staff pension schemes issues are covered by the group asset and liability committee and the group business risk committee.

The overall insurance risk is mitigated through pooling and through diversification across large numbers of uncorrelated individuals, geographical areas, and different types of risk exposure.

Insurance risk is primarily controlled via the following processes:


–	Underwriting (the process to ensure that new insurance proposals are properly assessed)

–	Pricing-to-risk (new insurance proposals are priced to cover the underlying risks inherent within the products)

–	Claims management

–	Product design

–	Policy wording

–	Product management

–	The use of reinsurance or other risk mitigation techniques.

In addition, limits are used as a control mechanism for insurance risk at policy level.

At all times, close attention is paid to the adequacy of reserves, solvency management and regulatory requirements.

General insurance exposure to accumulations of risk and possible catastrophes is mitigated by reinsurance arrangements which are broadly spread over different reinsurers. Detailed modelling, including that of the potential losses under various catastrophe scenarios, supports the choice of reinsurance arrangements. Appropriate reinsurance arrangements also apply within the life and pensions businesses with significant mortality risk and morbidity risk being transferred to our chosen reinsurers.

Options and guarantees are incorporated in new insurance products only after careful consideration of the risk management issues that they present.

In respect of insurance risks in the staff pension schemes, the Group ensures that effective communication mechanisms are in place for consultation with the trustees to assist with the management of risk in line with the Group’s risk appetite.

MONITORING

Ongoing monitoring is in place to track the progression of insurance risks. This normally involves monitoring relevant experiences against expectations (for example claims experience, option take up rates, persistency experience, expenses, non-disclosure at the point of sale), as well as evaluating the effectiveness of controls put in place to manage insurance risk. Reasons for any significant divergence from experience are investigated and remedial action is taken.

Insurance risk exposures are reported and monitored regularly by the group executive committee.


OPERATING AND FINANCIAL REVIEW AND PROSPECTS	AUDITED INFORMATION

O PERATIONAL RISK

DEFINITION

The risk of reductions in earnings and/or value, through financial or reputational loss, from inadequate or failed internal processes and systems, operational inefficiencies, or from people related or external events.

There are a number of categories of operational risk:

LEGAL AND REGULATORY RISK

Legal and regulatory risk is the risk of reductions in earnings and/or value, through financial or reputational loss, from failing to comply with the laws, regulations or codes applicable.

CUSTOMER TREATMENT RISK

The risk of reductions in earnings and/or value, through financial or reputational loss, from inappropriate or poor customer treatment.

PEOPLE RISK

The risk of reductions in earnings and/or value, through financial or reputational loss, from inappropriate colleague actions and behaviour, industrial action, legal action in relation to people, or health and safety issues. Loss can also be incurred through failure to recruit, retain, train, reward and incentivise appropriately skilled staff to achieve business objectives and through failure to take appropriate action as a result of staff underperformance.

INTEGRATION RISK

The risk that Lloyds Banking Group fails to realise the business growth opportunities, revenue benefits, cost synergies, operational efficiencies and other benefits anticipated from, or incurs unanticipated costs and losses associated with, the acquisition of HBOS plc.

BUSINESS PROCESS RISK

The risk of reductions in earnings and/or value, through financial or reputational loss, resulting from inadequate or failed internal processes and systems, people-related events and deficiencies in the performance of external suppliers/service providers.

FINANCIAL CRIME RISK

The risk of reductions in earnings and/or value, through financial or reputational loss, associated with financial crime and failure to comply with related legal and regulatory obligations (which includes compliance with economic sanctions). These losses may include censure, fines or the cost of litigation.

SECURITY RISK

The risk of reductions in earnings and/or value, through financial or reputational loss, resulting from theft of or damage to the Group’s assets, the loss, corruption, misuse or theft of the Group’s information assets or threats or actual harm to the Group’s people. This also includes risks relating to terrorist acts, other acts of war, geopolitical, pandemic or other such events.

CHANGE RISK

The risk of reductions in earnings and/or value, through financial or reputational loss, from change initiatives failing to deliver to requirements, budget or timescale, failing to implement change effectively or failing to realise desired benefits.

GOVERNANCE RISK

The risk of reductions in earnings and/or value, through financial or reputational loss, from poor corporate governance at group, divisional or business unit level. Corporate governance in this context embraces the structures, systems and processes that provide direction, control and accountability for the enterprise.

RISK APPETITE

The Group has developed an impact on earnings approach to operational risk appetite. This involves looking at how much the Group could lose due to operational risk losses at various levels of certainty.

In setting operational risk appetite, the Group looks at both impact on solvency and the Group’s reputation.

For legal and regulatory risk the Group has minimal risk appetite for non-compliance with mandatory requirements and seeks to operate to high ethical standards. The Group encourages and maintains an appropriately balanced legal and regulatory compliance culture and promotes policies and procedures to enable businesses and their staff to operate in accordance with the laws, regulations and voluntary codes which impact on the Group and its activities.

EXPOSURES

The main sources of operational risk within the Group relate to the rate and scale of change arising from the Group’s current integration programme, particularly in respect of people and business processes, and the legal and regulatory environment in which financial firms operate both in the UK and overseas.

Legal and regulatory exposure is driven by the significant volume of current legislation and regulation with which the Group has to comply, along with new legislation and regulation which needs to be reviewed, assessed and embedded into day-to-day operational and business practices across the Group as a whole. Following the financial crisis, the pace and extent of regulatory reform proposals both in the UK and internationally have increased significantly, and can be expected to remain at high levels. Future changes in regulation, fiscal or other policies are unpredictable and beyond the control of the Group, but could for instance affect the Group’s future business strategy, structure or approach to funding. Further uncertainties arise where regulations are principles-based without the regulator defining supporting minimum standards either for the benefit of the consumer or firms. This gives rise to both the risk of retrospection from any one regulator and also to the risk of differing interpretation by individual regulators.

For legal and regulatory issues there are significant reputational impacts associated with potential censure which drive the Group’s stance on appetites referred to above. There are clear accountabilities and processes in place for reviewing new and changing requirements. Each division and significant business areas have a nominated individual with ‘compliance oversight’ responsibility under FSA rules. The role of such individuals is to


OPERATING AND FINANCIAL REVIEW AND PROSPECTS	AUDITED INFORMATION

advise and assist management to ensure that each business has a control structure which creates awareness of the rules and regulations, to which the Group is subject, and to monitor and report on adherence to these rules and regulations.

Lloyds Banking Group welcomes the regulation of remuneration provided there is international consensus and we will comply with the FSA code.

MEASUREMENT

Both Lloyds TSB and HBOS had operational risk management and measurement frameworks that had been granted, by the FSA, Advanced Measurement Approach (AMA) Waivers, enabling the use of an internal model for the calculation of regulatory capital.

Throughout 2009, both frameworks have continued to operate, whilst a single integrated framework has been in the course of development. The integrated framework and capital model will be rolled out during 2010 and it is anticipated that the Group will seek a variation from the FSA to operate under a single AMA waiver.

The Lloyds TSB Group capital model calculations are driven by actual loss data (internal and external) and forward looking scenarios which value potential future risk events. External industry-wide data is collected to help with validating scenarios.

The HBOS capital model calculations are driven by risk and control assessments, validated by scenarios and internal and external loss events.

MITIGATION

Both Lloyds TSB and HBOS’s operational risk management frameworks consist of the following key components:


–	Identification and categorisation of the key operational risks facing a business area.

–	Risk assessment, including impact assessment of financial and non-financial impacts (e.g. reputational risk) for each of the key risks to which the business area is exposed.

–	Control assessment, evaluating the effectiveness of the control framework covering each of the key risks to which the business area is exposed.

–	Loss and incident management, capturing actions to manage any losses facing a business area.

–	The development of Key Risk Indicators for management reporting.

–	Oversight and assurance of the risk management framework in divisions and businesses.

–	Scenarios for estimation of potential loss exposures for material risks.

The Group purchases insurance to mitigate certain operational risk events.

MONITORING

Business unit risk exposure is aggregated at divisional level and reported to group risk where a group-wide report is prepared. The report is discussed at the monthly group compliance and operational risk committee. This committee can escalate matters to the chief risk officer, or higher committees if appropriate.

The insurance programme is monitored and reviewed regularly, with recommendations being made to the Group’s senior management annually prior to each renewal. Insurers are monitored on an ongoing basis, to ensure counterparty risk is minimised. A process is in place to manage any insurer rating changes or insolvencies.

The Group has adopted a formal approach to operational risk event escalation. This involves the identification of an event, an assessment of the materiality of the event in accordance with a risk event impact matrix and appropriate escalation.


OPERATING AND FINANCIAL REVIEW AND PROSPECTS	AUDITED INFORMATION

FINANCIAL SOUNDNESS

Financial soundness risk has three key risk components covering liquidity and funding risk; capital risk; and financial and prudential regulatory reporting, disclosure and tax risk.

LIQUIDITY AND FUNDING RISK

DEFINITION

Liquidity risk is defined as the risk that the Group does not have sufficient financial resources to meet its commitments when they fall due, or can secure them only at excessive cost. Funding risk is further defined as the risk that the Group does not have sufficiently stable and diverse sources of funding or the funding structure is inefficient.

RISK APPETITE

Liquidity and funding risk appetite for the banking businesses is set by the board and reviewed on an annual basis. This statement of the Group’s overall appetite for liquidity risk is reviewed and approved annually by the board. With the support of the group asset and liability committee, the group chief executive allocates this risk appetite across the Group. Individual members of the group executive committee ensure that liquidity risk appetite is further delegated to an appropriate level within their areas of responsibility. It is reported through various metrics that enable the Group to manage liquidity and funding constraints. The Group chief executive, assisted by the group asset and liability committee and its sub-committee the senior asset and liability committee, regularly reviews performance against risk appetite.

EXPOSURE

Liquidity exposure represents the amount of potential outflows in any future period less committed inflows. Liquidity is considered from both an internal and regulatory perspective.

MEASUREMENT

A series of measures are used across the Group to monitor both short and long term liquidity including: ratios, cash outflow triggers, liquidity gaps, early warning indicators and stress test survival period triggers. Strict criteria and limits are in place to ensure highly liquid marketable securities are available as part of the portfolio of liquid assets.

Details of contractual maturities for assets and liabilities form an important source of information for the management of liquidity risk. Note 54(4) to the consolidated financial statements sets out an analysis of assets and liabilities by relevant maturity grouping. In order to reflect more accurately the expected behaviour of the Group’s assets and liabilities, measurement and modelling of the behavioural aspects of each is constructed. This forms the foundation of the Group’s liquidity controls.

MITIGATION

The Group mitigates the risk of a liquidity mismatch in excess of its risk appetite by managing the liquidity profile of the balance sheet through both short-term liquidity management and long-term funding strategy. Short-term liquidity management is considered from two perspectives; business as usual and liquidity under stressed conditions, both of which relate to funding in the less than one year time horizon. Longer term funding is used to manage the Group’s strategic liquidity profile which is determined by the Group’s balance sheet structure. Longer term is defined as having an original maturity of more than one year.

The Group’s funding and liquidity position is underpinned by its significant retail deposit base, and has been supported by stable funding from the wholesale markets with a reduced dependence on short-term funding. A substantial proportion of the retail deposit base is made up of customers’ current and savings accounts which, although repayable on demand, have traditionally in aggregate provided a stable source of funding. Additionally, the Group accesses the short-term wholesale markets to raise inter-bank deposits and to issue certificates of deposit and commercial paper to meet short-term obligations. The Group’s short-term money market funding is based on a qualitative analysis of the market’s capacity for the Group’s credit. The Group has developed strong relationships with certain wholesale market segments, and also has access to central banks and corporate customers, to supplement its retail deposit base.

The ability to deploy assets quickly, either through the repo market or through outright sale, is also an important source of liquidity for the Group’s banking businesses. The Group holds sizeable balances of high grade marketable debt securities which can be sold to provide, or used to secure, additional short term funding should the need arise from either market counterparties or central bank facilities (European Central Bank, Federal Reserve, Bank of England).

MONITORING

Liquidity is actively monitored at business unit and Group level at an appropriate frequency. Routine reporting is in place to senior management and through the Group’s committee structure, in particular the group asset and liability committee and the senior asset and liability committee which meet monthly. In a stress situation the level of monitoring and reporting is increased commensurate with the nature of the stress event. Liquidity policies and procedures are subject to independent oversight.

Daily monitoring and control processes are in place to address both statutory and prudential liquidity requirements. In addition, the framework has two other important components:


–	Firstly, the Group stress tests its potential cash flow mismatch position under various scenarios on an ongoing basis. The cash flow mismatch position considers on-balance sheet cash flows, commitments received and granted, and material derivative cash flows. Specifically, commitments granted include the pipeline of new business awaiting completion as well as other standby or revolving credit facilities. Behavioural adjustments are developed, evaluating how the cash flow position might change under each stress scenario to derive a stressed cash flow position. Scenarios cover both Lloyds Banking Group name specific and systemic difficulties. The scenarios and the assumptions are reviewed at least annually to gain assurance they continue to be relevant to the nature of the business.

–	Secondly, the Group has a contingency funding plan embedded within the Group Liquidity Policy which has been designed to identify emerging liquidity concerns at an early stage, so that mitigating actions can be taken to avoid a more serious crisis developing.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

The Group has invested considerable resource to ensure that it will satisfy the governance, reporting and stress testing requirements of the FSA’s new ILAS liquidity regime. This work will continue in 2010 as further parts of the ILAS regime take effect. The Group has noted the industry move towards strategic balance sheet measures of the funding profile and has started to monitor the market’s net stable funding ratio and the FSA’s structural funding ratio. The Group is aware that the regulatory liquidity landscape is subject to potential change. Specifically, in relation to the consultation papers issued by the Basel Committee on Banking Supervision (‘Strengthening the resilience of the banking sector’ and ‘International framework for liquidity risk measurement, standards and monitoring’) the Group is actively participating in the industry-wide consultation and calibration exercises taking place through 2010.

During the year, the individual entities within the Group, and the Group, complied with all of the externally imposed liquidity and funding requirements to which they are subject.

APPROACH

The Group has adopted the heritage Lloyds TSB liquidity and funding approach which involves reduced risk appetite and increasing the diversity of funding sources, supported by extensive analysis of funding needs and strong governance. The Group expects to meet its funding requirements even in a stressed scenario.

LIQUIDITY AND FUNDING MANAGEMENT IN 2009

To understand the trends in liquidity and funding the comparatives have been provided for 2008 for the combined businesses. Consequently, pages 84 to 87 covering liquidity and funding management in 2009 are unaudited.

During 2009, the Group has seen a stabilisation in the customer deposit base, in marked contrast to the volatility observed by parts of the heritage HBOS businesses in the second half of 2008. The customer loan/deposit ratio improved slightly to 169 per cent compared with 177 per cent at the previous year end. The challenge facing the Group over the medium term is to continue to access the term funding markets, and for the Group to continue to reduce its utilisation of government sponsored funding schemes. The combination of a clear focus on right-sizing the balance sheet, developing the Group’s retail liability base, and strategically accessing the capital markets will enable the Group to continue to strengthen its funding base.

In keeping with the Group’s strategy of right-sizing the balance sheet, total funding has reduced by £73 billion. During the year the Group has reduced its dependency on the repo market whilst also reducing its wholesale funding requirements. Additionally there has been a managed reduction in certain types of non-bank deposits, in particular certain aggressively priced corporate deposits which were sourced from HBOS customers during the crisis in the second half of 2008. Actions taken to right size the balance sheet have reduced the portion of the Group’s funding that is derived from wholesale markets.


GROUP BALANCE SHEET
As at 31 December	2009 £bn		2008 ¹ £bn		2009 Change %
Assets
Loans and advances to customers		627.0		677.2		(7.4	)
Wholesale assets ²		153.6		189.2		(18.8	)
Banking assets		780.6		866.4		(9.9	)
Total assets		1,027.3		1,126.7		(8.8	)
Liabilities
Non-bank deposits ³		371.2		381.0		(2.6	)
Wholesale funding		325.5		342.9		(5.1	)
Repo ⁴		63.1		116.9		(46.0	)
Total equity		44.1		35.7		23.5
Total funding		803.9		876.5		(8.3	)
Total liabilities and shareholders’ equity		1,027.3		1,126.7		(8.8	)


¹	Adjusted to reflect the completion of the assessment of the fair value of the identifiable net assets of the HBOS Group.

²	Wholesale assets comprise balances arising from banking businesses and include cash and balances at central banks, loans and advances to banks, debt securities and available-for-sale financial assets.

³	Non-bank deposits comprise balances arising from banking businesses and consist of customer deposits.

⁴	All of the Group’s repurchase transactions are recorded as balance sheet liabilities within deposits.

The global upheaval in the financial markets that occurred during 2008 has abated during the latter part of 2009. The steps taken in 2008 by HM Treasury, through the introduction of the Government Credit Guarantee Scheme (CGS) for senior funding and other facilities including the Special Liquidity Scheme have together continued to provide assurance of liquidity support to the banking markets. Notwithstanding the improvement in market liquidity during 2009, the Group continues to be reliant upon these facilities in order to maintain its wholesale funding position. At 31 December 2009, the Group’s overall support from government and central bank sponsored funding facilities totalled £157 billion, with a significant portion maturing over the course of the next two years. The Group’s balance sheet reduction plans will avoid the necessity to refinance much of this funding.

The key dependencies on successfully funding the Group’s balance sheet include the continued functioning of the money and capital markets at their current levels; successful rightsizing of the Group’s balance sheet; the continuation of HM Treasury facilities in accordance with the terms agreed; limited further deterioration in the UK’s and the Group’s credit rating and no significant or sudden withdrawal of deposits resulting in increased reliance on money markets or UK Government support schemes. A return to the extreme market conditions of 2008 would place a strain on the Group’s ability to meet its financial commitments.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

GROUP RETAIL AND WHOLESALE FUNDING MIX

Wholesale funding has been analysed between that monitored by the London Treasury and Trading operations and the Group’s overseas Treasury operations. The wholesale funding shown excludes any repo activity.

The composition and quality of wholesale deposits are regularly reviewed by management and comprises deposits from corporates and government agencies that roll over on a regular basis and are reinvested.

WHOLESALE FUNDING BY TYPE

As at 31 December

2009
£bn

2009
%

2008
£bn

2008
%

Bank deposits

48.6

7.0

54.9

7.6

Debt securities in issue:

Certificates of deposit

50.9

7.3

77.5

10.7

Medium term notes

89.7

12.9

63.5

8.8

Covered bonds

28.1

4.0

29.1

4.0

Commercial paper

35.0

5.0

28.9

4.0

Securitisation

35.8

5.1

43.6

6.0

239.5

34.3

242.6

33.5

Subordinated debt

37.4

5.4

45.4

6.3

Total wholesale (excluding non-bank deposits)

325.5

46.7

342.9

47.4

Customer deposits

371.2

53.3

381.0

52.6

Total Group funding ¹

696.7

100.0

723.9

100.0


¹	Excludes repos and total equity.

TERM FUNDING

The Group has been able to take advantage of the improved market sentiment, by extending the duration of its money market funding, and by successfully accessing the term debt markets in unguaranteed format and through the issuance of Permanent RMBS. The reduction in the volume of money market funding has contributed to an improvement in the Group’s term funding ratio (wholesale funding with a remaining life of over one year) which has improved to 50 per cent at 31 December 2009 from 44 per cent at the previous year end. The Group’s long term target for this ratio is 40 per cent, this seeks to ensure that maturing liabilities are spread over subsequent years.

Lloyds Banking Group has continued to extend the term of its wholesale funding. The following significant capital market transactions were undertaken in 2009:

– £13.5 billion rights issue

– €5 billion public senior unguaranteed debt

– £4 billion public RMBS

– US$2 billion tier 1 capital securities

Lloyds Banking Group will continue to access the term capital markets, and has already successfully executed benchmark transactions in January 2010:

– US$5 billion equivalent of public senior term funding

– £2.5 billion equivalent of public RMBS

The Group had limited access to the term capital markets for large periods of 2009 due to highly market sensitive on-going negotiations around the Government Asset Protection Scheme and market recapitalisation.

Total wholesale funding is analysed by residual maturity as follows:

WHOLESALE FUNDING BY RESIDUAL MATURITY

As at 31 December

2009
£bn

2009
%

2008
£bn

2008
%

Less than one year

161.8

49.7

192.3

56.1

One to two years

48.8

15.0

29.8

8.7

Two to five years

68.7

21.1

62.2

18.1

More than five years

46.2

14.2

58.6

17.1

Total wholesale funding

325.5

100.0

342.9

100.0

During the period the Group has changed the definition of wholesale to align with that used by other international market participants to include interbank deposits, debt securities in issue and subordinated debt within this category.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

The table below illustrates the Group’s holding of highly liquid unencumbered assets. This liquidity is available for deployment at immediate notice and is a key component of the Group’s liquidity management process.


ELIGIBLE COLLATERAL
As at 31 December	2009 £bn		2008 £bn
Primary liquidity ¹		88.4		46.2
Secondary liquidity ²		62.4		58.3
		150.8		104.5


¹	Primary liquidity is defined as FSA eligible liquid assets (UK Gilts, US Treasuries, Euro AAA government debt, unencumbered cash balances held at central banks).

²	Secondary liquidity comprises a diversified pool of highly rated unencumbered collateral (including retained issuance)

The following tables reconcile figures reported on page 85 in the table Wholesale Funding by Type with those in the balance sheet.


RECONCILIATION OF WHOLESALE FUNDING BY TYPE TO THE BALANCE SHEET
As at 31 December 2009	Included in funding analysis £bn		Repos and conduits £bn		Fair value and other accounting methods £bn			Balance sheet £bn
Bank deposits		48.6		27.6		6.3			82.5
Debt securities in issue		239.5		—		(6.0	)		233.5
Subordinated debt		37.4		—		(2.7	)		34.7
Total wholesale funding		325.5		27.6
Customer deposits		371.2		35.5		—			406.7
		696.7		63.1

As at 31 December 2008	Included in funding analysis £bn		Repos and conduits £bn		Fair value and other accounting methods £bn			Balance sheet £bn
Bank deposits		54.9		95.8		4.4			155.1
Debt securities in issue		242.6		3.0		4.1			249.7
Subordinated debt		45.4		—		(3.2	)		42.2
Total wholesale funding		342.9		98.8
Customer deposits		381.0		18.1		10.1			409.2
		723.9		116.9

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

CONTRACTUAL CASH OBLIGATIONS

The following table sets out the amounts and maturities of Lloyds Banking Group’s contractual cash obligations at 31 December 2009.

Within
one year
£m

One to three
years
£m

Three to
five years
£m

Over five
years
£m

Total
£m

Enhanced capital notes

—

9,047

Long-term debt – dated

702

2,538

3,095

9,619

15,954

Medium-term notes

18,327

57,589

5,090

8,030

89,036

Commercial paper

34,900

—

34,900

Covered bonds

5,605

2,275

7,937

11,494

27,311

Securitisation notes

934

4,949

371

31,303

37,557

Finance leases

—

Operating leases

392

662

551

1,817

3,422

Capital commitments

256

—

260

Other purchase obligations

758

873

491

129

2,251

61,875

68,892

17,535

71,452

219,754

Other purchase obligations include amounts expected to be payable in respect of material contracts entered into by the Lloyds Banking Group, in the ordinary course of business, for the provision of outsourced and other services. The cost of these services will be charged to the income statement as it is incurred. The Lloyds Banking Group also has a constructive obligation to ensure that its defined post-retirement benefit schemes remain adequately funded. The amount and timing of the Lloyds Banking Group’s cash contributions to these schemes is uncertain and will be affected by factors such as future investment returns and demographic changes. Lloyds Banking Group expects to make cash contributions of at least £500 million to these schemes in 2010.

At 31 December 2009, Lloyds Banking Group also had £9,726 million of preference shares, preferred securities and undated subordinated liabilities outstanding.

At 31 December 2009, the principal sources of potential liquidity for Lloyds Banking Group plc were dividends received from its directly owned subsidiary company, Lloyds TSB Bank, and loans from this and other Lloyds Banking Group companies. The ability of Lloyds TSB Bank and HBOS to pay dividends going forward, or for Lloyds TSB Bank or other Lloyds Banking Group companies to make loans to Lloyds Banking Group plc, depends on a number of factors, including their own regulatory capital requirements, distributable reserves and financial performance.

OFF-BALANCE SHEET ARRANGEMENTS

A table setting out the amounts and maturities of Lloyds Banking Group’s other commercial commitments at 31 December 2009 is included in note 52 to the consolidated financial statements. These commitments are not included in Lloyds Banking Group’s consolidated balance sheet.

Lending commitments are agreements to lend to customers in accordance with contractual provisions; these are either for a specified period or, as in the case of credit cards and overdrafts, represent a revolving credit facility which can be drawn down at any time, provided that the agreement has not been terminated. The total amounts of unused commitments do not necessarily represent future cash requirements, in that commitments often expire without being drawn upon.

Lloyds Banking Group’s financial guarantee contracts are accounted for as financial instruments and measured at fair value on the balance sheet. The contractual nominal amounts of these guarantees totalled £18,021 million at 31 December 2009 (with £5,425 million expiring within one year; £1,996 million between one and three years; £8,398 million between three and five years; and £2,202 million over five years).

Lloyds Banking Group’s banking businesses are also exposed to liquidity risk through the provision of securitisation facilities to certain corporate customers. At 31 December 2009, Lloyds Banking Group offered securitisation facilities to its corporate and financial institution client base through its conduit securitisation vehicles, Cancara, Grampian and Landale. These are funded in the global asset-backed commercial paper market. The assets and obligations of these conduits are included in Lloyds Banking Group’s consolidated balance sheet. Lloyds Banking Group provides short-term asset-backed commercial paper liquidity support facilities on commercial terms to the issuers of the commercial paper, for use in the event of a market disturbance should they be unable to roll over maturing commercial paper or obtain alternative sources of funding.

Details of securitisations and other special purpose entity arrangements entered into by the Group are provided in notes 21 and 22 to the consolidated financial statements. The successful development of Lloyds Banking Group’s ability to securitise its own assets has provided a mechanism to tap a well established market, thereby diversifying Lloyds Banking Group’s funding base.

As indicated on page F-48, the Group’s securitisations include a number of synthetic securitisation arrangements. Synthetic securitisations use credit default swaps to transfer the credit risk of the underlying assets to a third party without transferring the funding requirement. As the prices of the underlying assets fall, this creates a credit risk on the third party which typically is not collateralised. The total notional amount of credit default swaps used for synthetic securitisation transactions at 31 December 2009 was £1,308 million. The Group takes a credit valuation adjustment by reserving the current mark to market of the exposure multiplied by the credit default swap spread of the counterparty for the maturity of the exposure. At 31 December 2009, the maximum exposure to default by the underlying counterparty (which is equivalent to the fair value) was £66 million, net of the credit reserves. There have been no recent changes in the methodology for assessing credit valuation reserves on credit default swaps.

Within Lloyds Banking Group’s insurance businesses, the principal sources of liquidity are premiums received from policyholders, charges levied upon policyholders, investment income and the proceeds from the sale and maturity of investments. The investment policies followed by Lloyds Banking Group’s life assurance companies take account of anticipated cash flow requirements including by matching the cash inflows with projected liabilities where appropriate. Cash deposits and highly liquid government securities are available to provide liquidity to cover any higher than expected cash outflows.


OPERATING AND FINANCIAL REVIEW AND PROSPECTS	AUDITED INFORMATION

CAPITAL RISK

DEFINITION

Capital risk is defined as the risk that the Group has insufficient capital to provide a sufficient resource to absorb losses or that the capital structure is inefficient.

RISK APPETITE

Capital risk appetite is set by the board and reported through various metrics that enable the Group to manage capital constraints and shareholder expectations. One of the key metrics is the Group’s core tier 1 capital ratio for which the board has set a target of more than 7 per cent. The chief executive, assisted by the group asset and liability committee, regularly reviews performance against risk appetite. The board formally reviews capital risk on an annual basis.

EXPOSURE

A capital exposure arises where the Group has insufficient regulatory capital resources to support its strategic objectives and plans, and to meet external stakeholder requirements and expectations. The Group’s capital management approach is focused on optimising value for shareholders.

MEASUREMENT

The Group’s regulatory capital is divided into tiers depending on level of subordination and ability to absorb losses. Core tier 1 capital as defined in the FSA letter to the British Bankers Association in May 2009, comprises mainly shareholders’ equity and minority interests, after deducting goodwill, other intangible assets and 50 per cent of the net excess of expected loss over accounting provisions and certain securitisation positions. Accounting equity is adjusted in accordance with FSA requirements, particularly in respect of pensions and available for sale assets. Tier 1 capital, as defined by the European Community Banking Consolidation Directive as implemented in the UK by the Financial Services Authority’s General Prudential Sourcebook (GENPRU), is core tier 1 capital plus tier 1 capital securities. Tier 2 capital, defined by GENPRU, comprises qualifying subordinated debt after deducting 50 per cent of the excess of expected loss over accounting provisions, and certain securitisation positions. Total capital is the sum of tier 1 and tier 2 capital after deducting investments in subsidiaries and associates that are not consolidated for regulatory purposes. In the case of Lloyds Banking Group, this means that the net assets of its life assurance and general insurance businesses are excluded from its total regulatory capital.

A number of limits are imposed by the FSA on the proportion of the regulatory capital base that can be made up of subordinated debt and preferred securities, for example the amount of qualifying tier 2 capital cannot exceed that of tier 1 capital. The Group seeks to ensure that even in the event of such restrictions the total capital ratio will remain adequate.

The Capital Resources Requirement (CRR), is 8 per cent of risk weighted assets and represents the capital required under Pillar 1 of the Basel II framework. In addition, the FSA currently sets Individual Capital Guidance (ICG) for each UK bank calibrated by reference to the CRR, to address the requirements of pillar 2 of the Basel II framework.

A key input into the FSA’s ICG setting process is each bank’s Internal Capital Adequacy Assessment Process. The FSA’s approach is to monitor the available capital resources in relation to the ICG requirement. The Group has been given an ICG by the FSA and the board has also agreed a formal buffer to be maintained in addition to this requirement. The FSA has made it clear that each ICG remains a confidential matter between each bank and the FSA.

In addition to the minimum requirement for total capital, the FSA has made further statements to explain the approach it has taken to the capital framework. These include core tier 1 and tier 1 targets under stressed conditions.

The Group undertook an extensive series of stress analysis during the year to determine the adequacy of the Group’s capital resources against the FSA minimum requirements.

The Group is subject to extensive regulation and regulatory supervision in relation to the levels of capital in its business. Specifically in relation to the consultation papers issued by the Basel Committee on Banking Supervision ‘Strengthening the resilience of the banking sector’ the group is participating in the industry-wide consultation and calibration exercises taking place through 2010.

MITIGATION

The Group has developed procedures meant to ensure that compliance with both current and potential future requirements are understood and that policies are aligned to its risk appetite.

The Group is able to raise equity either via a rights issue, placing or an open offer. Placing and open offers were completed in January 2009 as part of the Group’s participation in the recapitalisation of the banking sector and in June 2009 when the Group repaid preference shares which were issued to HM Treasury as part of GAPS, and a rights issue and liability management exercise was completed in December.

The Group is also able to raise Tier 2 capital by issuing subordinated liabilities. The cost and availability of subordinated liability finance are influenced by credit ratings of both the Group and the UK’s sovereign rating. A reduction in these ratings could increase the interest rate payable and could reduce market access.

The Group has in issue enhanced capital notes (ECNs) which will convert to core tier 1 capital in the event that Group’s published core tier 1 ratio (as defined by the FSA in May 2009) falls below 5 per cent.

MONITORING

Capital is actively managed at an appropriate level of frequency and regulatory ratios are a key factor in the Group’s budgeting and planning processes with updates of expected ratios reviewed regularly during the year by the group asset and liability committee. Capital raised takes account of expected growth and currency of risk assets. Capital policies and procedures are subject to independent oversight. Regular reporting of actual and projected ratios is made to the senior asset and liability committee and to the group asset and liability committee. As part of this reporting any guidance to the market is regularly reviewed.


OPERATING AND FINANCIAL REVIEW AND PROSPECTS	AUDITED INFORMATION


CAPITAL RATIOS
	2009 £m			2008 £m

Core tier 1
Ordinary share capital and reserves		44,275			9,573
Regulatory post-retirement benefit adjustments		434			435
Available-for-sale revaluation reserve		914			2,982
Cash flow hedging reserve		305			15
Other items		231			(108	)

		46,159			12,897
Less deductions from core tier 1
Goodwill and other intangible assets		(5,779	)		(2,256	)
Other deductions		(445	)		(1,099	)

Core tier 1 capital		39,935			9,542

Perpetual non-cumulative preference shares

Preference share capital		2,639			1,966

Innovative tier 1 capital instruments
Preferred securities		4,956			3,169
Less: restriction in amount eligible		—			(976	)

Total tier 1 capital		47,530			13,701

Tier 2
Available-for-sale revaluation reserve in respect of equities		221			8
Undated subordinated debt		2,575			5,189
Innovative capital restricted from tier 1		—			976
Eligible provisions		2,694			21
Dated subordinated debt		20,068			5,091
Deductions from tier 2
Other deductions		(445	)		(1,099	)

Total tier 2 capital		25,113			10,186

Supervisory deductions
Unconsolidated investments – life		(10,015	)		(4,208	)
Unconsolidated investments – other		(1,551	)		(550	)

Total supervisory deductions		(11,566	)		(4,758	)

Total capital resources		61,077			19,129

Risk-weighted assets (unaudited)		493,307			170,490
Ratios (unaudited)
Core tier 1 ratio		8.1	%		5.6	%
Tier 1 capital ratio		9.6	%		8.0	%

Total capital ratio		12.4	%		11.2	%


OPERATING AND FINANCIAL REVIEW AND PROSPECTS	AUDITED INFORMATION

TIER 1 CAPITAL

Core tier 1 capital increased by £30.4 billion largely reflecting the issuance of share capital during the year and retained profits.

Tier 1 capital increased by £33.8 billion principally as a result of the increase in core tier 1 capital. The remainder of the increase reflects the inclusion of HBOS tier 1 instruments, an increase in innovative securities of £2 billion as part of a liability management exercise to exchange upper tier 2 debt and a further issuance of £1.2 billion innovative securities in December 2009. This increase is offset by the effects of the offer of enhanced capital notes during December 2009; as part of the Group’s recapitalisation and exit from GAPS, certain preference shares and preferred securities were exchanged for enhanced capital notes included within tier 2 capital.

MOVEMENTS IN CORE TIER 1 AND TIER 1 CAPITAL DURING THE YEAR


	Core tier 1 £m			Tier 1 £m

As at 31 December 2008		9,542			13,701
Profit attributable to ordinary shareholders		2,827			2,827
Issue of ordinary shares		29,139			29,139
Recognition of HBOS tier 1 capital instruments		—			5,653
Movement in goodwill and other intangible assets		(2,526	)		(2,526	)
Movement in tier 1 securities relating to ECNs exchange offer		—			(5,447	)
Innovative securities exchange		—			1,959
Innovative issuance		—			1,235
Other movements		953			989

As at 31 December 2009		39,935			47,530

TIER 2 CAPITAL

Tier 2 capital has increased in the period by £14.9 billion, largely due to the acquisition of HBOS. The liability management exercises undertaken reduced tier 2 capital and increased tier 1 capital. The enhanced capital notes exchange offer completed during 2009 resulted in the exchange of certain existing tier 1 and tier 2 securities for tier 2 notes valued at £7.2 billion for regulatory purposes. Under certain specified conditions, these securities would convert to ordinary share capital and increase core tier 1 capital.

SUPERVISORY DEDUCTIONS

Supervisory deductions mainly consist of investments in subsidiary undertakings that are not within the banking group for regulatory purposes. These investments are primarily the Scottish Widows and Clerical Medical life and pensions businesses.

RISK WEIGHTED ASSETS – (unaudited)

The following table sets out the Group’s risk weighted assets that primarily arise in its banking businesses.

ANALYSIS OF RISK WEIGHTED ASSETS


As at 31 December	2009 (unaudited) £bn		2008 (unaudited) £bn

Credit risk		452.1		149.6
Operational risk		25.3		12.3
Market and counterparty risk		15.9		8.5

		493.3		170.4

Divisional analysis
Retail		128.6		49.7
Wholesale		286.0		106.8
Insurance		1.1		0.1
Wealth and International		63.2		11.0
Group Operations and Central items		14.4		2.8

		493.3		170.4

Risk-weighted assets increased by £322.9 billion to £493.3 billion, principally as a result of the acquisition of HBOS plc which had risk-weighted assets of £328.0 billion at 31 December 2008. Subsequent to the acquisition, deteriorating economic conditions have led to increased average risk weightings. This has been offset, primarily within Wholesale, by a reduction in exposures due to impairments and asset run-off, and movements due to currency retranslations.


OPERATING AND FINANCIAL REVIEW AND PROSPECTS	AUDITED INFORMATION

FINANCIAL AND PRUDENTIAL REGULATORY REPORTING, DISCLOSURE AND TAX RISK

DEFINITION

The risk of reputational damage, loss of investor confidence and/or financial loss arising from the adoption of inappropriate accounting policies, ineffective controls over financial, prudential regulatory and tax reporting, failure to manage the associated risks of changes in taxation rates, law, ownership or corporate structure and the failure to disclose information about the Group on a timely basis.

RISK APPETITE

The risk appetite is set by the board and reviewed on an annual basis. It includes complying with disclosure requirements within prescribed timescales and avoiding the need for restatement of published financial and prudential regulatory reporting, publicly disclosed information or tax reporting.

EXPOSURE

Exposure represents the sufficiency of the Group’s policies and procedures to maintain adequate books and records to support statutory, prudential and tax reporting, to prevent and detect financial reporting fraud and to manage the Group’s tax position.

MITIGATION

The Group maintains a system of internal controls, which is designed to be consistently applied and enable the preparation and disclosure of financial reporting, prudential regulatory reporting and tax returns in accordance with International Financial Reporting Standards, statutory and regulatory requirements. The system of internal control is designed to ensure that accounting policies are consistently applied, transactions are recorded and undertaken in accordance with delegated authorities and that assets are safeguarded and liabilities are properly recorded.

MONITORING

The Group has in place a disclosure committee whose responsibility is to review all significant disclosures made by the Group and to assist the group chief executive and group finance director fulfil their responsibilities under the Listing Rules and regulations emanating from the US Sarbanes-Oxley Act of 2002. A programme of work is undertaken and is designed to support an annual assessment of the effectiveness of internal controls over financial reporting, in accordance with the requirements of section 404 of the US Sarbanes-Oxley Act. It also has in place an assurance mechanism over its prudential regulatory reporting; additionally, monitoring activities are designed to identify and maintain tax liabilities and to assess the impact of emerging regulation and legislation on financial, prudential regulatory and tax reporting.

LIFE INSURANCE BUSINESSES

At 31 December 2009, the principal subsidiaries involved in the Group’s life insurance operations were Scottish Widows plc (Scottish Widows) and Clerical Medical Investment Group Limited (Clerical Medical). These subsidiaries hold the only large with-profit funds managed by Lloyds Banking Group.

BASIS OF DETERMINING REGULATORY CAPITAL OF THE LIFE INSURANCE BUSINESSES

AVAILABLE CAPITAL RESOURCES

Available capital resources represent the excess of assets over liabilities calculated in accordance with detailed regulatory rules issued by the FSA. Additional rules may apply depending on the nature of the fund, as detailed below.

Statutory basis. Assets are generally valued on a basis consistent with that used for accounting purposes (with the exception that, in certain cases, the value attributed to assets is limited) and which follows a market value approach where possible. Liabilities are calculated using a projection of future cash flows after making prudent assumptions about matters such as investment return, expenses and mortality. Discount rates used to value the liabilities are set with reference to the risk adjusted yields on the underlying assets in accordance with the FSA rules. Other assumptions are based on recent actual experience, supplemented by industry information where appropriate. The assessment of liabilities does not include future bonuses for with-profits policies that are at the discretion of management, but does include a value for policyholder options likely to be exercised.

‘Realistic’ basis. The FSA requires each life insurance company which contains a with-profit fund in excess of £500 million to also carry out a ‘realistic’ valuation of that fund. The Group has two such funds; one within Scottish Widows and one within Clerical Medical. The word ‘realistic’ in this context reflects the terminology used for reporting to the FSA and is an assessment of the financial position of a with-profits fund calculated under a prescribed methodology.

The valuation of with-profits assets in a with-profits fund on a realistic basis differs from the valuation on a statutory basis as, in respect of non-profits business written in a with-profits fund (a relatively small amount of business in the case of Scottish Widows and Clerical Medical), it includes the present value of the anticipated future release of the prudent margins for adverse deviation. The realistic valuation uses the market value of assets without the limit affecting the statutory basis noted above.

The realistic valuation of liabilities is carried out using a stochastic simulation model which values liabilities on a basis consistent with tradable market option contracts (a ‘market-consistent’ basis). The model takes account of policyholder behaviour on a best-estimate basis and includes an adjustment to reflect future uncertainties where the exercise of options by policyholders might increase liabilities. Further details regarding the stochastic simulation model are given in the section entitled Options and guarantees on page 96.

REGULATORY CAPITAL REQUIREMENTS

Each life insurance company must retain sufficient capital to meet the regulatory capital requirements mandated by the FSA; the basis of calculating the regulatory capital requirement is given below. Except for Scottish Widows and Clerical Medical, the regulatory capital requirement is a combination of amounts held in respect of actuarial reserves, sums at risk and maintenance expenses (the Long-Term Insurance Capital Requirement) and amounts required to cover various stress tests. The regulatory capital requirement is deducted from the available capital resources to give ‘statutory excess capital’.


OPERATING AND FINANCIAL REVIEW AND PROSPECTS	AUDITED INFORMATION

For Scottish Widows and Clerical Medical, no amount is required to cover the impact of stress tests on the actuarial reserves. However, a further test is required in respect of the with-profit funds, which compares the level of ‘realistic excess capital’ to the ‘statutory excess capital’ of each with-profit fund. In circumstances where the ‘realistic excess capital’ position is less than ‘statutory excess capital’, the company is required to hold additional capital to cover the shortfall, but only to the extent it exceeds the value, calculated in a prescribed way, of internal transfers from the with-profit fund. Any additional capital requirement under this test is referred to as the With-Profits Insurance Capital Component. The ‘realistic excess capital’ is calculated as the difference between realistic assets and realistic liabilities of the with-profit fund with a further deduction to cover various stress tests.

The determination of realistic liabilities of the with-profit funds includes the value of internal transfers expected to be made from each with-profit fund to the non-profit fund held within the same life insurance entity. These internal transfers include charges on policies where the associated costs are borne by the non-profit fund. The With-Profits Insurance Capital Component may be reduced by the value, calculated in the stress test scenario, of these internal transfers, but only to the extent that credit has not been taken for the value of these charges in deriving actuarial reserves for the relevant non-profit fund.

CAPITAL STATEMENT

The following table provides more detail regarding the capital resources available to meet regulatory capital requirements in the life insurance businesses. The figures quoted are as disclosed in the Group’s UK annual report and accounts and were based on management’s expectations in advance of completion of the annual financial returns to the FSA; these annual financial returns have since been completed and submitted without material change to the numbers set out below. The figures allowed for a transfer of £261 million and an anticipated transfer of £147 million from long-term funds to the UK life shareholder funds as at 31 December 2009.

Following the acquisition of the life companies within HBOS plc, the format of the capital position statement has been revised to accommodate the reporting of all life assurance businesses within the Group.

CAPITAL RESOURCES

Scottish Widows
With Profit Fund
£m

Clerical Medical
With Profit Fund
£m

UK non-profit
funds
£m

UK life
shareholder
funds
£m

Overseas life
business
£m

Total
life business
£m

As at 31 December 2009

Shareholders’ funds:

Held outside the long-term funds

—

1,048

651

1,699

Held within the long-term funds

—

8,011

—

405

8,416

Total shareholders’ funds

—

8,011

1,048

1,056

10,115

Adjustments onto a regulatory basis:

Unallocated surplus within insurance business

310

772

—

1,082

Value of in-force business

—

(5,513

)

—

(793

)

(6,306

)

Other differences between IFRS and regulatory valuation of assets and liabilities

—

253

(154

)

108

207

Estimated share of ‘realistic’ liabilities consistent with the FSA reporting treatment

(407

)

(40

)

—

(447

)

Qualifying loan capital

—

1,165

—

1,165

Support arrangement assets

354

—

(354

)

—

Available capital resources

257

732

2,397

2,059

371

5,816


	Scottish Widows With Profit Fund £m		UK non-profit funds £m		UK life shareholder funds £m		Overseas life business £m		Total life business £m

As at 31 December 2008 (statutory basis)
Shareholders’ funds
Held outside the long-term funds	—		—		865		2		867
Held within the long-term funds	—		3,762		—		13		3,775
Total shareholders’ funds	—		3,762		865		15		4,642
Adjustments onto a regulatory basis:
Unallocated surplus within insurance business	293		—		—		—		293
Value of in-force business	—		(1,893	)	—		—		(1,893	)
Other differences between IFRS and regulatory valuation of assets and liabilities	—		25		(317	)	(4	)	(296	)
Estimated share of ‘realistic’ liabilities consistent with the FSA reporting treatment	(406	)	—		—		—		(406	)
Qualifying loan capital	—		—		604		—		604
Support arrangement assets	371		(371	)	—		—

Available capital resources	258		1,523		1,152		11		2,944

Available capital resources for with-profit funds are presented in the table on a ‘realistic’ basis.


OPERATING AND FINANCIAL REVIEW AND PROSPECTS	AUDITED INFORMATION

FORMAL INTRA-GROUP CAPITAL ARRANGEMENTS

Scottish Widows has a formal arrangement with one of its subsidiary undertakings, Scottish Widows Unit Funds Limited, whereby the subsidiary company can draw down capital from Scottish Widows to finance new business which is reinsured from the parent to its subsidiary. Scottish Widows has also provided subordinated loans to its fellow group undertaking Scottish Widows Bank plc.

CONSTRAINTS OVER AVAILABLE CAPITAL RESOURCES

SCOTTISH WIDOWS

Scottish Widows was created following the demutualisation of Scottish Widows Fund and Life Assurance Society in 2000. The terms of the demutualisation are governed by a Court-approved Scheme of Transfer (the Scheme) which, inter alia, created a With Profit Fund and a Non-Participating Fund and established protected capital support for the with-profits policyholders in existence at the date of demutualisation. Much of that capital support is held in the Non-Participating Fund and, as such, the capital held in that fund is subject to the constraints noted below.

Requirement to maintain a Support Account: The Scheme requires the maintenance of a ‘Support Account’ within the Non-Participating Fund. The quantum of the Support Account is calculated with reference to the value of assets backing current with-profits policies which also existed at the date of demutualisation and must be maintained until the value of these assets reaches a minimum level. Assets can only be transferred from the Non-Participating Fund if the value of the remaining assets in the fund exceeds the value of the Support Account. Scottish Widows has obtained from the FSA permission to include the value of the Support Account (or, if greater, the excess of realistic liabilities for business written before demutualisation over the relevant assets) in assessing the realistic value of assets available to the With Profit Fund. At 31 December 2009, the estimated value of surplus admissible assets in the Non-Participating Fund was £1,627 million (31 December 2008: £1,523 million) and the estimated value of the Support Account was £222 million (31 December 2008: £200 million).

Further Support Account: The Further Support Account is an extra tier of capital support for the with-profits policies in existence at the date of demutualisation. The Scheme requires that assets can only be transferred from the Non-Participating Fund if the economic value of the remaining assets in the fund exceeds the aggregate of the Support Account and Further Support Account. Unlike the Support Account test, the economic value used for this test includes both admissible assets and the present value of future profits of business written in the Non-Participating Fund or by any subsidiaries of that fund. The balance of the Further Support Account is expected to reduce to nil by the year 2030. At 31 December 2009, the estimated net economic value of the Non-Participating Fund and its subsidiaries for the purposes of this test was £3,823 million (31 December 2008: £3,605 million) and the estimated combined value of the Support Account and Further Support Account was £2,495 million (31 December 2008: £2,582 million).

Other restrictions in the Non-Participating Fund: In addition to the policies which existed at the date of demutualisation, the With Profit Fund includes policies which have been written since that date. As a result of statements made to policyholders that investment policy will usually be the same for both types of business, there is an implicit requirement to hold additional regulatory assets in respect of the business written after demutualisation. The estimated amount required to provide such support at 31 December 2009 is £132 million (31 December 2008: £171 million). Scottish Widows has obtained from the FSA permission to include the value of this support in assessing the realistic value of assets available to the With Profit Fund. There is a further test requiring that no amounts can be transferred from the Non-Participating Fund of Scottish Widows unless there are sufficient assets within the Long Term Fund to meet both policyholders’ reasonable expectations in light of liabilities in force at a year end and the new business expected to be written over the following year.

CLERICAL MEDICAL

The surplus held in the Clerical Medical With Profit Fund can only be applied to meet the requirements of the fund itself or distributed accordingly to the prescribed rules of the fund. Shareholders are entitled to an amount not exceeding one ninth of the amount distributed to policyholders in the form of bonuses. The use of capital within the fund is also subject to the terms of the scheme of demutualisation effected in 1996 and the conditions contained in the Principles and Practices of Financial Management of the fund. Capital within the Clerical Medical Non-Profit Fund is available to meet the With Profit Fund requirements.

OTHER LIFE INSURANCE BUSINESSES

Except as described above capital held in UK non-profit funds is potentially transferable to other parts of the Group, subject to meeting the regulatory requirements of these businesses. There are no prior arrangements in place to allow capital to move freely between life insurance entities or other parts of the Group.

Overseas life business includes several life companies outside the UK, including Germany and Ireland. In all cases the available capital resources are subject to local regulatory requirements, and transfer to other parts of the Group is subject to additional complexity surrounding the transfer of capital from one country to another.


OPERATING AND FINANCIAL REVIEW AND PROSPECTS	AUDITED INFORMATION

MOVEMENTS IN REGULATORY CAPITAL

The movements in the Group’s available capital resources in the life business can be analysed as follows:

MOVEMENTS IN AVAILABLE CAPITAL RESOURCES


	Scottish Widows With Profit Fund £m		Clerical Medical With Profit Fund £m	UK non-profit funds £m		UK life shareholder funds £m		Overseas life business £m		Total life business £m

As at 31 December 2008	258		—	1,523		1,152		11		2,944
Acquisition of life businesses	—		511	1,205		1,342		250		3,308
Changes in estimations and in
demographic assumptions used to
measure life assurance liabilities	—		19	(208	)	43		36		(110	)
Changes in regulatory requirements	—		—	—		—		—		—
Dividends and capital transfers	—		—	(438	)	(453	)	(14	)	(905	)
Change in support arrangements	(17	)	—	17		—		—		—
New business and other factors	16		202	298		(25	)	88		579

As at 31 December 2009	257		732	2,397		2,059		371		5,816

WITH-PROFIT FUNDS

Available capital in the Scottish Widows With Profit Fund has decreased from £258 million at 31 December 2008 to an estimated £257 million at 31 December 2009.

Available capital in the Clerical Medical With Profit Fund has increased from £511 million at acquisition to an estimated £732 million at 31 December 2009.

UK NON-PROFIT FUNDS

Available capital in the UK non-profit funds has increased from £1,523 million at 31 December 2008 to an estimated £2,397 million at 31 December 2009. The acquisition of Clerical Medical resulted in a £1,205 million increase. Further increases due to new business were offset by changes in assumptions and actual and proposed transfers to the UK life shareholders funds.

UK LIFE SHAREHOLDER FUNDS

Available capital in the UK life shareholder funds has increased from £1,152 million at 31 December 2008 to an estimated £2,059 million at 31 December 2009. The acquisition of Clerical Medical resulted in a £1,342 million increase. Redemption of subordinated debt (shown within dividends and capital transfers) has been partly offset by actual and proposed transfers from the long term funds.

OVERSEAS LIFE BUSINESS

The acquisition of Clerical Medical business resulted in a £250 million increase. Further increases were due to new business and changes in assumptions.


OPERATING AND FINANCIAL REVIEW AND PROSPECTS	AUDITED INFORMATION

Analysis of policyholder liabilities reported in the balance sheet in respect of the Group’s life insurance business is as follows. With-profit fund liabilities are valued in accordance with FRS 27.

ANALYSIS OF POLICYHOLDER LIABILITIES


	Scottish Widows With Profit Fund £m	Clerical Medical With Profit Fund £m	UK non-profit funds £m	Overseas life business £m	Total life business £m

As at 31 December 2009
With-profit fund liabilities	13,347	10,225	5	—	23,577
Unit-linked business (excluding that accounted for as non-participating investment contracts)	—	—	32,816	6,864	39,680
Other life insurance business	—	—	11,449	183	11,632
Insurance and participating investment contract liabilities	13,347	10,225	44,270	7,047	74,889
Non-participating investment contract liabilities	—	—	45,328	1,020	46,348

Total policyholder liabilities	13,347	10,225	89,598	8,067	121,237


	Scottish Widows With Profit Fund £m	UK non-profit funds £m	Total life business £m

As at 31 December 2008
With-profit fund liabilities	13,293	—	13,293
Unit-linked business (excluding that accounted for as non-participating investment contracts)	—	11,480	11,480
Other life insurance business	—	8,364	8,364
Insurance and participating investment contract liabilities	13,293	19,844	33,137
Non-participating investment contract liabilities	—	14,243	14,243

Total policyholder liabilities	13,293	34,087	47,380

CAPITAL SENSITIVITIES

SHAREHOLDERS’ FUNDS

Shareholders’ funds outside the long-term business fund, other than those used to match regulatory requirements, are mainly invested in assets that are less sensitive to market conditions.

WITH-PROFIT FUNDS

The with-profit realistic liabilities and the available capital for the with-profit funds are sensitive to both market conditions and changes to a number of non-economic assumptions that affect the valuation of the liabilities of the fund. The available capital resources (and capital requirements) are sensitive to the level of the stock market, with the position worsening at low stock market levels as a result of the guarantees to policyholders increasing in value. However, the exposure to guaranteed annuity options increases under rising stock market levels. An increase in the level of equity volatility implied by the market cost of equity put options also increases the market consistent value of the options given to policyholders and worsens the capital position.

The most critical non-economic assumptions are the level of take-up of options inherent in the contracts (higher take-up rates are more onerous), mortality rates (lower mortality rates are generally more onerous) and lapses prior to dates at which a guarantee would apply (lower lapse rates are generally more onerous where guarantees are in the money). The sensitivity of the capital position and capital requirements of the with-profit funds is partly mitigated by the actions that can be taken by management.

OTHER LONG-TERM FUNDS

Outside the with-profit funds, assets backing actuarial reserves in respect of policyholder liabilities are invested so that the values of the assets and liabilities are broadly matched. The most critical non-economic assumptions are mortality rates in respect of annuity business written (lower mortality rates are more onerous). Reinsurance arrangements are in place to reduce the Group’s exposure to deteriorating mortality rates in respect of life insurance contracts. In addition, poor cost control would gradually depreciate the available capital and lead to an increase in the valuation of the liabilities (through an increased allowance for future costs).

Assets held in excess of those backing actuarial reserves are invested across a range of investment categories including fixed interest securities, equities, properties and cash. The mix of investments is determined in line with the policy of Lloyds Banking Group to minimise the working capital (defined as available capital less minimum required capital) required to ensure all capital requirements continue to be met under a range of stress tests.


OPERATING AND FINANCIAL REVIEW AND PROSPECTS	AUDITED INFORMATION

OPTIONS AND GUARANTEES

The Group has sold insurance products that contain options and guarantees, both within the with-profit funds and in other funds.

OPTIONS AND GUARANTEES WITHIN THE WITH-PROFIT FUNDS

The most significant options and guarantees provided from within the with-profit funds are in respect of guaranteed minimum cash benefits on death, maturity, retirement or certain policy anniversaries, and guaranteed annuity options on retirement for certain pension policies.

For those policies written in Scottish Widows pre-demutualisation containing potentially valuable options and guarantees, under the terms of the Scheme a separate memorandum account was set up within the With Profit Fund of Scottish Widows called the Additional Account which is available, inter alia, to meet any additional costs of providing guaranteed benefits in respect of those policies. The Additional Account had a value at 31 December 2009 of £1.6 billion (2008: £2.0 billion). The eventual cost of providing benefits on policies written both pre and post demutualisation is dependent upon a large number of variables, including future interest rates and equity values, demographic factors, such as mortality, and the proportion of policyholders who seek to exercise their options. The ultimate cost will therefore not be known for many years.

As noted above, under the realistic capital regime of the FSA, the liabilities of the with-profit funds are valued using a market-consistent stochastic simulation model. This model is used in order to place a value on the options and guarantees which captures both their intrinsic value and their time value.

The most significant economic assumptions included in the model are:


–	Risk-free yield. The risk-free yield is defined as spot yields derived from the UK gilt yield curve.

–	Investment volatility. The calibration of the stochastic simulation model uses implied volatilities of derivatives where possible, or historical observed volatility where it is not possible to observe meaningful prices. For example, as at 31 December 2009, the 10 year equity-implied at-the-money assumption was set at 26.6 per cent (31 December 2008: 34.6 per cent). The assumption for property volatility was 15 per cent (31 December 2008: 15 per cent). The volatility of interest rates has been calibrated to the implied volatility of swaptions which was broadly 15 per cent (31 December 2008: 16 per cent).

The model includes a matrix of the correlations between each of the underlying modelled asset types. The correlations used are consistent with long-term historical returns. The most significant non-economic assumptions included in the model are management actions (in respect of investment policy and bonus rates), guaranteed annuity option take-up rates and assumptions regarding persistency (both of which are based on recent actual experience and include an adjustment to reflect future uncertainties where the exercise of options by policyholders might increase liabilities), and assumptions regarding mortality (which are based on recent actual experience and industry tables).

OPTIONS AND GUARANTEES OUTSIDE THE WITH-PROFIT FUNDS

Certain personal pension policyholders in Scottish Widows, for whom reinstatement to their occupational pension scheme was not an option, have been given a guarantee that their pension and other benefits will correspond in value to the benefits of the relevant occupational pension scheme. The key assumptions affecting the ultimate value of the guarantee are future salary growth, gilt yields at retirement, annuitant mortality at retirement, marital status at retirement and future investment returns. There is currently a provision, calculated on a deterministic basis, of £64 million (31 December 2008: £65 million) in respect of those guarantees. If future salary growth were 0.5 per cent per annum greater than assumed, the liability would increase by some £3 million. If yields were 0.5 per cent lower than assumed, the liability would increase by some £11 million.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

INVESTMENT PORTFOLIO, MATURITIES, DEPOSITS, SHORT-TERM BORROWINGS

Trading securities and other financial assets at fair value through profit or loss; available-for-sale financial assets; and debt securities classified as loans and receivables

The following table sets out the book values and valuations of the Group’s debt securities, treasury and other bills and equity shares at 31 December for each of the three years indicated.



	2009 Book value £m			2009 Valuation £m		2008 Book value £m			2008 Valuation £m		2007 Book value £m		2007 Valuation £m

Trading securities and other financial assets at fair value through profit or loss
US treasury and US government agencies		482			482		258			258		38		38
Other government securities		19,479			19,479		7,106			7,106		4,872		4,872
Other public sector securities		706			706		18			18		—		—
Bank and building society certificates of deposit		2,034			2,034		433			433		811		811
Mortgage-backed securities		520			520		369			369		157		157
Other asset-backed securities		2,890			2,890		1,342			1,342		1,927		1,927
Corporate and other debt securities		20,668			20,668		11,656			11,656		17,171		17,171
Equity shares		84,150			84,150		23,274			23,274		31,746		31,746

		130,929			130,929		44,456			44,456		56,722		56,722

Available-for-sale financial assets
US treasury and US government agencies		2,898			2,898		358			358		319		319
Other government securities		5,771			5,771		510			510		—		—
Other public sector securities		31			31		12			12		5		5
Bank and building society certificates of deposit		1,014			1,014		9,602			9,602		1,825		1,825
Mortgage-backed securities		4,781			4,781		5,700			5,700		6,050		6,050
Other asset-backed securities		7,640			7,640		8,092			8,092		4,071		4,071
Corporate and other debt securities		19,904			19,904		2,183			2,183		6,270		6,270
Equity shares		2,031			2,031		41			41		29		29
Treasury bills and other bills		2,532			2,532		29,209			29,209		1,627		1,627

		46,602			46,602		55,707			55,707		20,196		20,196

Debt securities classified as loans and receivables
Mortgage-backed securities		13,322			12,799		478			402		—		—
Other asset-backed securities		17,137			15,998		540			192		—		—
Corporate and other debt securities		2,623			3,110		3,531			3,337		—		—

		33,082			31,907		4,549			3,931		—		—
Allowance for impairment losses		(430	)		—		(133	)		—		—		—

		32,652			31,907		4,416			3,931		—		—

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

MATURITIES AND WEIGHTED AVERAGE YIELDS OF INTEREST-BEARING SECURITIES

The weighted average yield for each range of maturities is calculated by dividing the annualised interest income prevailing at 31 December 2009 by the book value of securities held at that date.

Maturing within
one year

Maturing after one but
within five years

Maturing after five but
within ten years

Maturing after
ten years

Amount
£m

Yield
%

Amount
£m

Yield
%

Amount
£m

Yield
%

Amount
£m

Yield
%

Trading securities and other financial assets at fair value through profit or loss

US treasury and US government agencies

2.5

207

3.2

4.2

100

5.2

Other government securities

3,123

1.2

4,097

3.0

3,917

3.6

8,342

3.8

Other public sector securities

6.4

213

4.2

116

5.2

349

5.0

Bank and building society certificates of deposit

2,034

0.1

—

Mortgage-backed securities

4.4

4.6

5.0

433

5.4

Other asset-backed securities

—

130

5.7

271

6.2

2,489

3.8

Corporate and other debt securities

2,458

1.1

4,169

2.6

4,356

5.1

9,685

4.6

7,740

8,836

8,805

21,398

Available-for-sale financial assets

US treasury and US government agencies

4.6

6.8

2,159

3.6

731

5.8

Other government securities

0.4

327

4.6

2,007

3.5

3,354

3.7

Other public sector securities

9.4

—

Bank and building society certificates of deposit

983

0.7

0.3

—

Mortgage-backed securities

386

0.7

3,419

2.3

841

3.2

135

3.3

Other asset-backed securities

705

0.8

3,236

1.4

3,570

1.4

129

2.4

Corporate and other debt securities

2,694

2.0

12,862

1.2

4,040

3.4

308

5.5

Treasury bills

2,531

0.2

1.5

—

7,415

19,882

12,617

4,657

Debt securities classified as loans and

receivables

Mortgage-backed securities

1.8

403

1.2

1,582

1.1

11,322

0.9

Other asset-backed securities

0.1

2,747

0.8

4,710

0.7

9,653

0.7

Corporate and other debt securities

645

0.5

1,331

0.8

210

8.5

437

1.8

687

4,481

6,502

21,412

The Group’s investment holdings at 31 December 2009 include £15,228 million due from the UK Government and its agencies.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

MATURITY ANALYSIS AND INTEREST RATE SENSITIVITY OF LOANS AND ADVANCES TO CUSTOMERS AND BANKS AS AT 31 DECEMBER 2009

The following table analyses the maturity profile and interest rate sensitivity of loans by type on a contractual repayment basis as at 31 December 2009.

All amounts are before deduction of impairment allowances. Demand loans are included in the ‘maturing in one year or less’ category.

Maturing in one
year or less
£m

Maturing after
one but within
five years
£m

Maturing after
five years
£m

Total
£m

Domestic

Loans and advances to banks

26,594

1,604

1,277

29,475

Loans and advances to customers:

– Mortgages

8,296

34,683

301,172

344,151

– Other personal lending

22,359

13,686

4,745

40,790

– Property companies

24,629

22,811

16,629

64,069

– Financial, business and other services

25,632

20,873

11,627

58,132

– Transport, distribution and hotels

10,726

7,474

4,513

22,713

– Manufacturing

4,840

5,158

1,482

11,480

– Other

11,874

9,563

8,157

29,594

Total domestic

134,950

115,852

349,602

600,404

Foreign

31,378

19,148

26,350

76,876

Total loans

166,328

135,000

375,952

677,280

Of which:

– Fixed interest rate

34,989

40,159

122,688

197,836

– Variable interest rate

131,339

94,841

253,264

479,444

DEPOSITS

The following tables show the details of the Group’s average customer deposits in each of the past three years.


	2009 Average balance £m		2009 Average rate %		2008 Average balance £m		2008 Average rate %		2007 Average balance £m		2007 Average rate %

Non-interest bearing demand deposits		6,902		—		3,793		—		3,899		—
Interest-bearing demand deposits		89,603		0.43		47,985		1.28		46,124		1.80
Savings deposits		234,273		1.19		84,756		3.60		77,834		3.90
Time deposits		33,447		3.66		18,272		6.94		18,090		6.73

Total average deposits		364,225		1.21		154,806		3.19		145,947		3.48

The analysis of the Group’s average customer deposits for 2009 between domestic and foreign offices is as follows:

Domestic

Foreign

Total

Average
balance
£m

Average
rate
%

Average
balance
£m

Average
rate
%

Average
balance
£m

Average
rate
%

Non-interest bearing demand deposits

6,253

—

649

—

6,902

—

Interest-bearing demand deposits

88,567

0.44

1,036

0.19

89,603

0.43

Savings deposits

229,234

1.19

5,039

1.33

234,273

1.19

Time deposits

31,908

3.56

1,539

5.59

33,447

3.66

Total deposits

355,962

1.20

8,263

1.88

364,225

1.21

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

CERTIFICATES OF DEPOSIT AND OTHER TIME DEPOSITS

The following table gives details of the Group’s certificates of deposit issued and other time deposits as at 31 December 2009 individually in excess of US $100,000 (or equivalent in another currency) by time remaining to maturity.

3 months
or less
£m

Over 3 months but
within
6 months
£m

Over 6 months
but within
12 months
£m

Over
12 months
£m

Total
£m

Domestic

Certificates of deposit

16,816

1,508

8,701

171

27,196

Time deposits

55,300

6,520

6,868

10,538

79,226

72,116

8,028

15,569

10,709

106,422

Foreign

Certificates of deposit and other time deposits

23,943

3,310

2,265

1,199

30,717

Total

96,059

11,338

17,834

11,908

137,139

SHORT-TERM BORROWINGS

Short-term borrowings are included within the balance sheet captions ‘Deposits by banks’, ‘Customer accounts’ and ‘Debt securities in issue’ and are not identified separately on the balance sheet. The short-term borrowings of the Group consist of overdrafts from banks, securities sold under agreements to repurchase, notes issued as part of lending securitisations, certificates of deposit issued, commercial paper and promissory notes issued and other marketable paper. Securities sold under agreements to repurchase, certificates of deposit issued, commercial paper, securitisation notes and covered bonds are the only significant short-term borrowings of the Group.

The following tables give details of these significant short-term borrowings of the Group for each of the past three years.


	2009 £m			2008 £m			2007 £m

Liabilities in respect of securities sold under repurchase agreements
Balance at the year end		63,112			24,980			733
Average balance for the year		84,684			5,749			3,222
Maximum balance during the year		110,505			24,980			3,728
Average interest rate during the year		2.0	%		4.4	%		4.8	%
Interest rate at the year end		0.5	%		3.7	%		5.2	%

Certificates of deposit issued
Balance at the year end		50,858			33,207			14,995
Average balance for the year		68,318			23,082			24,085
Maximum balance during the year		111,761			33,207			30,467
Average interest rate during the year		1.9	%		4.1	%		5.3	%
Interest rate at the year end		0.8	%		2.2	%		5.6	%

Commercial paper
Balance at the year end		34,900			20,644			17,388
Average balance for the year		36,137			21,520			14,325
Maximum balance during the year		49,451			28,957			17,404
Average interest rate during the year		0.8	%		3.5	%		5.3	%
Interest rate at the year end		0.8	%		0.8	%		2.3	%

Securitisation notes
Balance at the year end		37,557			10,050			12,501
Average balance for the year		43,869			10,182			11,881
Maximum balance during the year		49,766			12,707			13,259
Average interest rate during the year		1.7	%		4.1	%		5.2	%
Interest rate at the year end		1.4	%		2.8	%		5.2	%

Covered bonds
Balance at the year end		27,311			—			—
Average balance for the year		27,601			—			—
Maximum balance during the year		29,408			—			—
Average interest rate during the year		4.4	%		—			—
Interest rate at the year end		4.2	%		—			—

100

M ANAGEMENT AND EMPLOYEES

DIRECTORS AND SENIOR MANAGEMENT

The Group is led by the board comprising executive and non-executive directors with wide experience. The appointment of directors is considered by the nomination and governance committee and approved by the board and, following the provisions in the articles of association, they must stand for election by the shareholders at the first annual general meeting following their appointment and must retire, and may stand for re-election by the shareholders, at least every three years. Independent non-executive directors are appointed for three-year renewable terms, which may, in accordance with the articles of association, be terminated without notice or payment of compensation.

The board usually meets at least nine times a year. It has a programme designed to enable the directors regularly to review corporate strategy and the operations and results of the businesses and discharge their duties within a framework of prudent and effective controls relating to the assessing and managing of risk.

The roles of the chairman, the group chief executive and the board and its governance arrangements, including the schedule of matters specifically reserved to the board for decision, are reviewed annually. The matters reserved to the board for decision include the approval of the annual report and accounts and any other financial statements; the payment of dividends; the long-term objectives of the Group; the strategies necessary to achieve these objectives; the Group’s budgets and plans; significant capital expenditure items; significant investments and disposals; the basis of allocation of capital within the Group; the organisation structure of the Group; the arrangements for ensuring that the Group manages risks effectively; any significant change in accounting policies or practices; the appointment of the Company’s main professional advisers and their fees; and the appointment of senior executives within the organisation and related succession planning.

According to the articles of association, the business and affairs of the Company are managed by the directors, who have delegated to management the power to make decisions on operational matters, including those relating to credit, liquidity and market risk, within an agreed framework.

All directors have access to the services of the company secretary, and independent professional advice is available to the directors at the Group’s expense, where they judge it necessary to discharge their duties as directors.

During 2009, the board, supported by JCA Group, conducted a formal evaluation of the performance of the board, its committees and individual directors. Directors were invited to comment, through questionnaires and interviews, and JCA Group’s report was subsequently reviewed and discussed by the board. Where areas for improvement were identified, action has been agreed.

The chairman’s performance was evaluated by the non-executive directors, taking account of the views of executive directors. This appraisal was discussed at a meeting of the non-executive directors, led by the senior independent director, without the chairman being present.

The remuneration committee reviewed the performance of the chairman, the group chief executive and the other group executive directors, when considering their remuneration arrangements. The nomination and governance committee reviewed the performance of all the directors and the independence of non-executive directors. Like all board committees, the nomination and governance committee and remuneration committee report to the board on their deliberations, including the results of the performance and independence evaluations.

The chairman has a private discussion at least once a year with each director on a wide range of issues affecting the Group, including any matters which the directors, individually, wish to raise.

There is an induction programme for all new directors, which is tailored to their specific requirements and includes visits to individual businesses and meetings with senior management. Major shareholders are also offered the opportunity to meet new non-executive directors. Additional training and updates on particular issues are arranged as appropriate.

The directors and senior management of Lloyds Banking Group plc are:

SIR WINFRIED BISCHOFF ¨¨ † +

Chairman

Joined the board and was appointed chairman on 15 September 2009. Previously chairman of Citigroup Inc. from December 2007 to February 2009. He joined J Henry Schroder & Co in January 1966 and became managing director of Schroders Asia in 1971, group chief executive of Schroders Plc in 1984 and chairman in 1995. Following the acquisition of Schroders’ investment banking business by Citigroup in 2000 he became chairman of Citigroup Europe before being appointed acting chief executive officer of Citigroup in 2007 and subsequently as chairman in the same year. A non-executive director of Eli Lilly and Company, and The McGraw Hill Companies Inc. in the United States, and chairman of the UK Career Academy Foundation. A member of the Akbank International advisory board. Aged 69.

LORD LEITCH ^* ¨ †

Deputy Chairman and Independent Director

Joined the board in 2005 and was appointed deputy chairman in May 2009. Appointed chairman of Scottish Widows in 2007. Held a number of senior and general management appointments in Allied Dunbar, Eagle Star and Threadneedle Asset Management before the merger of Zurich Group and British American Tobacco’s financial services businesses in 1998. Subsequently served as chairman and chief executive officer of Zurich Financial Services United Kingdom, Ireland, Southern Africa and Asia Pacific, until his retirement in 2004. Chairman of the Government’s Review of Skills (published in December 2006) and deputy chairman of the Commonwealth Education Fund. Chairman of BUPA and Intrinsic Financial Services and a non-executive director of Paternoster. Former chairman of the National Employment Panel. Aged 62.

SIR JULIAN HORN-SMITH ¨ † +

Independent Director

Joined the board in 2005. Held a number of senior and general management appointments in Vodafone from 1984 to 2006 including a directorship of that company from 1996, group chief operating officer from 2001 and deputy chief executive officer from 2005. Previously held positions in Philips from 1978 to 1982 and Mars GB from 1982 to 1984. A non-executive director of De La Rue, Digicel Group and Emobile (Japan), a director of Sky Malta, a member of the Altimo International advisory board and a senior advisor to UBS and CVC Capital Partners in relation to the global telecommunications sector. Pro vice-chancellor of University of Bath. A former chairman of The Sage Group. Aged 61.

GLEN R MORENO ¨ † ++

Senior Independent Director

Chairman of Pearson, the media group, since October 2005. He is a director of Fidelity International, one of the world’s largest fund management companies, and chairman of its audit committee. From 1987 to 1991 he was chief executive of Fidelity International. Until mid 2009, he was a non-executive director and senior independent director of Man Group, the FTSE 100 financial services group, and acting chairman of UKFI. He was a group executive at Citigroup; from 1969 to 1987 he held a number of senior positions at the bank in Europe and Asia. Aged 66.

101

MANAGEMENT AND EMPLOYEES

DAVID L ROBERTS ^* ^† +

Independent Director

Executive director, member of the group executive committee and chief executive, International Retail and Commercial Banking at Barclays until December 2006. He joined Barclays in 1983 and held various senior management positions, including chief executive, Personal Financial Services and chief executive, Business Banking. He was also a non-executive director of BAA until June 2006 and a non-executive director of Absa Group Limited, one of South Africa’s largest financial services groups, until October 2006. From 2007 to 2009 he was also the chairman and chief executive of BAWAG P.S.K. AG, the second largest retail bank in Austria. He is currently a member of the strategy board for Henley Business School, non-executive chairman of The Mind Gym and a non-executive director of Campion Willcocks. Aged 47.

T TIMOTHY RYAN, JR ^* ^† +

Independent Director

Joined the board on 1 March 2009. President and chief executive of the Securities Industry and Financial Markets Association. Held a number of senior appointments in JP Morgan Chase from 1993 to 2008 including vice chairman, financial institutions and governments, from 2005. A director of the US-Japan Foundation, Great-West Life Annuity Insurance Co. and Putnam Investments and a member of the Global Markets Advisory Committee for the National Intelligence Council. A former director in the Office of Thrift Supervision, US Department of the Treasury and Koram Bank and the International Foundation of Election Systems. Aged 64.

MARTIN A SCICLUNA ¨ ** +

Independent Director

Joined the board in September 2008. Chairman of Deloitte UK from 1995 to 2007 and a member of the board from 1991 to 2007. Joined the firm in 1973 and was a partner from 1982 until he retired in 2008. A member of the board of directors of Deloitte Touche Tohmatsu from 1999 to 2007. Chairman of Great Portland Estates. A member of the council of Leeds University and a governor of Berkhamsted School. Aged 59.

ANTHONY WATSON CBE ¨ * ††

Independent Director

Joined the board on 2 April 2009. Previously chief executive of Hermes Pensions Management. Held a number of senior appointments in AMP Asset Management from 1991 to 1998. A non-executive director of Hammerson, Vodafone and Witan Investment Trust, a member of the Norges Bank Investment Management advisory board and chairman of Marks and Spencer Pension Trust, Asian Infrastructure Fund and Lincoln’s Inn investment committee. A former chairman of MEPC and of the Strategic Investment Board (Northern Ireland) and a former member of the Financial Reporting Council. Aged 65.

J ERIC DANIELS

Group Chief Executive

Joined the board in 2001 as group executive director, UK retail banking before his appointment as group chief executive in June 2003. Served with Citibank from 1975 and held a number of senior and general management appointments in the USA, South America and Europe before becoming chief operating officer of Citibank Consumer Bank in 1998. Following the Citibank/Travelers merger in 1998, he was chairman and chief executive officer of Travelers Life and Annuity until 2000. Chairman and chief executive officer of Zona Financiera from 2000 to 2001. A non-executive director of BT Group. Aged 58.

ARCHIE G KANE

Group Executive Director Insurance (Board Representative for Scotland)

Joined the group in 1986 and held a number of senior and general management appointments before being appointed to the board in 2000, as group executive director, IT and operations. Appointed group executive director, insurance and investments in October 2003. After some 10 years in the accountancy profession, joined General Telephone & Electronics Corporation in 1980, serving as finance director in the UK from 1983 to 1985. Chairman of the Association of British Insurers and a member of The Takeover Panel. Aged 57.

G TRUETT TATE

Group Executive Director Wholesale

Joined the group in 2003 as managing director, corporate banking before being appointed to the board in 2004. Served with Citigroup from 1972 to 1999, where he held a number of senior and general management appointments in the USA, South America, Asia and Europe. He was president and chief executive officer of eCharge Corporation from 1999 to 2001 and co-founder and vice chairman of the board of Chase Cost Management Inc from 1996 to 2003. A non-executive director of BritishAmerican Business Inc. Chairman of Arora Holdings and a director of Business in the Community and a director and trustee of In Kind Direct. Aged 59.

TIM J W TOOKEY

Group Finance Director

Joined the group in 2006 as deputy group finance director, before being appointed acting group finance director in April 2008. Appointed to the board in October 2008 as group finance director. Previously finance director for the UK and Europe at Prudential from 2002 to 2006 and group finance director of Heath Lambert Group from 1996 to 2002. Prior to that, he spent 11 years at KPMG. Aged 47.

HELEN A WEIR CBE

Group Executive Director Retail

Joined the board in 2004 as group finance director. Appointed as group executive director, UK retail banking in April 2008. Group finance director of Kingfisher from 2000 to 2004. Previously finance director of B&Q, having joined that company in 1995 from McKinsey & Co where she was a senior manager. Began her career at Unilever. Member of the Financial Services Practitioner Panel and the Said Business School Advisory Board. Chair of the British Bankers’ Association Retail Committee. A former member of the Accounting Standards Board. Fellow of the Chartered Institute of Management Accountants. Aged 47.

*Member of the audit committee **Chairman of the audit committee ¨ Member of the nomination and governance committee ¨¨ Chairman of the nomination and governance committee ^† Member of the remuneration committee ^†† Chairman of the remuneration committee + Member of the risk oversight committee ++ Chairman of the risk oversight committee

102

MANAGEMENT AND EMPLOYEES

EMPLOYEES

As at 31 December 2009, the Group employed 107,144 people (on a full-time equivalent basis), compared with 58,756 at 31 December 2008 as a result of the acquisition of HBOS. At 31 December 2009 101,696 employees were located in the UK, 3,582 in continental Europe, 652 in the Americas, and 1,214 in the rest of the world. At the same date, 51,926 people were employed in Retail, 17,489 in Wholesale, 9,989 in Wealth and International, 9,646 in Insurance, 16,037 in Group Operations, and 2,057 in other functions.

The Group is committed to providing employment practices and policies which recognise the diversity of its workforce and ensure equality for employees regardless of sex, race, disability, age, sexual orientation or religious belief.

In the UK, the Group belongs to the major employer groups campaigning for equality for the above groups of staff, including Employers’ Forum on Disability, Employers’ Forum on Age, Stonewall and the Race for Opportunity. The Group’s involvement with these organisations enables it to identify and implement best practice for its staff.

Employees are kept closely involved in major changes affecting them through such measures as team meetings, briefings, internal communications and opinion surveys. There are well established procedures, including regular meetings with recognised unions, to ensure that the views of employees are taken into account in reaching decisions.

Schemes offering share options or the acquisition of shares are available for most staff, to encourage their financial involvement in the Group. Further details are given in Compensation .

The Group has a code of business conduct which applies to all employees. The code as amended from time to time is available to the public on the Company’s website at www.lloydsbankinggroup.com.

MEETINGS WITH SHAREHOLDERS

In order to develop an understanding of the views of major shareholders, the board receives regular reports from the group finance director and the director of investor relations.

The chairman, the group chief executive and the group finance director also have meetings with representatives of major shareholders and the senior independent director also attends some of these meetings. In addition, all directors are invited to attend investment analysts’ and stockbrokers’ briefings on the financial results.

All shareholders are encouraged to attend and participate in the Group’s annual general meeting.

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C OMPENSATION

This is a report made by the board of Lloyds Banking Group plc, on the recommendation of the remuneration committee. It covers the current and proposed components of the remuneration policy and details the remuneration for each serving director during 2009.

REMUNERATION DECISIONS FOR 2009/2010 KEY HIGHLIGHTS

In 2010, our remuneration package will continue to have the same main elements as for 2009:


–	Base salary

–	Annual incentive

–	Long-term incentive plan

In addition, executive directors participate in pension arrangements and receive benefits such as life assurance and medical insurance.

The following key decisions have been made for 2009/2010 remuneration:


–	2010 base salaries for executive directors will continue to be frozen at 2008 levels

–	At his own request the group chief executive waived his award under the annual incentive plan for 2009

–	Awards under the annual incentive plan for 2009 for executive directors amounted to between 150 per cent and 185 per cent of salary

–	All awards under the annual incentive plan are deferred into shares and subject to clawback, with any awards released in 2012

–	LTIP award below historic award levels at a maximum of 275 per cent of salary subject to stretching performance conditions based on EPS, economic profit and the achievement of stretching share price targets

–	Any shares vesting as a result of the element of the LTIP relating to the share price targets must be retained for a further two years post vesting

The approximate make-up of the main components of our new package for executive directors on an expected value basis is shown below:

(FLOW CHART)

(The split in the components in the above chart are for executive directors. Comparable numbers for the group chief executive are: long term incentive 40 per cent, short term incentive 32 per cent and salary 28 per cent)

The 2010 package is designed to encourage a long-term and risk-based focus:


–	Salary is a significant proportion of the total package, avoiding excessive leverage

–	All incentives will be paid on a deferred basis at the end of three years

–	Deferred annual incentive is subject to clawback; ie it is not released when information subsequently comes to light about the performance on which the incentive award is based, which had it been known prior to the determination of the awards would have affected the original award decision

–	A combination of financial and non-financial measures encourages a long-term focus

–	Economic profit, which is a risk-adjusted profit measure, is a core financial target used in both the annual incentive plan and the LTIP

–	Shares resulting from the vesting of the share price performance part of the LTIP must be retained for a further two years post vesting

We believe that these arrangements are well aligned with the Fast’s Code of Practice on Remuneration.

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COMPENSATION

GOVERNANCE AND RISK MANAGEMENT

An essential component of our approach to remuneration is the governance process that underpins it. This ensures that our policy is robustly applied and risk is managed appropriately.

The overarching purpose of the remuneration committee is to consider, agree and recommend to the board an overall remuneration policy and philosophy for the Group that is aligned to its long-term business strategy, its business objectives, its risk appetite and values, and recognizes the interests of relevant stakeholders. The remuneration policy and philosophy covers the whole Group, but the committee pays particular attention to the top management group and those colleagues who perform significant influence functions for the Group and those who could have a material impact on the Group’s risk profile. The committee’s role is to ensure that these colleagues are provided with appropriate incentives to encourage them to enhance the performance of the Group and that they are rewarded for their individual contribution to the success of the organization, whilst ensuring that there is no reward for excessive risk taking.

The committee determines the pensions policy for all colleagues and advises on other major changes to employee benefits schemes. It also agrees the policy for authorising claims for expenses from the group chief executive and the chairman. It has delegated power for settling remuneration for the chairman, the group executive directors, the company secretary and any group employee whose salary exceeds a specified amount, currently £350,000, and/or whose short-term incentive opportunity exceeds £250,000.

The committee monitors the application of the authority delegated to the group executive committee and the divisional remuneration committees to ensure that policies and principles are being fairly and consistently applied. The committee liaises with the risk oversight committee and the risk function in relation to risk-adjusted performance measures.

All the independent non-executive directors are invited to attend meetings if they wish, and they receive the minutes and have the opportunity to comment and have their views taken into account before the committee’s decisions are implemented.

The committee’s terms of reference are available from the company secretary and are displayed on the Group’s website, www.lloydsbankinggroup.com.

The committee met on 13 occasions during 2009, and the members were as follows:


–	Dr Wolfgang Berndt (chairman)

–	Sir Victor Blank (until 14 September 2009)

–	Sir Winfried Bischoff (from 15 September 2009)

–	Mr Philip Green (until 23 October 2009)

–	Sir Julian Horn-Smith

–	Lord Leitch (from 18 May 2009)

–	Sir David Manning (until 2 November 2009)

–	Ms Carolyn McCall (from 23 January 2009 until 31 December 2009)

The committee welcomed Lord Leitch and Ms Carolyn McCall to the committee and Sir Winfried Bischoff, on his appointment as chairman of the Group. We thank Sir Victor Blank, Mr Philip Green, Ms Carolyn McCall and Sir David Manning for their contributions to the committee during 2009 up until their departures from the Group.

We also thank all committee members for their commitment during the last year and attendance at the unprecedented number of meetings.

As at the date of this report, the members of the committee are Mr Watson (chairman), Sir Winfried Bischoff, Sir Julian Horn-Smith, Lord Leitch, Mr Moreno, Mr Roberts and Mr Ryan.

The committee appoints independent consultants to provide advice on specific matters according to their particular expertise. Towers Perrin, Hewitt New Bridge Street and Kepler Associates were retained by the committee during 2009 to advise on various matters relating to executive remuneration. In addition, PricewaterhouseCoopers LLP (PwC) were also retained in 2009 specifically to complete the committee’s project to review executive remuneration arrangements in light of the acquisition of HBOS, given their particular expertise in the remuneration aspects of transactions. This project had commenced in 2008. As PwC are also the auditors to Lloyds Banking Group and to mitigate any threat to audit independence, Kepler Associates continue to be retained as the remuneration committee’s primary independent advisors, and were commissioned to provide comment on PwC’s advice.

In addition to their advice on executive remuneration, during 2009 Towers Perrin also provided market remuneration data as well as other remuneration consulting services to the Group, Hewitt New Bridge Street provided pension consulting services.

During 2009, Alithos Limited continued to provide information on behalf of the committee for the testing of total shareholder return (TSR) (calculated by reference to both dividends and growth in share price) performance conditions for the Group’s long-term incentive schemes.

Mr Daniels, Mrs Risley (Group Human Resources Director) and Ms Kemp (HR Director, Total Reward) provided guidance to the committee (other than for their own remuneration). Mrs Carol Sergeant (Chief Risk Officer) also attended the committee to advise on risk matters.

The remuneration committee ensures that appropriate remuneration and governance arrangements are in place throughout the organisation, with the Group functions providing an oversight role in the development of remuneration policy and practice below the senior executive population. During 2009 as part of the review of compliance with the new FSA Code of Practice on Remuneration and the developing governance environment, the committee reviewed and adopted new terms of reference. In addition divisional remuneration committees were established to ensure a strong oversight from the group remuneration committee into the divisions.

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COMPENSATION

The key developments in the committee’s terms of reference are:


–	Extension of its direct responsibilities to include all those colleagues who perform significant influence functions for the Group and those who could have a material impact on the Group’s risk profile;

–	Formalising the periodic review of the adequacy and effectiveness of the Group’s remuneration policy;

–	Formalising annual reporting to the board on the substance of the Group’s remuneration policy and propose any substantive changes. This report will be supported by independent commentary from the chief risk officer in the context of the Group’s risk appetite and by positive assurance from each group executive director that all remuneration arrangements within their division/function reflect fully the Group’s overall approach to remuneration; and

–	The chief risk officer will attend the remuneration committee for at least two meetings a year.

The role of the divisional remuneration committees is to ensure a strong oversight from the group remuneration committee into the divisions. Specifically:


–	The relevant group executive director will be accountable for the effective implementation of the remuneration policy in their division;

–	The divisional remuneration committee, which will have representation from both divisional and group reward and risk functions, will ensure that the policy is effectively and efficiently executed in the division;

–	Formal positive assurance (through annual reporting) as to how the remuneration policy is being applied across the group will be provided to the group remuneration committee from each divisional remuneration committee; and

–	The divisional remuneration committee will be responsible for ensuring the effective governance of divisional specific remuneration arrangements, especially the design and outcome of short-term incentive/bonus schemes.

We believe our approach is well aligned with the FSA Code of Practice on Remuneration but we will continue to work with the FSA to ensure ongoing compliance and implement changes as appropriate.

DIRECTORS’ REMUNERATION POLICY

The Group’s remuneration policy supports our business strategy, which is based on building long-term relationships with our customers and employees, and managing the financial consequences of our business decisions across the entire economic cycle. The policy is to position base salaries to reflect the relevant market median and the total package is designed to enable upper quartile performance to be rewarded with upper quartile remuneration levels. Overall the policy is designed to ensure that cost effective packages are provided which attract and retain executive directors and senior management of the highest caliber and motivate them to perform to the highest standards. At the same time, the objective is to align individual rewards with the Group’s performance, the interests of its shareholders, and a prudent approach to risk management. In this way we balance the requirements of our various stakeholders: customers, shareholders, employees, and regulators. We believe that this approach is in line with the Association of British Insurers best practice code on remuneration as well as the FSA Code of Practice on Remuneration, as the policy seeks to reward long-term value creation whilst not encouraging excessive risk taking.

We summarise below how each of these policy objectives is met by our remuneration packages.



Policy objective		How achieved

Building long-term relationships		We build relationships with our customers and people rather than viewing them as counterparties in a money-making transaction and are in the process of extending this philosophy across the integrated Group. This means that working for the Lloyds Banking Group should be about more than pay. While our relationship with our people means that we will pay them fairly and competitively, our pay is positioned conservatively against the market and we will not seek to be among the highest payers in the sector. In setting pay for executive directors, we take account of the terms and conditions applying to other employees of the Group.

		Our incentive measures are not just financial. Half of the annual incentive for executives is linked to a scorecard including how they perform against targets that measure how satisfied our customers are, and the extent to which our employees feel engaged with and committed to working for the Lloyds Banking Group, both of which are important foundations of a relationship-based strategy.


Managing the financial consequences of our business through the economic cycle		Economic profit is a key measure by which we manage our business. This measure takes into account the level of capital required to generate profits as well as the risks taken. The same level of profit generated at lower risk results in higher economic profit. Economic profit also measures risk based on an assessment of how business will perform through the economic cycle.

		Therefore, for example, in good times, when default rates on loans are low, we adjust the economic profit measure downwards based on a higher average expected default experience over the economic cycle. This encourages us to avoid business and funding strategies that are only profitable during boom times but turn bad in a recession. Economic profit plays a prominent role in our incentive plans for executives, a role which was further enhanced in 2009, with its inclusion in the long-term incentive plan performance measures.

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COMPENSATION



Policy objective		How achieved

Aligning individual rewards with Group performance and shareholders		The majority of our executives’ pay is linked to stretching performance targets through annual and long-term incentives. Performance measures on the annual incentive are directly aligned to the Group’s financial and non-financial performance.

		Executives are aligned with shareholders through the long-term incentive plan, which pays out based on performance against Group targets over a three year period, and which is paid in shares to further improve alignment with shareholders.

		This objective of aligning the interests of executives with those of shareholders throughout the economic cycle can be seen through the vesting outcomes of awards made to executives under the LTIP plans. In 2009, historic LTIP and option plans from 1999, 2005 and 2006 lapsed as their performance conditions were not met. The same outcome is envisaged for the 2007 LTIP with a performance period ending in 2010.

		Executives are required to build up a holding in Lloyds Banking Group shares of value equal to 1.5 times salary for executive directors (2 times salary for the group chief executive). They are expected to retain 100 per cent of the net-of-tax proceeds of the 2009 LTIP until they reach this target. In addition they are required to retain any shares vesting from the share price performance element of the 2010 LTIP for a further two years post vesting.

		Finally, we operate tough contract provisions whereby no executive has an entitlement to more than 12 months’ notice, compensation on termination is limited to basic salary, and any compensation is paid monthly over 12 months and is mitigated if the executive gets another job. This approach avoids the risk of payment for failure. These requirements are among the toughest in the FTSE 100.

A prudent approach to risk management		Economic profit measures profit relative to the risk taken to generate that profit. Its use in our incentive plans therefore encourages executives to take a prudent approach to risk.

		We also have non-financial measures of performance against risk objectives in the plan for executives, which enables a more rounded assessment of risk-taking behavior.

		For the 2009 annual incentive we increased the alignment to long-term prudent risk management by deferring all of the award. For executive directors any cash incentive earned will be deferred 100 per cent into shares and paid out in 2012. If the performance that led to the incentive is found to be unsustainable during the deferral period, then some or all of the award may be forfeited.

		We pay competitively but not excessively. Our prudent approach to positioning compensation means that we reduce the incentives to take excessive risk for personal gain. This means that we do not attract employees with an extreme appetite for risk.

		We have a robust governance framework with an independent remuneration committee reviewing all compensation decisions. This approach to governance and review is cascaded through the organisation.

Cost effective packages to attract and retain executives		We aim to ensure that the totality of remuneration for executive directors is competitive against our benchmark groups. These groups are other major UK banks, and also the top 20 companies in the FTSE 100, reflecting practices in comparably sized large UK companies across all sectors. We aim to be competitively but conservatively positioned against the market.

		We aim to choose incentive plan targets that are directly linked to the business strategy and priorities. This not only ensures alignment with company performance, but also means that the targets are meaningful to executives and therefore motivating. This ensures that incentive packages are valued by executives and are cost effective.

REMUNERATION FOR 2010

The remuneration committee undertook an extensive review of executive remuneration during late 2008 and into 2009 in light of the HBOS acquisition. That review in conjunction with detailed consultation with shareholders led to the remuneration decisions for 2009. The committee continued to review remuneration during 2009 in light of the FSA Code of Practice on Remuneration, the outcomes of the G20 meeting in September 2009 and Sir David Walker’s review of corporate governance in UK banks and other financial industry entities. This ongoing review process has found that the structure of the remuneration package, in particular the focus on risk through the long-term incentive plan measures and balanced scorecard, was well aligned with emergent best practice in the sector.

The review process has highlighted the concern on how to maintain an appropriately competitive incentive for the senior executives of the Group, following the significant reduction in incentive levels in 2009, whilst recognizing the sensitivity of the operating environment and the fact that the Group was loss making on a combined businesses basis in 2009. Following consultation with shareholders, the remuneration committee is proposing a package for 2010 that is closely based on the structure and principles of 2009, but with an additional LTIP performance measure based on the achievement of stretching share price targets. With the addition of this performance measure, the maximum LTIP award for 2010 will be 275 per cent of salary, still 100 per cent of salary lower than the 2008 maximum level. To achieve maximum vesting of this award, not only will stretching EPS and economic profit targets need to be achieved but also stretching share price targets.

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COMPENSATION

SUMMARY OF REMUNERATION ELEMENTS

The key remuneration elements for 2010 are summarised below. Each individual element is then described in more detail in the subsequent sub-sections.



Element	Level/design for 2010	Key purpose

Base salary	Base pay should be set competitively relative to FTSE 20 and banking sector competitors	Meet essential commitments of executive Retention

	In light of circumstances, no increase for 2010 and base salaries held at same level as for 2008

Annual incentive	200 per cent of salary maximum (225 per cent for group chief executive), as for 2009	Alignment with Group performance

	Based 50 per cent on Group financial targets relating to profit before tax and economic profit	Alignment with sound risk management

	Based 50 per cent on balanced scorecard covering, customers, people, risk and build franchise	Motivation of executives

	Subject to deferral and clawback

Long-term incentive plan	275 per cent of salary maximum, split as follows:	Motivation and retention of executives

	100 per cent on earnings per share

	100 per cent on economic profit	Alignment with sound risk management

	75 per cent on absolute share price growth

	Any shares vesting from the absolute share price growth element retained for a further 2 years post vesting	Alignment with long-term shareholder interests

Pension	A mixture of final salary and defined contribution pension arrangements	Enable executives to build long-term retirement savings

	From April 2012, executive directors with final salary pensions will move to a defined contribution pension arrangement, with no compensation	Retention

GENERAL CONSIDERATIONS

When deciding the approach to take for remuneration in 2010, the remuneration committee considered a range of factors. The environment for remuneration in the banking sector remains very sensitive and the committee is aware of this. Consistent with best practice, shareholders were fully consulted during the process and their views have been taken into account in the decisions the committee has made. At the same time, the ongoing challenges of the HBOS integration to create the UK’s leading consumer bank were also considered by the committee as is the need to retain and motivate the management team to build on the outstanding start made to this process in 2009.

BASE SALARY

Basic salaries are reviewed annually, usually in December, taking into account individual performance and market information (which is provided by Towers Perrin and supplemented with information from Kepler Associates as appropriate) and then adjusted from 1 January of the following year. The remuneration committee confirmed during the 2009 review that the FTSE 20 was the most appropriate comparator group to use to benchmark overall competitiveness of the remuneration package whilst taking particular account of the remuneration practice of our direct competitors, namely the major UK banks. The FTSE 20 is regarded as providing a realistic and relevant comparison in terms of company size and complexity, as well as being a key market for talent.

However, in recognition of the current operating environment base salaries for 2010 remain unchanged from the salaries set for 2008. Base salary increases for other employees across the Group will remain in line with any market movement, but will, in general be significantly lower than in previous years.



Name	J E Daniels		A G Kane		G T Tate		T J W Tookey		H A Weir

As at 1 January 2010		£1,035,000		£590,000		£640,000		£600,000		£625,000

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COMPENSATION

ANNUAL INCENTIVE PLAN

The combination of financial and non-financial measures, which support our prudent approach to managing risk, are retained in the annual incentive plan, whilst the operation of the plan is enhanced in order to increase the alignment between risk and reward still further. The committee recognises the challenges of setting robust targets in the current operating environment. Furthermore, the committee will review the performance against the targets for the 2010 annual incentive plan at the end of the year, taking into account the overall operating performance of the business in determining how much of any bonus will be paid out. The committee reserves the right to exercise its discretion in reducing any payment that otherwise would have been earned, if they deemed this appropriate.

Consistent with the aim of ensuring that short-term financial results are only achievable sustainably, the committee has decided that the incentive will be deferred and released in tranches over a three year period. The deferred incentive will be subject to 100 per cent clawback if the performance that generated the incentive is found to be unsustainable.

The maximum annual incentive opportunity remains unchanged at 200 per cent (225 per cent for the group chief executive) of base salary for the achievement of exceptional performance targets.

The remuneration committee believes that the structure of the incentive – in particular the use of risk-adjusted and non-financial measures – has been highly successful in promoting a long-term focus within the senior management team.

LONG-TERM INCENTIVE AWARD

Given the extraordinary circumstances during 2008, the remuneration committee made a reduced maximum LTIP award of 200 per cent of salary in 2009, 175 per cent less than the maximum award for 2008. For 2010, the remuneration committee continues to believe that it is appropriate to make LTIP awards below the maximum levels that the plan allows (400 per cent) and less than the award levels for 2008 (maximum award 375 per cent). Notwithstanding the increased size and complexity of the Group since the HBOS acquisition and the concerns about retention and motivation, the committee believes that the current environment requires a demonstration of continued restraint in relation to remuneration. At the same time, the committee believes in the importance of aligning shareholder and executive motivation and therefore it has approved maximum awards for the group chief executive and executive directors for 2010 of 275 per cent of base salary of which 200 per cent of the award will be based on the same performance conditions as for 2009, namely EPS and economic profit, with the remaining 75 per cent based on the achievement of stretching share price targets.

LONG-TERM INCENTIVE PERFORMANCE MEASURES

In continuing with the same financial performance measures as for 2009, the remuneration committee has continued to create a focus on long-term performance, taking appropriate account of risk.

Performance targets have been set by reference to analysts’ expectations, internal business plans, competitive performance assessments and probability modelling. Stretch performance will be equated to the remuneration committee’s assessment of an upper quartile performance level or greater. Shareholders have been consulted on the targets and the targets have been made more stretching as a consequence of those discussions.

The details of the targets for the proposed measures are set out below:

EARNINGS PER SHARE (APPLYING TO AWARD OF 100 PER CENT OF SALARY)

Earnings per share continues to be an important measure of our profitability and ability to generate cash. The committee has therefore decided to retain this well-recognised measure in our incentive system.

For the EPS element of the award, performance will be measured based on EPS growth over a three year period from the baseline EPS of 2009.


	Vesting (%)			EPS absolute percentage improvement

Threshold		25	%		158	%
Maximum		100	%		180	%

ECONOMIC PROFIT (APPLYING TO AWARD OF 100 PER CENT OF SALARY)

The use of economic profit has been very successful in introducing a long-term, risk-based approach to managing our business. Economic profit is calculated on a through-the-cycle basis, considering the impact of decisions over an entire economic cycle, encouraging prudent risk management of our portfolio.

For the economic profit element of the award, performance will be based on the compound annual growth rate (CAGR) from the 2009 base over a three year period.


	Vesting (%)			CAGR growth in EP

Threshold		25	%		57	% pa
Maximum		100	%		77	% pa

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COMPENSATION

ABSOLUTE SHARE PRICE GROWTH (APPLYING TO AWARD OF 75 PER CENT OF SALARY)

The absolute share price element of the award will fully align shareholder and executives’ interests during a period of share price recovery.

Performance will be measured based on the average absolute share price achieved during the 90 days at the end of the three year period.


	Vesting %		Absolute share price achieved

Threshold	0	%		75p
Maximum	100	%		114p

There will be an underpin to the absolute share price element of the award such that shares making up that element may only be released if both the EPS and the economic profit element have achieved a threshold level of vesting as above.

Any shares vesting as a result of this element of the 2010 award will be required to be held for a further two years post vesting.

Vesting between threshold and maximum will be on a straight line basis for all three elements.

PENSION

As stated last year, in April 2012, all executive directors will transition to defined contribution pension arrangements with contributions of 25 per cent of base salary for the group chief executive and other executive directors, with no compensation for ceasing final salary accrual.

OTHER SHARE PLANS

The executive directors are also eligible to participate in the Group’s ‘sharesave’ and ‘shareplan’ schemes. These are ‘all-employee’ share schemes.

CHAIRMAN’S REMUNERATION

The chairman’s remuneration comprises salary and benefits. He does not participate in the annual bonus and long-term incentive arrangements, nor is he entitled to pension benefits.

The chairman’s salary was reviewed at the time of the appointment of Sir Winfried Bischoff in 2009. The review took into account the market information and also the significant amount of time the chairman would be expected to focus on the Group’s activities particularly during the current period. The chairman was appointed on a salary of £700,000 per annum. His salary will next be reviewed at the end of 2010, with any adjustments effective 1 January 2011.

INDEPENDENT NON-EXECUTIVE DIRECTORS’ FEES

The fees of the independent non-executive directors are agreed by the board within a total amount determined by the shareholders. Directors may also receive fees, agreed by the board, for membership of board committees. The fees are designed to recognise the various responsibilities of a non-executive director’s role and to attract individuals with relevant skills, knowledge and experience. The fees are neither performance related nor pensionable and are comparable with those paid by other companies. The annual fees from 1 January 2010 are unchanged and are listed below.



Board			£65,000
Audit committee chairmanship			£50,000
Audit committee membership			£20,000
Nomination and governance committee membership			£5,000
Remuneration committee chairmanship			£30,000
Remuneration committee membership			£15,000
Risk oversight committee membership			£15,000

Independent non-executive directors who serve on the boards of subsidiary companies may also receive fees from the subsidiaries. The fees paid in 2009 to the current non-executive directors are shown in the table in the following section.

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COMPENSATION

REMUNERATION FOR 2009

2009 ANNUAL INCENTIVE SCHEME

The annual incentive scheme for executive directors is designed to reflect specific goals linked to the performance of the business.

Incentive awards for executive directors are based upon individual contribution and overall corporate results. Half of the incentive opportunity is driven by corporate performance based on the stretching target relating to profit before tax and economic profit. The level of achievement against the targets for profit before tax and economic profit that results in the lower payout will determine the extent to which the target has been met. The other half of the incentive opportunity is determined by divisional achievement driven through individual performance. Individual targets relevant to improving overall business performance are contained in a balanced scorecard and are grouped under the following headings:


–	Financial

–	Franchise growth

–	Customer service

–	Risk

–	People development

These targets are weighted differently for each of the executive directors, reflecting differing strategic priorities. The non-financial measures include key performance indicators relating to process efficiency, service quality and employee engagement.

The maximum annual incentive opportunity is 200 per cent (225 per cent for the group chief executive) of basic salary for the achievement of exceptional performance targets. The maximum payment under the corporate half of the annual incentive is only available if exceptional performance is achieved against the stretching corporate target. An amount equal to 50 per cent of this element of the incentive is available on the achievement of the stretching corporate target. Failure to achieve at least 90 per cent of the stretching target would result in no payment under the corporate half of the incentive.

In 2009, the Group delivered a resilient trading performance against the backdrop of a marked slow down in the UK economic environment and continued challenges in financial markets. This has been a year of substantial achievement with the creation of a sound platform for future growth of the combined franchise. Positive trends have been established in margins, costs and impairments. The interest margin improved in the second half of the year and is expected to increase in 2010, with further improvements expected in subsequent years. Costs fell by 5 per cent in the year as integration related savings have started to be realised, with £534 million of cost synergy savings in 2009. Impairments peaked in the first half of the year, falling off by 21 per cent in the second half. A similar rate of improvement is expected through 2010. The Group’s funding and liquidity positions were also strengthened during the year.

A number of actions were taken during the year to create a robust capital position, including the £4 billion ordinary share placing and compensating open offer in June and the successful £22.5 billion equity raising at the end of the year.

Franchise growth has been strong in both Retail and Wholesale and there has been a 48 per cent improvement in cross sales income from the Lloyds TSB customers. There were strong levels of mortgage lending with over £34 billion of gross new lending. The Lloyds TSB conservative approach to risk management has been implemented across the Group. All new lending is within the Group’s risk appetite. Our employee engagement index has remained high through the year and has performed well against the UK norm.

Additionally a number of significant activities were delivered on during 2009 which were not anticipated when the targets were set. These activities have contributed to placing the Group in the best position possible to grow and develop the combined franchise. They include the largest ever capital raising and the successful conclusion of negotiations with the European Commission on State Aid. These have all been achieved at the same time as delivering the ‘business as usual’ agenda and the integration programme.

Any payments under the plan are deferred 100 per cent in shares until June 2012 and subject to claw back.

The calculation of the annual incentive plan payments for executive directors, based on the achievement of performance against targets in respect of performance in 2009, has been independently checked. The bonuses awarded to directors are shown in the table below:

Name

A G Kane

G T Tate

T J W Tookey

H A Weir

Opportunity

200

Bonus awarded

£885,000

£1,120,000

£1,110,000

£1,062,000

% awarded

150

175

185

170

The group chief executive has chosen to waive any payment under the scheme for the second successive year.

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COMPENSATION

2009 LONG-TERM INCENTIVE PLAN AWARDS

The current LTIP rules allow for awards to be made of up to 400 per cent of base salary. Under normal circumstances, awards are made of 300 per cent of salary with the additional 100 per cent available for circumstances that the remuneration committee deems to be exceptional. In 2008, awards were made of 375 per cent of base salary to the chief executive and two of the executive directors for retention purposes, and in light of data reviewed by the committee which showed total remuneration to be behind median both for the FTSE 20 and the other major UK banks.

Further information viewed by the committee through 2008 continued to show that total remuneration for the executive directors was materially behind the median of our peer groups, even before allowing for the increased responsibilities of running the combined bank and the magnitude of the task of integrating the two businesses. However, due to the external environment and following extensive consultation with shareholders, the committee determined that for 2009 the grant level for executive directors should be set at 200 per cent of base salary, 175 per cent less than the maximum award for 2008.

Details of the plan, including the specific performance conditions, can be found on page 121.

2009 NON-EXECUTIVE DIRECTORS’ FEES (£)

Lloyds Banking Group fees

Board

Audit
committee

Remuneration
committee

Nomination
and governance
committee

Risk oversight
committee

SW Board
Fees

2009
Total

W C G Berndt

65,000

30,000

5,000

100,000

Ewan Brown

(until 5 June 2009)

28,314

8,665

6,581

43,560

J P du Plessis

(until 17 April 2009)

19,451

14,962

1,496

4,489

40,398

P N Green

(until 23 October 2009)

52,936

16,288

12,216

81,440

Sir Julian Horn-Smith

65,000

15,000

5,000

15,000

100,000

Lord Leitch ²

204,028

7,540

1,885

5,655

30,000

249,108

Sir David Manning

(until 2 November 2009)

54,424

12,560

4,187

12,560

83,731

C J McCall

(until 31 December 2009)

65,000

14,090

79,090

T T Ryan

(from 1 March 2009)

54,167

16,667

12,500

83,334

M A Scicluna

65,000

41,136

15,000

121,136

Anthony Watson

(from 2 April 2009)

48,504

13,095

9,821

71,420


¹	Scottish Wido w s Services Ltd.

²	Lord Leitch was appointed deputy chairman on 17 May 2009 when his remuneration was consolidated into an annual fee of £300,000.

112

COMPENSATION

DILUTION LIMITS

The following charts illustrate the shares available for the Group’s share schemes.

(FLOW CHART)

PENSIONS

Executive directors are either entitled to participate in the Group’s defined benefit pension schemes (based on salary and length of service, with a maximum pension of two thirds of final salary), or the Group’s defined contribution scheme (under which their pension entitlement will be based upon both employer and employee contributions). The defined benefit schemes are closed to new entrants on recruitment.

Pension accruals under the defined benefits scheme for Messrs Daniels and Kane will continue until April 2012. Thereafter they will have the opportunity to either participate in a defined contribution scheme or to receive a cash supplement with no compensation for ceasing final salary accrual. There is no entitlement to an immediate and unreduced pension should their employment be terminated before the normal date of retirement.

SERVICE AGREEMENTS

The Group’s policy is for executive directors to have service agreements with notice periods of no more than one year. All current executive directors are entitled to receive 12 months’ notice from the Group, but would be required to give six months’ notice if they wished to leave. Executive directors normally retire at age 60. However, following the implementation of The Employment Equality (Age) Regulations 2006, they may now choose to delay their retirement until age 65.

It is the Group’s policy that where compensation on early termination is due, it should be paid on a phased basis, mitigated in the event that alternative employment is secured, and that bonus payments should relate to the period of actual service, rather than the full notice period, and will be determined on the basis of performance.

Any entitlements under the pension scheme or equity plans will be in accordance with the scheme rules on leaving.


	Notice to be given by the Company	Date of service agreement/letter of appointment
Sir Winfried Bischoff	6 months	27 July 2009
J E Daniels	12 months	22 January 2009
A G Kane	12 months	23 January 2009
G T Tate	12 months	9 February 2009
T J W Tookey	12 months	26 January 2009
H A Weir	12 months	21 January 2009
Former director who served during 2009
Sir Victor Blank	6 months	25 January 2006

Independent non-executive directors do not have service agreements and their appointment may be terminated, in accordance with the articles of association, at any time without compensation.

113

COMPENSATION

EXTERNAL APPOINTMENTS

The Group recognises that executive directors may be invited to become non-executive directors of other companies and that these appointments may broaden their knowledge and experience, to the benefit of the Group. Fees are normally retained by the individual directors as the post entails personal responsibility.

Executive directors are generally allowed to accept one non-executive directorship.

During 2009, Mr Daniels and Mrs Weir received fees of £75,000 and £30,208 respectively, which were retained by them, for serving as non-executive directors of other companies.

PERFORMANCE GRAPH

The graph below illustrates the performance of the Group measured by TSR against a ‘broad equity market index’ over the past five years. The Group has been a constituent of the FTSE 100 index throughout this five year period.

TOTAL SHAREHOLDER RETURN – FTSE 100 INDEX

(LINE GRAPH)

114


COMPENSATION	AUDITED INFORMATION


DIRECTORS’ EMOLUMENTS FOR 2009
							Performance- related payments £000 ³
	Salaries/ fees £000		Other benefits						2009 Total £000		2008 Total £000
	Salaries/ fees £000		Cash £000 ¹		Non-cash £000 ²				2009 Total £000		2008 Total £000
Current directors who served during 2009
Executive directors
J E Daniels		1,035		78		8				1,121		1,151
A G Kane		590		24		24		885		1,523		635
G T Tate		640		27		20		1,120		1,807		689
T J W Tookey		600		25		1		1,110		1,736		108
H A Weir		625		59		21		1,062		1,767		742
Non-executive directors
Sir Winfried Bischoff (from 15 September 2009)		207		4						211
W C G Berndt		100								100		100
Sir Julian Horn-Smith		100								100		100
Lord Leitch		249								249		165
T T Ryan (from 1 March 2009)		83								83
M A Scicluna		121								121		33
Anthony Watson (from 2 April 2009)		71								71
Former directors who served during 2009
Sir Victor Blank ⁴ (until 14 September 2009)		640		5		38				683		669
Ewan Brown (until 5 June 2009)		44								44		122
J P du Plessis (until 17 April 2009)		40								40		119
P N Green (until 23 October 2009)		81								81		100
Sir David Manning (until 2 November 2009)		84								84		67
C J McCall (until 31 December 2009)		79								79		16
Others												807
		5,389		222		112		4,177		9,900		5,623


¹	The cash column under ‘other benefits’ includes flexible benefits payments (4 per cent of basic salary), the tax planning allowance for Mr Daniels, payments to certain directors who elect to take cash rather than a company car under the car scheme and the cash balance of a pension allowance for Mrs Weir. Sir Winfried Bischoff has elected to take cash rather than a company car.

²	The non cash column includes amounts relating to the use of a company car, use of a company driver and private medical insurance and the cost of home security in respect of Sir Victor Blank. It also includes the value of any matching shares which are received under the terms of Shareplan, through which employees have the opportunity to purchase shares up to a maximum of £125 per month and receive matching shares on a one for one basis up to a maximum value of £30 per month, rounded down to the nearest whole share.

³	The group chief executive waived his entitlement to any bonus in respect of 2009 performance. There were no free shares awarded under Shareplan in respect of 2009.

⁴	Sir Victor Blank donated his salary from 30 September 2009 until 31 December 2009, amounting to £160,000 to charity. The Group was obligated to pay Sir Victor Blank’s remuneration in lieu of services rendered during 2010 of £53,333. This was also donated to charity.

DIRECTORS’ PENSIONS

The executive directors are currently members of one of the pension schemes provided by the Lloyds TSB Group with benefits either on a defined benefit or defined contribution basis. Those directors who joined the Lloyds TSB Group after 1 June 1989 and are members of a defined benefit scheme have pensions provided on salary in excess of the earnings cap through membership of or by an unfunded pension promise. Retirement pensions accrue at rates of between 1/60 and 1/30 of basic salary.

For those directors who are members of a defined benefit pension scheme, pension will continue to accrue until 5 April 2012. On 6 April 2012, defined benefit pension accrual will cease and directors will be offered the option to participate in the defined contribution pension scheme in operation at that date. Alternatively, they may choose not to join the scheme and elect to receive a pension cash allowance.

Directors have a normal retirement age of 60. However, following the implementation of The Employment Equality (Age) Regulations 2006, they may now choose to delay their retirement until age 65. In the event of death in service, a lump sum of four times salary is payable plus, for members of a defined benefit scheme, a spouse’s pension of two-thirds of the member’s prospective pension. On death in retirement, a spouse’s pension of two-thirds of the member’s pension is payable. The defined benefit schemes are non-contributory. Members of defined contribution schemes are required to contribute.

115


COMPENSATION	AUDITED INFORMATION

DEFINED CONTRIBUTION SCHEME MEMBERS

During the year to 31 December 2009 the employer has made the following contributions to the defined contribution scheme:


		£000
G T Tate		159
T J W Tookey		147
H A Weir		122

DEFINED BENEFIT SCHEME MEMBERS

Accrued
pension at
31 December
2009
£000
(a)

Accrued
pension at
31 December
2008
£000
(b)

Change in
accrued
pension
£000
(a)-(b)

Transfer
value at
31 December
2009
£000
(c)

Transfer
value at
31 December
2008
£000
(d)

Change in
transfer
value
£000
(c)-(d)

Additional
pension
earned to
31 December
2009
£000
(e)

Transfer
value of the
increase
£000
(f)

J E Daniels

192

175

3,844

3,263

581

169

A G Kane

357

342

6,889

6,146

743

—

The disclosures in columns (a) to (d) are as required under section 421 of the Companies Act 2006.

Columns (a) and (b) represent the deferred pension to which the directors would have been entitled had they left the Group on 31 December 2009 and 2008, respectively.

Column (c) is the transfer value of the deferred pension in column (a) calculated as at 31 December 2009 based on factors supplied by the actuary of the relevant Lloyds TSB Group pension scheme. The basic method used to arrive at the factors has not changed during the year.

Column (d) is the equivalent transfer value, but calculated as at 31 December 2008 on the assumption that the director left service at that date.

Column (e) is the increase in pension built up during the year, recognising (i) the accrual rate for the additional service based on the pensionable salary in force at the year end, and (ii) where appropriate the effect of pay changes in ‘real’ (inflation adjusted) terms on the pension already earned at the start of the year.

Column (f) is the capital value of the pension in column (e).

The disclosures in columns (e) and (f) are as required by the UK Listing Authority listing rules. The requirements of the listing rules differ from those of the Companies Act. The listing rules require the additional pension earned over the year to be calculated as the difference between the pension accrued at the end of the financial year and the pension accrued at the start of the financial year less the increase in the pension earned over the year solely due to inflation. The transfer value in column (f) can differ significantly from the change in transfer value as required by the Companies Act because the additional pension accrued over the year calculated in accordance with the listing rules makes allowance for inflation, and the change in the transfer value required by the Companies Act will be significantly influenced by changes in the assumptions underlying the transfer value calculation at the beginning and end of the financial year.

Members of the Lloyds TSB Group’s pension schemes have the option to pay additional voluntary contributions: neither the contributions nor the resulting benefits are included in the above table.

Major changes to the legislation governing the provision of pensions in the UK (known as pension simplification) came into effect in April 2006. Benefits from an approved pension scheme will be limited to the Lifetime Allowance, currently £1.75 million which is equivalent to an annual pension of £87,500. Any benefit in excess of this amount will incur a tax charge for the individual. The Group has agreed that if an executive director has benefits in excess of the Lifetime Allowance they may cease to accrue benefits in the Scheme and receive a salary supplement as an alternative. This will not cost the Group more than the current arrangements. The Group will not compensate any individual in respect of any increased tax liability arising from pension simplification. To date, the executive directors affected have elected to continue to accrue benefits in the approved scheme.

116

COMPENSATION

DIRECTORS’ INTERESTS

The interests, all beneficial, of those who were directors at 31 December 2009 in shares in Lloyds Banking Group were:


NUMBER OF SHARES
	At 1 January 2009 (or later date of appointment)		At 31 December 2009		At 25 February ¹ 2010
Executive directors
J E Daniels		423,018		2,557,816		2,558,383
A G Kane		204,061		1,224,960		1,225,527
G T Tate		75,072		526,061		526,629
T J W Tookey		2,493		97,727		98,294
H A Weir		61,822		425,162		425,729
Non-executive directors
Sir Winfried Bischoff		—		585,000
W C G Berndt		170,000		948,429
Sir Julian Horn-Smith		5,000		27,890
Lord Leitch		10,000		55,787
T T Ryan		—		63,451
M A Scicluna		10,000		56,226
Anthony Watson		13,209		51,357


¹	The changes in beneficial interests between 31 December 2009 and 25 February 2010 related to ‘partnership’ and ‘matching’ shares acquired under the Lloyds TSB Group Shareplan.

117


COMPENSATION	AUDITED INFORMATION


INTERESTS IN SHARE OPTIONS
	At 1 January 2009	Granted during the year	Exercised during the year	Lapsed during the year	At 31 December 2009
						Exercise price		Exercise periods
						Exercise price		From	To	Notes
J E Daniels	131,484	—	—	—	131,484	419.25p		18/3/2007	17/3/2014	d, f
	430,547	—	—	—	430,547	474.25p		17/3/2008	16/3/2015	e, f
	6,906	—	—	—	6,906	139p		1/1/2012	30/6/2012	a, h

A G Kane	27,000	—	—	27,000	—	887.5p		4/3/2002	3/3/2009	b, g, i
	64,786	—	—	—	64,786	549.5p		6/3/2003	5/3/2010	c, g
	11,841	—	—	—	11,841	615.5p		8/8/2003	7/8/2010	c, g
	34,759	—	—	—	34,759	655p		6/3/2004	5/3/2011	c, g
	73,255	—	—	—	73,255	419.25p		18/3/2007	17/3/2014	d, f
	247,891	—	—	—	247,891	474.25p		17/3/2008	16/3/2015	e, f
	6,906	—	—	—	6,906	139p		1/1/2012	30/6/2012	a, h

G T Tate	64,400	—	—	—	64,400	419.25p		18/3/2007	17/3/2014	d, f
	27,357	—	—	—	27,357	403p		12/8/2007	11/8/2014	d, f
	247,891	—	—	—	247,891	474.25p		17/3/2008	16/3/2015	e, f
	6,906	—	—	—	6,906	139p		1/1/2012	30/6/2012	a, h

T J W Tookey	6,906	—	—	—	6,906	139p		1/1/2012	30/6/2012	a, h

H A Weir	77,868	—	—	—	77,868	424.75p		29/4/2007	28/4/2014	d, f
	247,891	—	—	—	247,891	474.25p		17/3/2008	16/3/2015	e, f
	6,906	—	—	—	6,906	139p		1/1/2012	30/6/2012	a, h

Other share plan

T J W Tookey	35,305	—	35,305	—	—	(see page 122	)	20/4/2009	19/10/2009	j

Former director who served during 2009

Sir Victor Blank	6,906	—	—	—	6,906	139p		1/2/2010	31/7/2010	a, k


a	Sharesave.

b	Executive option granted between March 1999 and August 1999.

c	Executive option granted between March 2000 and March 2001.

d	Executive option granted between March 2004 and August 2004.

e	Executive option granted from March 2005.

f	Exercisable to the extent at which the performance condition vested.

g	Not exercisable as the performance conditions had not been met.

h	Not exercisable as the option has not been held for the period required by the relevant scheme.

i	Option lapsed as not exercised by 10th anniversary of date of grant.

j	Mr Tookey exercised his option on 8 May 2009. Market price on day of exercise was 100.70p.

k	Exercisable only in the period shown.

Sir Victor Blank retired as chairman on 14 September 2009 but remained employed by the Group until 31 January 2010.

None of the other directors at 31 December 2009 had options to acquire shares in Lloyds Banking Group plc or its subsidiaries.

The market price for a share in the Company at 1 January 2009 and 31 December 2009 was 126p and 50.69p, respectively. The range of prices between 1 January 2009 and 31 December 2009 was 40.30p to 140.70p.

The following table contains information on the performance conditions for executive options granted since 1999. The remuneration committee chose the relevant performance condition because it was felt to be challenging, aligned to shareholders’ interests and appropriate at the time.

118


COMPENSATION	AUDITED INFORMATION


Options granted		Performance conditions
March 1999 – August 1999		Growth in earnings per share which is equal to the aggregate percentage change in the retail price index plus two percentage points for each complete year of the relevant period plus a further condition that the Company’s ranking based on TSR over the relevant period should be in the top 50 companies of the FTSE 100.

		As the performance condition had not been met, the options lapsed in 2009.
March 2000 – March 2001		As for March 1999 – August 1999 except that there must have been growth in the earnings per share equal to the change in the retail price index plus three percentage points for each complete year of the relevant period.
March 2004 – August 2004		That the Company’s ranking based on TSR over the relevant period against a comparator group (17 UK and international financial services companies including Lloyds Banking Group) must be at least ninth, when 14 per cent of the option will be exercisable. If the Company is ranked first in the group, then 100 per cent of the option will be exercisable and if ranked tenth or below the performance condition is not met.

		Options granted in 2004 became exercisable as the performance condition was met on the re-test. The performance condition vested at 24 per cent for Mr Tate’s March option and at 14 per cent for all other options granted to executive directors during 2004.
March 2005 – August 2005		That the Company’s ranking based on TSR over the relevant period against a comparator group (15 companies including Lloyds Banking Group) must be at least eighth, when 30 per cent of the option will be exercisable. If the Company is ranked first to fourth position in the group, then 100 per cent of the option will be exercisable and if ranked ninth or below, the performance condition is not met.

		Options granted in 2005 became exercisable as the performance condition was met when tested. The performance condition vested at 82.5 per cent for all options granted to executive directors.

LLOYDS TSB PERFORMANCE SHARE PLAN

Under the plan, executive directors were required to defer 50 per cent of their bonus awards in 2006 into shares in the Company, known as bonus shares. The number of bonus shares awarded was calculated after the deduction of income tax and national insurance from the deferred element of the bonus.

The bonus shares are held on behalf of the executive for a period of three years before release.

Executives received a further award of ‘performance shares’ on the basis of two performance shares for each bonus share. The receipt of the performance shares is dependent on the satisfaction of a TSR performance condition measured over three financial years of the Company.

The following table details the number of bonus and performance shares released in respect of their 2005 bonus.


	Bonus shares						Performance shares
	At 1 January 2009		Released 20 March 2009		At 31 December 2009		At 1 January 2009		Lapsed 20 March 2009		At 31 December 2009		Award price
J E Daniels		50,944		50,944		—		172,694		172,694		—		566.10p
A G Kane		20,531		20,531		—		69,598		69,598		—		566.10p
G T Tate		27,358		27,358		—		92,738		92,738		—		566.10p
H A Weir		20,062		20,062		—		68,008		68,008		—		566.10p

The following table contains information on the performance conditions for performance shares. The remuneration committee chose the relevant performance condition because it was felt to be challenging, aligned to shareholders’ interests and appropriate at the time.


Performance shares awarded		Performance conditions
March 2006		That the Company’s ranking based on TSR over the relevant period against a comparator group (15 companies including Lloyds Banking Group) must be at least eighth for any shares to be received. If ranked ninth or below no shares would be received. The maximum of two performance shares for each bonus share will be awarded only if the Company is first in the comparator group; one performance share will be awarded for each bonus share if the Company is placed fifth; and one performance share for every two bonus shares if the Company is placed eighth. Between first and fifth positions and fifth and eighth positions a sliding scale will apply.

		Whilst income tax and national insurance was deducted from the deferred bonus before the conversion to bonus shares, where a match of performance shares is justified, these shares will be awarded as if income tax and national insurance had not been deducted. This maintains the original design of the plan prior to the issue of guidance from HM Revenue & Customs in December 2004.

		The performance condition attached to the March 2006 award was not met, with Lloyds Banking Group ranked in ninth place. Bonus shares were released on 20 March 2009, at which time the performance shares lapsed.

119


COMPENSATION	AUDITED INFORMATION

LLOYDS TSB LONG-TERM INCENTIVE PLAN

The following are conditional share awards available under the plan. Further information regarding this plan can be found on pages 121 and 122.

At
1 January
2009

Awarded
during
the year

Adjusted
number
of shares

Lapsed
during
the year

At
31 December
2009

Year of
vesting

Notes

J E Daniels

507,692

507,692

2009

534,322

165,403

699,725

2010

838,735

259,637

1,098,372

2011

1,143,014

353,829

1,496,843

2012

a, b

1,714,522

530,743

2,245,265

2012

a, b

A G Kane

288,460

288,460

2009

306,122

94,762

400,884

2010

413,309

127,943

541,252

2011

651,573

201,700

853,273

2012

a, b

977,360

302,549

1,279,909

2012

a, b

G T Tate

297,114

297,114

2009

333,951

103,377

437,328

2010

518,638

160,548

679,186

2011

706,791

218,792

925,583

2012

a, b

1,060,187

328,189

1,388,376

2012

a, b

T J W Tookey

54,258

54,258

2009

52,875

16,367

69,242

2010

71,220

22,046

93,266

2011

662,617

205,118

867,735

2012

a, b

993,926

307,677

1,301,603

2012

a, b

H A Weir

288,460

288,460

2009

320,037

99,069

419,106

2010

506,482

156,785

663,267

2011

690,226

213,665

903,891

2012

a, b

1,035,339

320,497

1,355,836

2012

a, b


a	Conditional awards of shares made under this plan were adjusted on 2 July 2009 as a result of the Placing and Compensatory Open Offer. The adjustment was made using a standard HMRC formula, to negate the dilutionary impact of the capital raising event.

b	Original award price 72.44p, award price post adjustment 55.31p.

120


COMPENSATION	AUDITED INFORMATION

The following table contains information on the performance conditions for awards made under the long-term incentive plan. The remuneration committee chose the relevant performance conditions because they were felt to be challenging, aligned to shareholders’ interests and appropriate at the time.


LTIP award		Performance conditions
May 2006		For 50 per cent of the award (the EPS Award) – the percentage increase in earnings per share of the Group (on a compound annualised basis) over the relevant period must be at least an average of 6 percentage points per annum greater than the percentage increase (if any) in the retail price index over the same period. If it is less than 3 per cent per annum, the EPS Award will lapse. If the increase is more than 3 per cent but less than 6 per cent per annum, then the proportion of shares released will be on a straight line basis between 17.5 per cent and 100 per cent. The relevant period commenced on 1 January 2006 and ended on 31 December 2008.

		For the other 50 per cent of the award (the TSR Award) – it will be necessary for the Group’s TSR to exceed the median of a comparator group (14 companies) over the relevant period by an average of 7.5 per cent per annum for the TSR Award to vest in full. 17.5 per cent of the TSR Award will vest where the Group’s TSR is equal to median and vesting will occur on a straight line basis in between these points. Where the Group’s TSR is below the median of the comparator group, the TSR Award will lapse. The relevant period commenced on 1 January 2006 and ended on 31 December 2008.

		When tested at the end of the relevant performance period, neither the EPS nor the TSR performance conditions were met and all awards made in 2006 lapsed.
March 2007		For 50 per cent of the award (the EPS Award) – the performance condition was as described for May 2006 with the relevant performance period commencing on 1 January 2007 and ending on 31 December 2009.

		For the other 50 per cent of the award (the TSR Award) – the performance condition was as described for May 2006 with the relevant performance period commencing on 8 March 2007 (the date of award) and ending on 7 March 2010.
March and April 2008		For 50 per cent of the award (the EPS Award) – the performance condition was as described for May 2006 with the relevant performance period commencing on 1 January 2008 and ending on 31 December 2010.

		For the other 50 per cent of the award (the TSR Award) – the performance condition was as described for May 2006 with the relevant performance period commencing on 6 March 2008 (the date of the March award) and ending on 5 March 2011.
April 2009		EPS: The release of 50 per cent of the shares will be dependent on the extent to which the growth in EPS achieves cumulative EPS targets over the three year period.

		Economic profit: The release of the remaining 50 per cent of shares will be dependent on the extent to which Lloyds Banking Group achieves cumulative Economic Profit targets over a three year period.

		The EPS and economic profit performance measures applying to this 2009 LTIP award were set on the basis that the Group would enter into GAPS. Now that the Group is not participating in GAPS, the remuneration committee has determined that these performance measures will be restated on a basis consistent with the EPS and economic profit measures used for the 2010 LTIP awards. This restatement will be undertaken in 2010.


The current targets prior to restatement are:
EPS
	Vesting			Growth in EPS
Threshold		25	%		55	%
Maximum		100	%		81	%
ECONOMIC PROFIT
	Vesting			Absolute Improvement in EP
Threshold		25	%		100	%
Maximum		100	%		185	%

121


COMPENSATION	AUDITED INFORMATION


April 2009 Integration award		Synergy Savings: The release of 50 per cent of the shares will be dependent on the achievement of target run-rate synergy savings in 2009 and 2010 as well as the achievement of sustainable synergy savings of at least £1.5 billion by the end of 2011. The award will be broken down into three equally weighted annual tranches. Performance will be assessed at the end of each year against annual performance targets based on a trajectory to meet the 2011 target. The extent to which targets have been achieved will determine the proportion of shares to be banked each year. Any release of shares will be subject to the remuneration committee judging the overall success of the delivery of the integration programme.

		Integration Balanced Scorecard: The release of the remaining 50 per cent of the shares will be dependent on the outcome of a Balanced Scorecard of non-financial measures of the success of the integration in each of 2009, 2010 and 2011. The Balanced Scorecard element will be broken down into three equally weighted tranches. The tranches will be crystallised and banked for each year of the performance cycle subject to separate annual performance targets across the four measurement categories of Building the Business, Customer, Risk and People and Organisation Development.

		Performance against the first year of the award has been assessed and all targets have been met or exceeded.

Alithos Limited provided information for the testing of the TSR performance conditions for the Company’s long-term incentive schemes. EPS is the Group’s normalised earnings per share as shown in the Group’s report and accounts, subject to such adjustments as the remuneration committee regards as necessary for consistency.

OTHER SHARE PLAN

LLOYDS TSB GROUP EXECUTIVE SHARE PLAN 2003

Mr Tookey was granted an option under this plan to acquire 35,305 ordinary shares in Lloyds Banking Group plc. The option was not subject to any performance condition but would normally have become exercisable only if he remained an employee, and had not given notice of resignation, as at 19 April 2009. As Mr Tookey remained an employee, the option vested on 19 April 2009, and was exercised on 8 May 2009.

In addition, on 26 March 2008 (prior to his appointment as an executive director), Mr Tookey was granted an award under the Lloyds TSB Executive Retention Plan 2006. The award is satisfied in cash only and, subject to continued employment, gives Mr Tookey the right to receive an amount equal to the value of 141,880 Lloyds Banking Group shares on the date of vesting. The award was adjusted on 2 July 2009 as a result of the placing and compensatory open offer. The adjustment was made using a standard HMRC formula, to negate the dilutionary impact of the capital raising event. The award vests as to 50 per cent on 26 March 2011 and 50 per cent on 26 March 2013. Mr Tookey has agreed to reinvest the cash proceeds into Lloyds Banking Group shares. As an executive director, he is no longer eligible to be granted awards under this plan.

None of those who were directors at the end of the year had any other interest in the capital of Lloyds Banking Group plc or its subsidiaries.

The register of directors’ interests, which is open to inspection, contains full particulars of directors’ shareholdings and options to acquire shares in Lloyds Banking Group.

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STATEMENT ON US CORPORATE GOVERNANCE STANDARDS

As a non-US company listed on the New York Stock Exchange (NYSE) Lloyds Banking Group plc is required to disclose any significant ways in which its corporate governance practices differ from those followed by domestic US companies listed on the NYSE. As Lloyds Banking Group’s main listing is on the London Stock Exchange, it follows the principles contained in the combined code on corporate governance issued by the UK Financial Reporting Council. The Group has complied with the provisions of the code and has done so throughout 2009 regarding the provisions where the requirements are of a continuing nature. Key differences are set out below.

The nomination and governance committee sets the corporate governance principles applicable to the Company and conducts an annual evaluation of the performance of the board, its committees and its individual members.

The remuneration and nomination and governance committees comprise the chairman and six and five independent non-executive directors respectively.

DIRECTORS’ CONFLICTS OF INTEREST

The board, as permitted by the Company’s articles of association, has authorised all potential conflicts of interest declared by individual directors. Decisions regarding these conflicts of interest could only be taken by directors who had no interest in the matter. In taking the decision, the directors acted in a way they considered, in good faith, would be most likely to promote the Company’s success. The directors had the ability to impose conditions, if thought appropriate, when granting authorisation. Any authorities given will be reviewed at least every 15 months. No director is permitted to vote on any resolution or matter where he or she has an actual or potential conflict of interest.

THE BOARD AND ITS COMMITTEES

At the year end, the board comprised the chairman, five executive directors and seven independent non-executive directors. Sir Winfried Bischoff succeeded Sir Victor Blank as chairman on 15 September 2009. Details of his selection and appointment process are set out on page 125.

The board considers that it is of an appropriate size to oversee the Group’s businesses, with a suitable diversity of backgrounds and mix of experience and expertise to maximise its effectiveness. The composition of the board is kept under continuous review by the chairman, with the support of the nomination and governance committee, to ensure the right balance of skills and experience. All director appointments are subject to detailed due diligence which includes a robust search and selection process overseen by the nomination and governance committee. On 11 February 2010, the Company announced the appointments of Mr Moreno and Mr Roberts which took effect on 1 March 2010. Their details are included in the biographies on pages 101 and 102.

The chairman is responsible for leading the board and ensuring its effectiveness while the group chief executive manages the Group’s business – these are distinct functions.

The chairman is responsible for the clarity and timeliness of information provided to the board and for facilitating the effective contribution of all directors and ensures that directors receive appropriate induction and ongoing training.

The chairman has a key role in the development (jointly with the group chief executive) of the Group’s strategy, as well as oversight of strategy implementation and performance delivery. He ensures that there is a constructive, close working relationship with the group chief executive and the rest of the board.

MEETINGS

Responding to the challenges faced by the Company, the board held 28 meetings during 2009. In addition there was regular contact with directors outside of these meetings. The time commitment demanded of directors, in particular, non-executive directors, was far in excess of that anticipated in the normal course of business. All directors showed themselves to be willing and able to devote the additional time required often at short notice and at unsocial hours.

INDEPENDENCE

All the non-executive directors are considered by the board to be independent both in character and judgement and free of relationships or circumstances which could affect their judgement. Throughout the year at least half of the board comprised independent non-executive directors.

INDUCTION AND TRAINING

All new directors and committee members receive a full and tailored induction. The primary aim of the induction programme is to provide directors with a comprehensive introduction to the Group; its individual businesses; business models; strategy; and risks. This enables directors to make an early, informed and effective contribution to board debates, based on an understanding of the key challenges facing the Group, the Group’s businesses, and the business model. The induction programme is supplemented by ongoing training and development.

The current induction and training programmes are being reviewed and enhanced to ensure that they meet the requirement for a ‘substantive and personalised’ programme as recommended by the Walker review of corporate governance in UK banks and other financial industry entities published in November 2009.

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BOARD EVALUATION

In autumn 2009, the board, supported by JCA Group, conducted a rigorous process of evaluating its effectiveness, and the effectiveness of its principal committees. The process included confidential, unattributable, one-on-one interviews with every board member and with UKFI and the Group’s external auditors. The review covered corporate governance, board effectiveness, strategy development, risk management and board and committee organisation, composition, operation and dynamics. In addition, although early in his tenure, the review also considered the performance of the chairman, including the effectiveness of his relationships with the group chief executive and other members of the board. The outcomes of the review were subsequently discussed by the board as a whole.

The review was conducted during a period of significant change for the board with several members leaving and a number of relatively new members.

The board members individually and collectively considered that the board is working as an effective whole. After the significant challenges faced by the Group and the board in 2009, the review highlighted the importance of returning to a more normal operating mode by focusing on delivering the integration, developing the future strategy, and reviewing the operations and risk management for the Group as a whole and within each of the key areas. In addition, the review encouraged continued vigorous debate in the board and committees and emphasised the importance of succession plans for the management team and non-executive directors. An action plan has been developed to ensure that the chief conclusions of the review are addressed in a timely manner. As part of this, it has been agreed that issues of risk, liquidity and funding should receive particularly high attention in 2010.

ELECTION AND RE-ELECTION OF DIRECTORS

All directors are subject to election by shareholders at the first annual general meeting (AGM) following their appointment. Sir Winfried Bischoff, Mr Moreno and Mr Roberts stood for election at the AGM, held on 6 May 2010, and were duly elected.

The Company requires all directors to stand for re-election at intervals of no more than three years. At the 2010 AGM, Dr Berndt, Mr Daniels and Mrs Weir retired. Mr Daniels and Mrs Weir sought re-election by shareholders and were re-elected.

The chairman endorsed the effectiveness and commitment of all directors standing for election or re-election at the AGM, and the senior independent director gave a similar endorsement in respect of the chairman’s election.

COMPANY SECRETARY AND INDEPENDENT ADVICE

The company secretary, Mr Baines, is responsible for advising the board on corporate governance matters and, in conjunction with the chairman, for ensuring good information flows between the board, its committees, non-executive directors and senior executives. All directors have access to his advice and services. Additionally, if required in the furtherance of their duties, non-executive directors (along with any other members of the board’s main committees) are entitled to seek independent, professional advice at the Company’s expense.

RELATIONS WITH SHAREHOLDERS

The investor relations team has primary, day-to-day responsibility for managing communications with institutional shareholders through a combination of briefings to analysts and institutional shareholders (both at the interim and year end results and throughout the year), site visits and individual discussions between institutional shareholders and board members and key senior executives. Regular dialogue with shareholders helps to ensure that the Company’s strategy is understood and that any queries or other issues are addressed in a constructive way. In 2009, there has been extensive and regular engagement with institutional shareholders and UKFI, the body set up to manage the Government’s investments in banks. The board receives weekly reports on market and investor sentiment and opinion which helps it develop a balanced understanding of the views of major shareholders.

The company secretary oversees communications with private shareholders. Shareholders are encouraged to attend and participate in the Group’s AGM.

AUDIT COMMITTEE

The audit committee comprises Mr Scicluna (chairman), Lord Leitch, Mr Roberts, Mr Ryan and Mr Watson. All members of the audit committee are independent. The committee’s terms of reference are available from the company secretary and are displayed on the Group’s website, www.lloydsbankinggroup.com. The board of directors has determined that Mr. Scicluna is an ‘audit committee financial expert’ (as defined in the rules promulgated under the U.S. Securities Exchange Act). Although Mr. Scicluna has been identified as an audit committee financial expert for the purposes of the SEC’s rules, the committee members are selected with a view to the expertise and experience of the committee as a whole, and the committee reports to the board of directors as a single entity. The designation of a person as an audit committee financial expert does not impose on such person any duties, obligations or liability that are greater than the duties, obligations and liability imposed on such person as a member of the audit committee and board of directors in the absence of such designation. Nor does the designation of a person as an audit committee financial expert affect the duties, obligations or liability of any other member of the audit committee or board of directors.

During the year, the audit committee received reports from, and held discussions with, management and the external auditors. In discharging its duties, the committee has approved the auditors’ terms of engagement, including their remuneration and, in discussion with them, has assessed their independence and objectivity (more information about which is given in note 11 to the consolidated financial statements, in relation to the procedure for approving fees for audit and non-audit work) and recommended their re-appointment at the AGM. The committee also reviewed the financial statements published in the name of the board and the quality and acceptability of the related accounting policies, practices and financial reporting disclosures; the scope of the work of the group audit department, reports from that department and the adequacy of its resources; the effectiveness of the systems for internal control, risk management and compliance with financial services legislation and regulations (more information about which is given in the note about internal control on page 127); the results of the external audit and its cost effectiveness; and reports from the external auditors on audit planning and their findings on accounting and internal control systems. Procedures for handling complaints regarding accounting, internal accounting controls or auditing matters and for staff to raise concerns in confidence have been established by the committee. The committee also had a meeting with the auditors, without executives present, and a meeting with the group audit director alone.

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CHAIRMAN’S COMMITTEE

The chairman’s committee, comprising the chairman, deputy chairman, senior independent director and the group chief executive, meets to assist the chairman in ensuring the effectiveness and efficiency of board meetings. The committee exercises specific powers delegated to it by the board from time to time.

NOMINATION AND GOVERNANCE COMMITTEE

To ensure that the Group’s governance arrangements take due account of best practice developments, the nomination and governance committee has expanded its terms of reference to expressly include governance issues.

The nomination and governance committee is chaired by Sir Winfried Bischoff. Lord Leitch, Sir Julian Horn-Smith, Mr Moreno, Mr Scicluna and Mr Watson are members. The committee reviews the structure, size and composition of the board; oversees the selection process for prospective directors; makes recommendations to the board on potential appointments and re-appointments of directors at the end of their specified term; and considers board succession. Following expansion of its terms of reference, it also reviews the board’s governance arrangements and oversees the Company’s implementation of governance requirements egunder the Walker Review and Combined Code.

The committee is responsible for overseeing the process for appointments of new non-executive directors and making recommendations to the board. In 2009, two new non-executive director appointments were announced. A further two appointments were announced on 11 February 2010. All appointments are subject to a rigorous search and selection process.

In addition, on 26 July 2009, the appointment of Sir Winfried Bischoff as chairman of Lloyds Banking Group was recommended to, and approved by, the board, following the process set out below.

The committee’s terms of reference are available from the company secretary and are displayed on the Group’s website, www.lloydsbankinggroup.com.

CHAIRMAN’S SUCCESSION

On 18 May 2009, following Sir Victor Blank’s decision to step down from the board, a sub-committee of the nomination committee was established to oversee the chairman’s succession. The committee was chaired by Sir Julian Horn-Smith. Membership was made up entirely of independent non-executive directors, namely Dr Berndt, Mr Green, Sir David Manning and Mr Watson. There was an open invitation to other non-executive directors to attend meetings. Ms McCall was a regular attendee; Mr Ryan and Mr Scicluna also attended a number of meetings. As deputy chairman, Lord Leitch was kept advised of developments and, towards the latter end of the process, was invited to join meetings. The committee was advised by the group human resources director and the head of secretariat. Sir Victor Blank did not participate in any part of the process.

Following a tender process, the committee appointed Jan Hall of JCA Group, as executive search advisor.

The sub-committee met 10 times. Activities included agreeing the role specification and selection criteria; reviewing applicant profiles and agreeing short lists; reviewing shareholder feedback and ultimately recommending the appointment of Sir Winfried Bischoff to the board. In conjunction with the remuneration committee, the committee also proposed the terms and conditions of appointment for the new chairman. Between meetings, there were regular updates on progress.

Short listed candidates were subject to an extensive interview process, initially by panels of committee members along with other directors. Ms McCall and Lord Leitch also participated in the interview process. All executive and non-executive directors were given the opportunity to meet the candidates prior to any decision being made. Detailed referencing and due diligence, both formal and informal, was also carried out. The appointment was subject to, and received, approval from the Financial Services Authority.

The views of institutional shareholders including UKFI were sought prior to any decision being made. Those shareholders consulted confirmed that they were satisfied that the search and selection process had been robust and extensive.

REMUNERATION COMMITTEE

Information about the remuneration committee’s membership and work is given in the directors’ remuneration report on pages 105 and 106. Its terms of reference are available from the company secretary and are displayed on the Group’s website, www.lloydsbankinggroup.com.

RISK OVERSIGHT COMMITTEE

The risk oversight committee comprises Mr Moreno (chairman), Sir Winfried Bischoff, Sir Julian Horn-Smith, Mr Roberts, Mr Ryan and Mr Scicluna. There is a standing invitation for all other non-executive directors to attend meetings of the committee. The risk oversight committee’s duties include overseeing the development, implementation and maintenance of the Group’s overall risk management framework, and its risk appetite, strategy, principles and policies, to ensure they are in line with emerging regulatory, corporate governance and industry best practice. The committee also oversees the Group’s risk exposures; facilitates the involvement of non-executive directors in risk issues and aids their understanding of these issues; oversees adherence to Group risk policies and standards and considers any material amendments to them; and reviews the work of the group risk function.

GROUP EXECUTIVE COMMITTEE

The group executive committee, comprising the group chief executive, all the group executive directors (as shown on page 102), together with the chief risk officer, the group human resources director and the director of group operations, meets to assist the group chief executive in performing his duties. Specifically, the committee considers the development and implementation of strategy, operational plans, policies and budgets; the monitoring of operating and financial performance; the assessment and control of risk; the prioritisation and allocation of resources; and the monitoring of competitive forces in each area of operation. The committee, assisted by its sub-committees, the group business risk and group asset and liability committees, also supports the group chief executive in endeavouring to ensure the development, implementation and effectiveness of the Group’s risk management framework and the clear articulation of the Group’s risk policies, and in reviewing the Group’s aggregate risk exposures and concentrations of risk.

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ATTENDANCE AT MEETINGS

The attendance of directors at board meetings and at meetings of the audit, nomination and governance, remuneration and risk oversight committees during 2009 was as follows:


											Nomination and governance committee

	Board meetings							Audit						Remuneration			Risk oversight
	Regular		Ad hoc		Total			committee						committee			committee

Number of meetings during the year		9		19		28			8			2			13			4
Current directors who served during 2009
Dr W C G Berndt		9		15		24						2			13
Sir Winfried Bischoff ¹		3		7		10	(max 10 )								3	(max 3)		1	(max 1)
J E Daniels		9		19		28
Sir Julian Horn-Smith		8		17		25						2			8			3
A G Kane		9		19		28
Lord Leitch ²		8		19		27			7			2			4	(max 5)		4
T T Ryan ³		7		14		21	(max 22)		5	(max 5 )								3	(max 3)
M A Scicluna		9		18		27			8									4
G T Tate		8		18		26
T J W Tookey		9		19		28
																		2	(max 2)
A Watson ⁴		7		11		18	(max 20)		3	(max 3 )

H A Weir		9		19		28

Former directors who served during 2009
Sir Victor Blank ⁵		6		11		17	(max 18 )								10	(max 10)		3	(max 3)
E Brown ⁶		4		6		10	(max 12)		4	(max 5 )								2	(max 2)
J P du Plessis ⁷		2		6		8	(max 9)		3	(max 4)		1	(max 1 )					1	(max 2)
P N Green ⁸		7		10		17	(max 22)		6	(max 7)		1	(max 2)		7	(max 11)
Sir David Manning ⁹		7		15		22	(max 26 )					1	(max 1)		12	(max 12)		4
C J McCall ¹⁰		9		11		20									7	(max 12)


¹	Appointed to the board, nomination and governance, remuneration and risk oversight committees on 15 September 2009.

²	Appointed to the remuneration committee on 4 August 2009.

³	Appointed to the board, audit and risk oversight committees on 1 March 2009.

⁴	Appointed to the board on 2 April 2009. Appointed to the audit and risk oversight committees on 6 May 2009.

⁵	Left the board on 15 September 2009.

⁶	Left the board on 5 June 2009.

⁷	Left the board on 17 April 2009.

⁸	Left the board on 23 October 2009.

⁹	Left the board on 2 November 2009.

¹⁰	Appointed to the remuneration committee on 23 January 2009. Left the board on 31 December 2009.

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COMPLIANCE WITH THE BRITISH BANKERS’ ASSOCIATION DRAFT CODE FOR FINANCIAL REPORTING DISCLOSURE

In October 2009, the British Bankers’ Association published a draft Code for Financial Reporting Disclosure (the Disclosure Code). The draft Disclosure Code sets out five disclosure principles together with supporting guidance. The principles are that UK banks: commit to providing high quality, meaningful and decision-useful disclosures; commit to ongoing review of, and enhancement to, their financial instrument disclosures for key areas of interest; will assess the applicability and relevance of good practice recommendations to their disclosures acknowledging the importance of such guidance; will seek to enhance the comparability of financial statement disclosures across the UK banking sector; and will clearly differentiate in their annual reports between information that is audited and information that is unaudited.

The Group and other major UK banks have voluntarily adopted the draft Disclosure Code in their 2009 financial statements. The Group’s 2009 financial statements have therefore been prepared in compliance with the draft Disclosure Code’s principles.

INTERNAL CONTROL

The board of directors is responsible for the establishment and review of Lloyds Banking Group’s system of internal control, which is designed to ensure effective and efficient operations, quality of internal and external reporting, internal control, and compliance with laws and regulations. It should be noted, however, that such a system is designed to manage, rather than eliminate, the risk of failure to achieve business objectives. In establishing and reviewing the system of internal control, the directors have regard to the nature and extent of relevant risks, the likelihood of a loss being incurred and the costs of control. It follows, therefore, that the system of internal control can only provide reasonable but not absolute assurance against the risk of material loss.

The directors and senior management are committed to maintaining a control-conscious culture across all areas of operation. This is communicated to all employees by way of published policies and procedures and regular management briefings. A requirement to comply with internal control risk policies is a key component of individual staff objectives expressed in the balanced scorecard. Key business risks are identified, and these are controlled by means of procedures such as physical controls, credit, trading and other authorisation limits and segregation of duties. In addition, there is an annual control self assessment exercise whereby the key businesses and head office functions review specific controls and attest to the accuracy of their assessments. The assessment covers all enterprise-wide risk management categories and is in accordance with the principles of the Combined Code. As in previous years, this exercise was completed for the year ended 31 December 2009. All returns have been satisfactorily completed and appropriately certified.

The effectiveness of the internal control system is reviewed regularly by the board and the audit committee, which also receives reports of reviews undertaken around Lloyds Banking Group by group risk and group audit. The audit committee receives reports from the Company’s auditors, PricewaterhouseCoopers LLP (which include details of significant internal control matters that they have identified), and has a discussion with the auditors at least once a year without executives present, to ensure that there are no unresolved issues of concern.

DISCLOSURE CONTROLS AND PROCEDURES

As of 31 December 2009, Lloyds Banking Group, under the supervision and with the participation of the Group’s management, including the group chief executive and the group finance director, performed an evaluation of the effectiveness of the Group’s disclosure controls and procedures. Based on this evaluation, the group chief executive and group finance director concluded that the Company’s disclosure controls and procedures, as at 31 December 2009, were effective for gathering, analysing and disclosing with reasonable assurance the information that Lloyds Banking Group is required to disclose in the reports it files under the Securities Exchange Act of 1934, within the time periods specified in the SEC’s rules and forms. The Lloyds Banking Group’s management necessarily applied its judgement in assessing the costs and benefits of such controls and procedures, which by their nature can provide only reasonable assurance regarding management’s control objectives.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

Lloyds Banking Group was formed on 16 January 2009 following the acquisition of HBOS plc in a purchase business combination. Management has performed an evaluation of changes in the Lloyds Banking Group’s internal control over financial reporting. This evaluation has not included an assessment of internal control over financial reporting relating to the HBOS businesses, except for controls over certain assets where the progress of integration with heritage Lloyds TSB assets has made it possible for these to be included.

Based on this evaluation, management has concluded that there has been no change in the Lloyds Banking Group’s internal control over financial reporting that occurred during the year ended 31 December 2009 that has materially affected, or is reasonably likely to materially affect, the Lloyds Banking Group’s internal control over financial reporting.

As part of the Group’s integration project a separate work stream has been created to assess the effectiveness of financial reporting controls. This workstream is a critical element of the overall integration programme, is sufficiently resourced and is on target to achieve required milestones. A complete assessment of the internal controls over financial reporting for Lloyds Banking Group, including HBOS, will be included in management’s assessment as of 31 December 2010.

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MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of Lloyds Banking Group plc is responsible for establishing and maintaining adequate internal control over financial reporting. Lloyds Banking Group plc’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS.

The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with IFRS and that receipts and expenditures are being made only in accordance with authorisations of management and directors of Lloyds Banking Group plc; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorised acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

Internal control systems, no matter how well designed, have inherent limitations and may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.

The management of Lloyds Banking Group plc assessed the effectiveness of the Company’s internal control over financial reporting as at 31 December 2009 based on the criteria set forth by the Committee of Sponsoring Organisations of the Treadway Commission (COSO) in its report ‘Internal Control – Integrated Framework’.

Management’s assessment of and conclusion on the effectiveness of internal control over financial reporting does not include internal controls relating to the HBOS plc business which was acquired in a purchase business combination on 16 January 2009, except for controls over certain assets where the progress of integration with heritage Lloyds TSB assets has made it possible for these to be included. The HBOS plc business has been included in the consolidated financial statements of Lloyds Banking Group plc for the year ended 31 December 2009. The businesses which have not been included in management’s assessment represented approximately 49 per cent of the Group’s total income and 56 per cent of the Group’s total assets for the year ended 31 December 2009.

Based on this assessment, management concluded that, as at 31 December 2009, the Company’s internal control over financial reporting was effective.

PricewaterhouseCoopers LLP, an independent registered public accounting firm, has issued an audit report on the Company’s internal control over financial reporting as of 31 December 2009. This report appears on page F-2.

128

MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

MAJOR SHAREHOLDERS

At 30 April 2010, notification had been received that The Solicitor for the Affairs of Her Majesty’s Treasury had a direct interest of 41.26 per cent (27,608,563,642 ordinary shares) in the Company’s issued share capital with rights to vote in all circumstances at general meetings. No other notification has been received that anyone has an interest of 3 per cent or more in the Company’s issued ordinary share capital. Further information on The Solicitor for the Affairs of Her Majesty’s Treasury’s shareholding in the Company is provided in Information about the Lloyds Banking Group’s relationship with the UK Government and Business – History and development of Lloyds Banking Group .

All shareholders within a class of the Company’s shares have the same voting rights.

RELATED PARTY TRANSACTIONS

The Group, as at 31 December 2009, had related party transactions with 14 key management personnel. See note 47 to the consolidated financial statements. In addition, material contracts with HM Treasury are described in the Information about the Lloyds Banking Group’s relationship with the UK Government section below.

Except as described in Business – Material contracts and below under Information about the Lloyds Banking Group’s relationship with the UK Government , there are no transactions to which the Group is a party involving the UK Government or any body controlled by the UK Government which are material to the Group or, to the Group’s knowledge, to the UK Government or any UK Government controlled body, that were not made in the ordinary course of business, or that are unusual in their nature or conditions. However, considering the nature and scope of the bodies controlled by the UK Government, it may be difficult for the Group to know whether a transaction is material for such a body.

To the best of the Group’s knowledge, any outstanding loans made by the Group to or for the benefit of the UK Government or any body controlled by the UK Government, were made (1) in the ordinary course of business, (2) on substantially the same terms, including interest rate and collateral, as those prevailing at the time for comparable transactions with other persons, (3) did not involve more than the normal risk of collectability or present other unfavourable features, and (4) were made on arm’s length basis.

INFORMATION ABOUT THE LLOYDS BANKING GROUP’S RELATIONSHIP WITH THE UK GOVERNMENT

On 18 September 2008, with the support of the UK Government, the boards of the Company and HBOS announced that they had reached agreement on the terms of a recommended acquisition by the Company of HBOS. On 13 October 2008, in the context of further unprecedented turbulence in global financial markets and as part of a co-ordinated package of capital and funding measures for the UK banking sector implemented by HM Treasury, the boards of both the Company and HBOS announced that they intended to participate in the proposed UK Government funding package and that they had agreed to proceed with the acquisition on revised terms. In this context, a combined total of £17,000 million of new capital was raised, consisting of £4,500 million in ordinary shares and £1,000 million in preference shares (before costs and expenses) by the Company and £8,500 million by ordinary shares and £3,000 million in preference shares (before costs and expenses) by HBOS.

2008 PLACING AND OPEN OFFER AGREEMENT AND PREFERENCE SHARE SUBSCRIPTION AGREEMENT

Pursuant to a placing and open offer agreement with effect from 13 October 2008 entered into between the Company, HM Treasury and the joint sponsors and joint bookrunners named therein (the 2008 Placing and Open Offer Agreement), (i) the Company agreed to invite qualifying shareholders to apply to acquire open offer shares at an issue price of 173.3 pence per ordinary share by way of an open offer; (ii) the joint sponsors and joint bookrunners agreed to use reasonable endeavours to procure placees to acquire open offer shares at not less than the issue price on the basis that the open offer shares placed were subject to clawback to the extent they were taken up by qualifying shareholders in the open offer; and (iii) HM Treasury agreed that, to the extent not placed or taken up under the open offer, HM Treasury would acquire the open offer shares at the issue price. The 2008 placing and open offer comprised a placing and open offer of 2,596,653,203 shares at the issue price. The 2008 placing and open offer was successfully completed in accordance with its terms; however, the Company gave certain customary representations and warranties and indemnities to each of HM Treasury, the joint sponsors and joint bookrunners under the 2008 Placing and Open Offer Agreement that are unlimited as to time and amount.

The Company and HM Treasury also entered into a preference share subscription agreement, with effect from 13 October 2008, pursuant to which HM Treasury agreed to acquire, and the Company agreed to allot and issue, 1,000,000 new preference shares to HM Treasury for a total consideration of £1,000 million (before costs and expenses).

HBOS also entered into a placing and open offer agreement with effect from 13 October 2008 with HM Treasury and the joint sponsors and joint bookrunners named therein, on similar terms and for similar purposes as the Company’s 2008 Placing and Open Offer Agreement and corresponding placing and open offer. A total of 7,482,394,366 HBOS open offer shares were offered at the issue price of 113.6 pence per share. In addition, HBOS entered into a preference share subscription agreement with HM Treasury with effect from 13 October 2008, pursuant to which HM Treasury agreed to acquire, and HBOS agreed to allot to HM Treasury, new HBOS preference shares for a total consideration of £3,000 million (before costs and expenses).

Pursuant to the placing and open offer, which was completed in January 2009 (and the concomitant placing and open offer by HBOS) and the acquisition of HBOS by the Company completed on 16 January 2009, the UK Government acquired 43.38 per cent of the Company’s issued ordinary share capital. In addition, £3,000 million non-cumulative 12 per cent fixed to floating rate preference shares were issued by the Company to HM Treasury on 16 January 2009 in exchange for the £3,000 million preference shares which had been issued by HBOS plc to HM Treasury on 15 January 2009 (as referred to above).

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MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

2009 PLACING AND OPEN OFFER AGREEMENT

In June 2009 the Company issued approximately 10,408 million new ordinary shares as part of a placing and compensatory open offer. HM Treasury subscribed for approximately 4,521 million of these new ordinary shares at a price of 38.43 pence per share. As placees were procured for all the new ordinary shares for which valid acceptances were not received under the placing and compensatory open offer, HM Treasury’s shareholding remained at 43.4 per cent. The Company used the proceeds from this placing and compensatory open offer to redeem the £4,000 million preference shares issued by the Company to HM Treasury, described above, at 101 per cent of their issue price (in accordance with the terms agreed with HM Treasury) together with accrued dividends thereon.

In connection with the placing and compensatory open offer, a Placing and Open Offer Agreement dated 7 March 2009 (the 2009 Open Offer Agreement) was entered into between the Company and HM Treasury (as amended and restated on 20 March 2009 between the Company, HM Treasury, Citigroup Global Markets U.K. Equity Limited, J.P. Morgan Cazenove Limited and UBS Limited and further amended and restated between the same parties on 18 May 2009), pursuant to which (i) the Company agreed to invite qualifying shareholders to apply to subscribe for the new ordinary shares described above at an issue price of 38.43 pence per share by way of a compensatory open offer, (ii) the joint sponsors and joint bookrunners were appointed and agreed to use reasonable endeavours to procure placees to subscribe for the open offer shares not taken up under the compensatory open offer, and (iii) HM Treasury agreed that, to the extent not placed or taken up under the compensatory open offer and subject to the terms and conditions set out in the Open Offer Agreement, HM Treasury would subscribe for such open offer shares itself at the issue price.

In consideration of the provision of its services under the 2009 Open Offer Agreement, the Company agreed to pay to HM Treasury (i) a commission of 0.5 per cent of the aggregate value of the open offer shares at the issue price per open offer share payable on the earlier of admission to the Official List and to trading on the London Stock Exchange’s main market and the second business day after the day on which the 2009 Open Offer Agreement is terminated, and (ii) a further commission of 1 per cent of the aggregate value of the open offer shares subscribed for by HM Treasury (or its nominee) or by placees (including, for the avoidance of doubt, HM Treasury) at the issue price per open offer share payable on such date.

The Company also agreed to pay to each of HM Treasury, the joint sponsors and joint bookrunners all legal and other costs and expenses (properly incurred in the case of the joint bookrunners), and those of HM Treasury’s financial advisers incurred in connection with the placing and compensatory open offer, the redemption of the preference shares or any arrangements referred to in the 2009 Open Offer Agreement.

The Company also agreed to bear all costs and expenses relating to the placing and compensatory open offer and the preference share redemption, including (but not limited to) the fees and expenses of its professional advisers, the cost of preparation, advertising, printing and distribution of the prospectus document and all other documents connected with the placing and compensatory open offer and the preference share redemption, the listing fees of the FSA, any charges by CREST and the fees of the London Stock Exchange and Euronext. The costs and commissions incurred by the joint bookrunners in connection with the rump placing were deducted from the aggregate proceeds of the rump placing.

The Company gave certain representations and warranties and indemnities to each of HM Treasury, the joint sponsors and joint bookrunners under the 2009 Open Offer Agreement. The Company’s liabilities thereunder are unlimited as to time and amount. HM Treasury is entitled to novate its rights under the agreement to any entity that is wholly-owned, directly or indirectly, by HM Treasury.

REGISTRATION RIGHTS AGREEMENT

Pursuant to its obligations to HM Treasury under the open offer agreement entered into by the Company with effect from 13 October 2008, the Company entered into a Registration Rights Agreement with HM Treasury on 12 January 2009, granting customary demand and ‘piggyback’ registration rights in the United States under the United States Securities Act of 1933, as amended to HM Treasury with respect to any ordinary shares of the Group held by HM Treasury (Registrable Securities). Pursuant to the Registration Rights Agreement, HM Treasury is permitted to transfer its registration rights to any of its wholly-owned, directly or indirectly, entities, as well as to any third party to whom it transfers not less than US$500 million in Registrable Securities. In connection with any registered offering of ordinary shares by the Group under the Securities Act, any holders of Registrable Securities will have the right to participate in the offering, pursuant to customary ‘piggyback’ registration rights, to the extent that such participation would not prevent successful completion of the offering. In addition, all holders of Registrable Securities have ‘piggyback’ registration rights, on a pro rata basis, in any demand registration made by another holder pursuant to the Registration Rights Agreement.

The Registration Rights Agreement was amended with effect from 11 June 2009 to include as Registrable Securities (as defined in the Registration Rights Agreement) any new shares subscribed for under the 2009 Open Offer Agreement, any B shares and other securities in the Company called by HM Treasury to be issued by any person from time to time and securities issued by HM Treasury from time to time which are exchangeable for, convertible into, give rights over or are referable to any such securities.

RESALE RIGHTS AGREEMENT

Pursuant to its obligations to HM Treasury under the 2009 Open Offer Agreement, the Company entered into a Resale Rights Agreement with HM Treasury with effect from 11 June 2009, in which it agreed to provide its assistance to HM Treasury in connection with any proposed sale by HM Treasury of ordinary shares, B shares and other securities held by HM Treasury in the Company from time to time, by HM Treasury and of any securities of any description caused by HM Treasury to be issued by any person from time to time and which are exchangeable for, convertible into, give rights over or are referable to such ordinary shares or other securities issued by the Group, to be sold in such jurisdictions (other than the United States) and in such manner as HM Treasury may determine. Such assistance may include, the provision by the Company of assistance with due diligence and the preparation of marketing and such other documentation (including any offering memorandum, whether or not a prospectus) as HM Treasury may reasonably request.

GOVERNMENT ASSET PROTECTION SCHEME

The Company entered into a Pre-Accession Commitments Deed dated 7 March 2009 and a Lending Commitments Deed dated 6 March 2009 with HM Treasury, both relating to the Company’s proposed participation in the Government Asset Protection Scheme (GAPS). As further detailed below, the Company subsequently withdrew from its proposed participation in GAPS.

LENDING COMMITMENTS DEED

On 6 March 2009, the Company entered into a ‘deed poll’ in favour of certain UK Government departments under which it undertook to support lending to creditworthy borrowers in the UK in a commercial manner with effect from 1 March 2009. This lending commitment was a pre-requisite to the Group’s proposed participation in the GAPS, the objective of which was to reinforce the stability of the UK financial system and support the recovery of the UK economy. A condition to the Group’s proposed participation in the GAPS was the commitment by the Company to increase net

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lending by approximately £14,000 million in the twelve months commencing 1 March 2009 to support UK businesses (approximately £11,000 million) and homeowners (approximately £3,000 million), and to maintain in the twelve months commencing 1 March 2010 similar levels of lending as in the twelve months commencing 1 March 2009, subject to adjustment of the lending commitments by agreement with HM Treasury and the Department for Business, Enterprise and Regulatory Reform to reflect circumstances at the start of the twelve month period commencing 1 March 2010.

Under the GAPS Withdrawal Deed (detailed below), the Company has agreed to reaffirm the lending commitments which were originally given in the Lending Commitments Deed. On 23 March 2010, the Company entered into a deed poll in favour of the UK Government departments confirming its lending commitments for the 12 month period commencing 1 March 2010. The Company agreed subject to, amongst other things, sufficient customer demand, to provide gross new lending to UK businesses of £44,000 million and to adjust the undertakings given in connection with lending to homeowners for the 12 month period. This additional lending in 2009 and 2010 is expressed to be subject to the Group’s prevailing commercial terms and conditions (including pricing and risk assessment) and, in relation to mortgage lending, the Group’s standard credit and other acceptance criteria.

HM TREASURY PRE-ACCESSION DEED

On 7 March 2009, the Company entered into a deed poll in favour of HM Treasury, pursuant to which the Company gave a series of undertakings in relation to the provision of information and the management of the proposed assets, commitments and exposures proposed to be included in the GAPS (the Proposed Assets) in the period to the Group’s proposed accession to the GAPS.

The Company’s obligations under the Pre-Accession Deed referred to above (other than its commitment to inform the UK Government of certain deleveraging activities) were terminated pursuant to the GAPS Withdrawal Deed.

2009 RIGHTS ISSUE

In connection with the rights issue announced in November 2009, the Company issued approximately 36,505 million new ordinary shares in respect of a rights issue as part of an alternative to the Group’s proposed participation in GAPS (together with a liability management exercise). The Company entered into an Undertaking to Subscribe agreement with HM Treasury whereby HM Treasury undertook, amongst other things, to take up its rights to subscribe for all of the new shares to which it was entitled under the rights issue. HM Treasury subscribed for approximately 15,854 million new shares at a price of 37 pence per share. As subscribers were procured for all the new ordinary shares for which valid acceptances were not received under the rights issue, HM Treasury’s shareholding again remained at 43.4 per cent.

GAPS WITHDRAWAL DEED

Pursuant to the successful rights issue, the Company withdrew from its proposed participation in GAPS and on 3 November 2009, the Company entered into a GAPS Withdrawal Deed with HM Treasury (the GAPS Withdrawal Deed) pursuant to which, among other matters, the Company agreed to pay HM Treasury an amount of £2,500 million in recognition of the benefits to the Group’s trading operations arising as a result of HM Treasury proposing to make GAPS available to the Group.

The GAPS Withdrawal Deed contained certain undertakings given by the Group to HM Treasury in connection with the state aid approval obtained from the European Commission and its withdrawal from GAPS. In particular, the Group is required to do all acts and things necessary to ensure the UK Government’s compliance with its obligations under the European Commission decision approving state aid to the Group. This undertaking includes an obligation: (i) to comply with the restructuring measures that the Group has agreed to undertake; (ii) to comply with the terms of the restructuring plan accepted by the European Commission in connection with the approval of state aid to the Group; and (iii) to provide certain information to HM Treasury and do such acts as are necessary to enable compliance with the state aid approval to be monitored. The GAPS Withdrawal Deed also provides for the Group’s restructuring obligations to be modified in certain limited circumstances (without prejudice to any challenge to such modifications). However, HM Treasury has undertaken that it will not, without the consent of the Company, agree modifications to the Group’s undertakings with respect to state aid which are significantly more onerous to the Company than those granted in order to obtain the state aid approval.

If the European Commission adopts a decision that the United Kingdom must recover any state aid, the Group has undertaken to repay all such state aid (subject to the Group’s right to challenge any such decision in the European courts).

The GAPS Withdrawal Deed includes a number of other commitments given by the Company to HM Treasury. The Company has, among other things, acknowledged its commitment to the principle that, from 2010, it should be at the leading edge of implementing the G20 principles, the FSA Code on remuneration and any remuneration provisions accepted by the Government from the Walker Review, provided that this principle shall always be applied in such a way as to allow the Company to operate on a level playing field with its competitors. In addition, the Group has agreed with HM Treasury the specific deferral and clawback terms which will apply to any bonuses in respect of the 2009 performance year.

STATE AID

As part of the European Commission’s decision approving state aid to the Group, Lloyds Banking Group was required to work with HM Treasury to submit a restructuring plan to the European Commission in the context of a state aid review. The plan was required to contain measures to limit any competition distortions resulting from the state aid received by Lloyds Banking Group. The College of Commissioners announced its formal approval of Lloyds Banking Group’s restructuring plan on 18 November 2009.

The restructuring plan consists of the following principal elements: (i) the disposal of a retail banking business with at least 600 branches, a 4.6 per cent share of the personal current accounts market in the UK and approximately 19 per cent of Lloyds Banking Group’s mortgage assets; (ii) an asset reduction programme to achieve a £181 billion reduction in a specified pool of assets by 31 December 2014; and (iii) behavioural commitments, including commitments not to make certain acquisitions for approximately three to four years and not to make discretionary payments of coupons or to exercise voluntary call options on hybrid securities from 31 January 2010 until 31 January 2012, which will prevent Lloyds Banking Group from paying dividends on its ordinary shares for the same duration.

The business referred to in (i) above will need to be disposed of within four years and consists of the TSB brand, the branches, savings accounts and branch-based mortgages of Cheltenham & Gloucester, the branches and branch-based customers of Lloyds TSB Scotland and a related banking licence, additional Lloyds TSB branches in England and Wales, with branch-based customers, and Intelligent Finance. Lloyds Banking Group is unable at this time to identify with any precision the assets and liabilities that will be divested, and associated income and expenses, until nearer the date of a sale.

HMT UNDERTAKING TO SUBSCRIBE

Under the HMT Undertaking to Subscribe, HM Treasury irrevocably undertook to procure that the Solicitor for the Affairs of Her Majesty’s Treasury (as nominee for HM Treasury) (i) would vote in favour of all of the resolutions set out in the notice convening the general meeting of the Company held on 26 November 2009 in accordance with the recommendation of the board (except for resolution 4, as set out in the notice of general meeting) and (ii) would take up its rights to subscribe for all of the new shares to which it is entitled under the rights issue.

The Company agreed to pay to HM Treasury the HMT Commitment Commission, being a commission of up to £143.7 million, in consideration, amongst other things, for the undertakings given by HM Treasury in the HMT Undertaking to Subscribe.

COST REIMBURSEMENT DEED

Under the cost reimbursement deed dated 2 November 2009, the Group agreed to pay for the UK Government’s set-up costs relating to the proposed participation of the Group in GAPS (including all costs of the UK Government relating to the proposed participation of the Group in, and its withdrawal from, GAPS) and the UK Government’s costs associated with the European Commission’s approval of state aid to the Group.

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CREDIT GUARANTEE SCHEME

HM Treasury launched the Credit Guarantee Scheme in October 2008 as part of a range of measures announced by the UK Government intended to ease the turbulence in the UK banking system. It charged a commercial fee for the guarantee of new short and medium term debt issuance. The fee payable to HM Treasury on guaranteed issues was based on a per annum rate of 50 basis points plus the median five-year Credit Default Swap spread. The drawdown window for the Credit Guarantee Scheme closed for new issuance at the end of February 2010. At 31 December 2009, the Group had £49,070 million of debt in issue under the Credit Guarantee Scheme. During the year, fees of £498 million were paid to HM Treasury in respect of guaranteed funding were included in the Group’s income statement.

GOVERNMENT SHAREHOLDING

The Government’s shareholding in the Company is currently held by the Solicitor for the Affairs of HM Treasury as nominee for HM Treasury and managed by UKFI (a company wholly owned by HM Treasury) on behalf of HM Treasury. No formal relationship agreement has been concluded between the Group and the UK Government and no specific measures are in place to ensure that control is not abused by HM Treasury. However, the relationship falls within the scope of the revised framework document between HM Treasury and UKFI published on 13 July 2009. The framework document states that UKFI will manage the UK financial institutions in which HM Treasury holds an interest ‘on a commercial basis and will not intervene in day-to-day management decisions of the Investee Companies (as defined therein) (including with respect to individual lending or remuneration decisions)’. This document also makes it clear that such UK financial institutions will continue to be separate economic units with independent powers of decision and ‘will continue to have their own independent boards and management teams, determining their own strategies and commercial policies (including business plans and budgets)’.

These goals are consistent with the stated public policy aims of the UK Government, as articulated in a variety of public announcements (as at 10 May 2010). In the publication ‘An Introduction: Who We Are, What We Do and the Framework Document Which Governs the Relationship Between UKFI and HM Treasury’, it is stated that UKFI is to ‘develop and execute an investment strategy for disposing of the investments in the banks in an orderly and active way through sale, redemption, buy-back or other means within the context of an overarching objective of protecting and creating value for the taxpayer as shareholder, paying due regard to the maintenance of financial stability and to acting in a way that promotes competition’. UKFI has also stated that it intends to ‘engage robustly with banks’ boards and management, holding both strategy and financial performance to account, and taking a strong interest in getting the incentives structures right on the board and beyond – accounting properly for risk and avoiding inefficient rewards for failure’.

The Group, in common with other financial institutions, is also working closely with a number of Government departments and agencies on various industry-wide initiatives that are intended to support the Government’s objective of greater stability in the wider financial system. These initiatives currently include the potential extension of the Bank of England’s discount window facility whereby banks and building societies can exchange eligible securities and, potentially, other asset classes for HM Treasury bills.

The Group also engages in numerous transactions on arm’s length commercial terms in the ordinary course of its business with the Government and its various departments and agencies, as well as with other companies in which the Government has invested. This includes financings, lendings, banking, asset management and other transactions with UK financial institutions in which the Government has invested. During 2008 and 2009, the Group has made use of these measures in order to maintain and improve a stable funding position.

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OVERVIEW OF UK REGULATION

The cornerstone of the regulatory regime in the UK is the Financial Services and Markets Act 2000 (FSMA) which came into force on 1 December 2001 The FSA has responsibility under the FSMA for the regulation and oversight of a wide range of financial services activities in the UK. The FSA is responsible for the authorisation and supervision of institutions that perform regulated activities as defined in the FSMA. As part of its authorisation process, the FSA reviews applicants to ensure that they satisfy the necessary criteria, including suitability, competence and financial soundness, to engage in regulated activity.

These responsibilities include the regulation of mortgage lending, sales and administration (October 2004) and general insurance sales and administration (January 2005). More recently, on 1 November 2009, responsibility for the regulation of banking conduct of business and for payment services, under the Payment Services Regulations 2009, transferred to the FSA.

The Financial Services Act 2010 (FS Act) received Royal Assent on 8 April 2010. The FS Act establishes a new consumer financial education body, amends the FSMA to provide the FSA with a new financial stability statutory objective, gives the FSA powers to make rules on remuneration arrangements, short selling, living wills, consumer redress schemes, and extends its enforcement powers. The FSA is currently consulting on implementing certain powers in the FS Act.

Significant changes to the UK regulatory regime are likely following the UK general election on 6 May 2010.

As at 31 December 2009 there were approximately 50 UK authorised institutions across the Group. These are regulated by the FSA on both an individual and a consolidated basis.

REGULATORY APPROACH OF THE FSA

The FSA’s regulatory approach aims to focus and reinforce the responsibility of senior management of a financial institution to ensure that it takes reasonable care to organise and control its affairs responsibly and effectively and that it develops and maintains adequate risk management systems.

A risk-based approach for the supervision of all financial institutions is adopted by the FSA and the starting point for the FSA’s supervision is based on a systematic analysis of an institution’s risk profile. Having determined the level of inherent risk, a minimum capital adequacy requirement is established, which the institution is required to meet at all times.

The FSA carries out its supervision of UK financial institutions through the collection of information from a series of prudential returns covering sterling and non-sterling operations, on-site reviews (through its ARROW reviews and through industry-wide thematic reviews), desk-based reviews, meetings with senior management and reports obtained from skilled persons. For major retail groups such as the Group, a dedicated relationship team coordinates much of this activity via its ‘Close and Continuous’ supervision regime.

Regular prudential reports required by the FSA include operating statements and returns covering (amongst other things) capital adequacy, liquidity, large single exposures and large exposures to related borrowers. Capital adequacy returns are submitted on a periodic basis for all the authorised institutions within the Group. Regular non-prudential reports required by the FSA include complaints data, daily transaction reporting returns and product sales data. The FSA reporting rules were revised through the introduction of the Integrated Regulatory Reporting Programme, which came into effect in 2008.

The FSA Handbook sets out rules and guidance across a range of issues with which financial institutions are required to comply. These include, amongst other things:


•	Principles for Businesses – 11 high level principles to which financial institutions are required to adhere.

•	Authorisation requirements and threshold conditions – these are standards that need to be met in order to be authorised and continue to be met on an ongoing basis.

•	Prudential rules – these relate to capital adequacy and liquidity.

•	Systems and controls requirements that are appropriate to the volume and complexity of activity undertaken.

•	Conduct of Business rules that set out the requirements for aspects such as advising and selling, product disclosure, financial promotions (including compliance with the requirement that such promotions should be clear, fair and not misleading), responsible lending and default.

•	Reporting Requirements – these set out periodic reporting requirements and event driven notifications that must be submitted to the FSA.

•	Training and Competence rules – these are standards that apply to firms providing advice, amongst other services, to retail customers.

•	Code of Market Conduct – this provides further rules and guidance on the market abuse offences set out in the FSMA.

A key theme running through most of the FSA’s rules and regulations is the concept of Treating Customers Fairly (TCF), contained in Principle 6 of the FSA’s Principles for Businesses. From 31 December 2008, the FSA expects all firms to be able to demonstrate that full TCF compliance has been embedded within their business activities, operations and culture. As mentioned above, the FS Act amends the FSMA to provide the FSA with an added regulatory objective of “financial stability”, defined as “contributing to the protection and enhancement of the stability of the UK financial system”. In considering this objective, the FSA must have regard to the economic and fiscal consequences for the UK of instability of the UK financial system, the effects on the growth of the UK economy of any regulatory action taken to meet the financial stability objective and the impact on the stability of the UK financial system of events or circumstances outside the UK.

At this stage it is unclear how the addition of the financial stability objective will affect the operation of the FSA’s policy and supervisory functions. It is clear that it could have significant ramifications for the FSA’s approach to the regulation of systemic organisations, particularly as regards the setting of capital and liquidity requirements, and potentially may affect the willingness of the FSA to allow organisations to grow by acquisition where growth could have systemic implications.

The FS Act also gives the FSA a new financial stability information gathering power which applies to authorised and unauthorised persons and is aimed at assisting the FSA in identifying threats to financial stability. In its consultation paper, the FSA proposes that, when deciding whether to impose a financial stability information requirement, factors it will take into account include: (i) the nature and extent of the risks to financial stability; (ii) whether the information is readily available from another source; and (iii) whether the information may assist the FSA in fulfilling its functions.

OTHER BODIES IMPACTING THE REGULATORY REGIME

THE BANK OF ENGLAND AND HM TREASURY

The agreed framework for co-operation in the field of financial stability in the financial markets is set out in detail in the Memorandum of Understanding published jointly by HM Treasury, the FSA and the Bank of England at the end of October 1997 and updated in March 2006. The Bank of England has specific responsibilities in relation to financial stability, including: (i) ensuring the stability of the monetary system; (ii) oversight of the financial system infrastructure, in particular payments systems at home and abroad; and (iii) maintaining a broad overview of the financial system through its monetary stability role and the deputy governor’s membership of the FSA’s Board. HM Treasury, the FSA and the Bank of England (collectively the tri-partite) work together to achieve stability in the financial markets.

UK GOVERNMENT

The UK Government is responsible for the overall structure of financial regulation and the legislation which governs it. It has no operational responsibility for the activities of the FSA or the Bank of England. However, there are a variety of circumstances where the FSA and the Bank of England will need to alert HM Treasury (the representative of the UK Government) about possible problems, for example, where there may be a need for a support operation or a problem arises which could cause wider economic disruption.

In light of the current crisis in financial markets, the Banking Act 2009 secured Royal Assent in February 2009 and certain provisions, including those relating to the Special Resolution Regime (SRR), bank insolvency and bank administration, came into force at that time. The Banking Act provides the FSA, Bank of England and HM Treasury with tools for dealing with failing institutions as part of the SRR. These powers enable the Authorities to deal

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with and stabilise UK-incorporated institutions with permission to accept deposits pursuant to Part IV of the FSMA (each a relevant entity) that are failing or are likely to fail to satisfy the threshold conditions (within the meaning of section 41 of the FSMA).

The SRR consists of three stabilisation options: (i) transfer of all or part of the business of the relevant entity or the shares of the relevant entity to a private sector purchaser; (ii) transfer of all or part of the business of the relevant entity to a ‘bridge bank’ wholly-owned by the Bank of England; and (iii) temporary public ownership of the relevant entity. HM Treasury may also take a parent company of a relevant entity into temporary public ownership where certain conditions are met.

If a parent undertaking is taken into temporary public ownership, HM Treasury may take various actions in relation to any securities issued by it without the consent of the holders thereof (Investors), including (among other things):


•	transferring securities free from any restrictions on transfer and free from any trust, liability or encumbrance;

•	delisting the securities;

•	converting securities into another form or class; or

•	prescribing that the transfer of shares takes place free from any trust.

Accordingly, the taking of any such actions could adversely affect the rights of Investors, the price or value of their investment, and the ability of such parent undertaking to satisfy its obligations under the issued securities or the related contracts.

Where the stabilisation powers are exercised, HM Treasury must make statutory provision for a scheme or other arrangements for determining the compensation, if any, due to those affected by an exercise of the powers. However, there can be no assurance that Investors would thereby recover compensation promptly and equal to any loss actually incurred.

UK FINANCIAL OMBUDSMAN SERVICE (FOS)

The FOS was established on 1 December 2001 pursuant to the FSMA to provide customers with a free and independent service designed to resolve disputes where the customer is not satisfied with the response received from the regulated firm. The FOS resolves disputes that cover most financial products and services provided in (or from) the UK, from insurance and pension plans to bank accounts and investments, for eligible complainants, private individuals and small businesses, charities or trusts. The jurisdiction of FOS was extended in 2007 to include firms conducting activities under the Consumer Credit Act. Although the FOS takes account of relevant regulation and legislation, its guiding principle is to resolve cases on the basis of what is fair and reasonable; in this regard, the FOS is not bound by law or even its own precedent. The decisions made by the FOS are binding on firms.

LENDING STANDARDS BOARD

The Lending Standards Board (formerly the Banking Code Standards Board) is responsible for monitoring and enforcing compliance with a new Lending Code introduced on 1 November 2009 which relates to lending to private customers and small businesses.

UK OFFICE OF FAIR TRADING (OFT)

The OFT is the UK’s consumer and competition authority. Its regulatory and enforcement powers impact the banking sector in a number of ways. For further details see note 52 to the consolidated financial statements and Risk factors – Legal and regulatory risks .

UK INFORMATION COMMISSIONER’S OFFICE

This office is responsible for overseeing implementation of the Data Protection Act 1998. This Act regulates, among other things, the retention and use of data relating to individual customers.

The Freedom of Information Act 2000 (the FOIA) sets out a scheme under which any person can obtain information held by, or on behalf of, a ‘public authority’ without needing to justify the request. A public authority will not be required to disclose information if certain exemptions set out in the FOIA apply.

EU REGULATION

The UK has implemented all of the directives introduced under the Financial Services Action Plan which was intended to create a single market for financial services across the EU. However, these directives are regularly reviewed at EU level and could be subject to change. The Group will continue to monitor the progress of these initiatives, provide specialist input on their drafting and assess the likely impact on its business.

EU directives, which are required to be implemented in EU Member States through national legislation, have a strong influence over the framework for supervision and regulation of financial services in the UK. The directives aim to harmonise financial services regulation and supervision throughout the EU by setting standards in key areas such as capital adequacy, access to financial markets, consumer protection and compensation schemes.

Financial institutions, such as those in the Group, are primarily regulated in their home state by a local regulator but the EU directives prescribe criteria for the authorisation of such institutions and the prudential conduct of business supervision applicable to them.

US OPERATIONS AND REGULATION

In the United States, Lloyds TSB Bank plc maintains a branch in New York and an agency in Miami, licensed by the States of New York and Florida, respectively. Lloyds Banking Group maintains representative offices in several US cities. The existence of branch and agency offices in the US subjects Lloyds Banking Group plc and its subsidiaries doing business or conducting activities in the US to oversight by the Federal Reserve Board and limits the nature of the activities in which Lloyds Banking Group plc and its subsidiaries can engage in the US. Lloyds TSB Bank’s branch and agency offices are subject to extensive federal and state supervision and regulation relating to their operations.

A major focus of US governmental policy relating to financial institutions in recent years has been combating money laundering and terrorist financing and enforcing compliance with US economic sanctions, with serious legal and reputational consequences for any failures arising in these areas. The Group engages, or has engaged, in a limited amount of business with counterparties in certain countries which the US State Department currently designates as state sponsors of terrorism, including Iran, Syria, Cuba, and Sudan. In January 2008, the Group introduced an enhanced financial sanctions policy which applies to all of the Group’s operations and severely restricts activity with certain high risk jurisdictions including the countries designated by the US State Department. From their acquisition in January 2009, HBOS plc and its subsidiaries became subject to the same policy and the Group has undertaken the activities necessary to implement policy requirements across the HBOS heritage businesses. The Group continues to reduce its outstanding exposures to such states which have arisen through historical business activity. In accordance with this policy, the Group intends to engage only in new business in such jurisdictions in very limited circumstances where the Group is satisfied concerning legal, compliance and reputational issues.

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Since its implementation the policy has resulted in a significant reduction in the contacts that the Group had (in terms of value and volume) and the Group expects a further reduction in its contacts in the coming years. The Group does not have, and does not anticipate having, a physical presence in any of the countries designated as state sponsors of terrorism.

At 31 December 2009, the Group does not believe the Group’s business activities relating to countries designated as state sponsors of terrorism were material to its overall business.

The Group estimates that the value of the Group’s business in respect of such states represented less than 0.02 per cent of the Group’s total assets and, for the year ended 31 December 2009, the Group believes that the Group’s revenues from all activities relating to such states were less than 0.01 per cent of its total income net of insurance claims. This information has been compiled from various sources within the Group, including information manually collected from relevant business units, and this has necessarily involved some degree of estimate and judgement.

OTHER INTERNATIONAL REGULATION

The Group operates in many other countries around the world. The Group’s overseas operations are subject to reporting and reserve requirements and controls imposed by the relevant central banks and regulatory authorities.

In view of the global financial crisis and the increased scrutiny financial regulators have come under, it is also expected that regulatory regimes in many jurisdictions will be significantly tightened. At a G20 meeting to tackle the financial crisis in November 2008, a set of common principles for the reform of financial markets was set out. These principles have been endorse at subsequent G20 meetings and have the aim of strengthening transparency and accountability; enhancing sound regulation; promoting integrity in financial markets; re-enforcing international co-operation and reforming international institutions. As a result of this and other domestic pressures, it is expected that Group entities in all jurisdictions will be subject to increased scrutiny.

CURRENT REGULATORY THEMES

Regulatory themes which have a current bearing on the business of the Group include, but are not limited to, the following:

LIQUIDITY REGIME

On 5 October 2009 the FSA published its new liquidity rules which significantly broaden the scope of the existing liquidity regime and are designed to enhance regulated firms’ liquidity risk management practices and, in part, can be seen as a response to issues highlighted by the credit crisis. These new rules, which apply to a wider range of entities than the current liquidity regime, are based on the over-arching principle of regulated firms (their subsidiaries and branch offices) being self-sufficient and having adequate liquid resources to withstand particular liquidity stresses. The rules specify that this will be delivered through greatly enhanced systems and controls requirements and a regular and comprehensive liquidity risk assessment of the business which will be linked to the supervisory process and monitored through more granular and frequent reporting on the part of regulated firms. In particular, the rules have introduced enhanced quantification requirements which will ultimately require regulated firms to hold a greater quantity of higher quality liquid assets as a buffer against liquidity stresses. It is noted that the specific rules vary depending on the type of regulated firm and some regulated firms may be able to benefit from particular relaxations.

The new systems and controls requirements apply to most regulated firms from 1 December 2009 and the enhanced quantitative requirements will be introduced in stages over the course of 1 June to 1 November 2010.

Lloyds Banking Group believes that these new rules will apply to it and will likely require changes to its business model, in particular, the requirement to hold increased and higher quality liquid assets and the detailed reporting requirements (which may require Lloyds Banking Group to change or upgrade its systems) may result in reduced profitability for Lloyds Banking Group.

Lloyds Banking Group manages liquidity on a consolidated basis. In order to comply with certain FSA requirements regarding the management of liquidity resources on a consolidated basis certain FSA-authorised deposit-taking subsidiaries of Lloyds Banking Group plc have entered into intra-group facilities.

FSA SUPERVISORY REVIEW INTO HISTORICAL HBOS DISCLOSURES

The FSA is conducting a supervisory review into the accuracy and completeness of financial disclosures made by HBOS in connection with its capital raisings in 2008, including information as to corporate impairments disclosed in the circulars and/or prospectuses issued by HBOS in connection with such capital raisings. The Group is cooperating fully with this review.

BASEL II Basel II has been implemented throughout the EU through the Capital Requirements Directive. This came into force for all European banks on 1 January 2007. With effect from 1 January 2008, for credit risk, the heritage Lloyds TSB Group adopted the Foundation Internal Ratings Based approach for its non-retail exposures and the Advanced (Retail) Internal Ratings Based approach for its retail exposures. The heritage HBOS Group adopted the Advanced Internal Ratings Based approach for both its non-retail and retail exposures.

Both the heritage Lloyds TSB Group and the heritage HBOS Group adopted the Advanced Measurement Approach for Operational Risk from 1 January 2008.

CONTINUING OBLIGATIONS

Those Companies in the Group which have securities listed on the Official List or on other regulated markets intend to comply with their obligations as companies with securities admitted to the Official List in connection with further disclosures in relation to the impact of the reviews and inquiries being conducted by the UK Office of Fair Trading as disclosed above on the Group. Under the GAPS Withdrawal Deed, the Group has, among other things, agreed to implement any measures relating to personal current accounts agreed between the OFT and the UK banking industry.

RETAIL BANKING INVESTIGATION

On 10 January 2007, the European Commission published the Final Report of its sector inquiry into European retail banking markets covering payment cards and (non-card) payment systems and current accounts and related services. The European Commission found that markets were fragmented along national lines, limiting consumer choice and leading to higher costs for current accounts, loans or payments.

High degrees of variation of prices, profit margins and selling patterns between EU Member States and high degrees of homogeneity within EU Member States were found to be indicative of persisting regulatory or behavioural barriers to competition.

135

REGULATION

The Final Report identified competition concerns in several areas of retail banking, including:


•	the combination of sustained high profitability, high market concentration and evidence of entry barriers in some Member States raise concerns about banks’ ability to influence the level of prices for consumers and small firms;

•	large variations in merchant and interchange fees between banks across the EU may indicate competition barriers;

•	the existence of high joining fees for payment cards, co-branding, surcharging and the practice of ‘blending’ card fees where a retailer is charged the same merchant fee irrespective of the different costs of card types;

•	some credit registers, holding confidential data that lenders use to set loan rates, may be used to exclude new entrants to retail banking markets;

•	some aspects of co-operation among banks, including savings and co-operative banks, can reduce competition and deter market entry;

•	product tying by banks is widespread in Member States and can reduce consumer choice and increase banks’ power in the market place to influence prices; and

•	obstacles to customer mobility in banking, notably the inconvenience of changing a current account, are high.

The Final Report also listed the following specific areas where enforcement action by the European Commission and the national competition authorities is appropriate:

•	high interchange fees and merchant fees in some payment card networks;

•	access barriers and discriminatory rules in relation to credit registers;

•	tying of products by some banks; and

•	bank co-operation (in respect to which the European Commission indicated that it intended to gather more information before acting).

Further specific regulatory matters are set out in Business – Legal actions on page 7.

136

LISTING INFORMATION

The information in this section has been extracted from publicly available documents from various sources, including officially prepared materials from the London Stock Exchange, and has not been prepared or independently verified by the Lloyds Banking Group.

The ordinary shares of Lloyds Banking Group plc are listed and traded on the London Stock Exchange under the symbol ‘LLOY.L’. The prices for shares as quoted in the official list of the London Stock Exchange are in pounds sterling. The following table shows the reported high and low closing prices for the ordinary shares on the London Stock Exchange. This information has been extracted from publicly available documents from various sources, including officially prepared materials from the London Stock Exchange, and has not been prepared or independently verified by the Lloyds Banking Group.


	Price per share		Price per share
	(in pence	)	(in pence	)
	High		Low

Annual prices:
2009	140.70		40.30
2008	483.25		118.50
2007	614.00		451.25
2006	581.00		489.75
2005	509.00		439.50
2004	476.25		391.75
2003	483.00		295.75
2002	817.00		427.50
2001	772.00		590.00
2000	774.50		517.00
Quarterly prices:
2010
First quarter	64.91		46.59
2009
Fourth quarter	99.23		48.70
Third quarter	111.34		63.30
Second quarter	121.10		61.10
First quarter	140.70		40.30
2008
Fourth quarter	290.25		118.50
Third quarter	346.50		217.25
Second quarter	483.25		306.75
First quarter	482.25		373.50
Monthly prices:
April 2010	70.24		62.56
March 2010	64.91		50.26
February 2010	55.00		46.59
January 2010	58.58		50.69
December 2009	58.22		48.70
November 2009	94.25		55.15

On 30 April 2010, the closing price of shares on the London Stock Exchange was 66.13 pence, equivalent to $1.012 per share translated at the Noon Buying Rate of $1.5308 per £1.00 on 30 April 2010.

Lloyds Banking Group plc’s American Depositary Receipts (ADRs) have been traded on the over-the-counter market in the US under the symbol ‘LLDTY’ since March 2000. Since 27 November 2001 Lloyds Banking Group plc American Depositary Shares (ADSs) have been listed on The New York Stock Exchange under the symbol ‘LYG’. The prices for Lloyds Banking Group plc’s ADRs and ADSs, as quoted below, are in US dollars. Each ADS represents four ordinary shares.

137

LISTING INFORMATION

The following table shows the reported high and low closing prices for the ADRs in the over-the-counter market in the US.


	Price per ADR		Price per ADR
	(in US dollars	)	(in US dollars	)
	High		Low

Annual prices:
2001 (to 26 November 2001)	46.00		34.75
2000	45.27		33.50
Quarterly prices:
2001
Fourth quarter (to 26 November 2001)	43.88		38.25
Third quarter	44.00		35.50
Second quarter	43.94		38.94
First quarter	46.00		34.75

The following table shows the reported high and low closing prices for ADSs on the New York Stock Exchange.


	Price per ADS		Price per ADS
	(in US dollars	)	(in US dollars	)
	High		Low

Annual prices:
2009	8.40		2.22
2008	38.56		7.15
2007	48.44		36.70
2006	45.41		34.72
2005	39.06		31.12
2004	36.88		29.47
2003	32.55		19.65
2002	48.55		27.85
Quarterly prices:
2010
First quarter	3.88		2.92
2009
Fourth quarter	6.44		3.21
Third quarter	7.37		4.17
Second quarter	7.36		4.10
First quarter	8.40		2.22
2008
Fourth quarter	18.80		7.15
Third quarter	27.92		15.75
Second quarter	38.56		24.46
First quarter	38.52		31.12
2007
Fourth quarter	46.95		36.70
Third quarter	47.22		41.25
Second quarter	47.20		44.72
First quarter	48.44		41.64
2006
Fourth quarter	45.41		40.70
Third quarter	40.70		38.00
Second quarter	40.38		36.91
First quarter	40.32		34.72
Monthly prices:
April 2010	4.37		3.92
March 2010	3.88		3.08
February 2010	3.55		2.92
January 2010	3.87		3.26
December 2009	5.25		3.21
November 2009	6.20		5.40

On 30 April 2010, the closing price of ADSs on the New York Stock Exchange was $4.07.

138

LISTING INFORMATION

ADR FEES

The Group’s depositary, Bank of New York Mellon, collects its fees for delivery and surrender of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them. The depositary collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The depositary may collect its annual fee for depositary services by deductions from cash distributions or by directly billing investors or by charging the book-entry system accounts of participants acting for them. The depositary may generally refuse to provide fee-attracting services until its fees for those services are paid.



Persons depositing or withdrawing shares must pay:	For:

$5.00 (or less) per 100 ADSs (or portion of 100 ADSs)	•	Issuance of ADSs, including issuances resulting from a distribution of shares or rights or other property

	•	Cancellation of ADSs for the purpose of withdrawal, including if the deposit agreement terminates

$.02 (or less) per ADS	•	Any cash distribution to ADS registered holders

A fee equivalent to the fee that would be payable if securities distributed to you had been shares and the shares had been deposited for issuance of ADSs	•	Distribution of securities distributed to holders of deposited securities which are distributed by the depositary to ADS registered holders

$.02 (or less) per ADSs per calendar year	•	Depositary services

Registration or transfer fees	•	Transfer and registration of shares on our share register to or from the name of the depositary or its agent when you deposit or withdraw shares

Expenses of the depositary	•	Cable, telex and facsimile transmissions (when expressly provided in the deposit agreement)

	•	Converting foreign currency to US dollars

Taxes and other governmental charges the depositary or the custodian have to pay on any ADS or share underlying an ADS, for example, stock transfer taxes, stamp duty or withholding taxes	•	As necessary

Any charges incurred by the depositary or its agents for servicing the deposited securities	•	As necessary

FEES RECEIVED TO DATE

In 2009, the Company received from the depositary $311,220 for continuing annual stock exchange listing fees, standard out-of-pocket maintenance costs for the ADRs (consisting of the expenses of postage and envelopes for mailing annual and interim financial reports, printing and distributing dividend checks, electronic filing of US Federal tax information, mailing required tax forms, stationery, postage, facsimile, and telephone calls), any applicable performance indicators relating to the ADR facility, underwriting fees and legal fees.

FEES TO BE PAID IN THE FUTURE

The Bank of New York Mellon, as depositary, has agreed to reimburse the Company for expenses they incur that are related to establishment and maintenance expenses of the ADS program. The depositary has agreed to reimburse the Company for its continuing annual stock exchange listing fees. The depositary has also agreed to pay the standard out-of-pocket maintenance costs for the ADRs, which consist of the expenses of postage and envelopes for mailing annual and interim financial reports, printing and distributing dividend checks, electronic filing of US Federal tax information, mailing required tax forms, stationery, postage, facsimile, and telephone calls. It has also agreed to reimburse the Company annually for certain investor relationship programs or special investor relations promotional activities. In certain instances, the depositary has agreed to provide additional payments to the Company based on any applicable performance indicators relating to the ADR facility. There are limits on the amount of expenses for which the depositary will reimburse the Company, but the amount of reimbursement available to the Company is not necessarily tied to the amount of fees the depositary collects from investors.

The depositary collects its fees for delivery and surrender of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them. The depositary collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The depositary may collect its annual fee for depositary services by deduction from cash distributions or by directly billing investors or by charging the book-entry system accounts of participants acting for them. The depositary may generally refuse to provide fee-attracting services until its fees for those services are paid.

139

DIVIDENDS

As a result of the UK Government’s investment in the Group as part of the initial recapitalisation by the Company in November 2008, the rights issue announced in November 2009 and our participation in the Credit Guarantee Scheme, the Group has been deemed to have accepted state aid and subsequently the European Commission required us to undertake a restructuring plan. This, amongst other things, includes a behavioural commitment not to make discretionary payments of coupons or to exercise voluntary call options on hybrid securities from 31 January 2010 until 31 January 2012. This also prevents the Group from paying dividends on its ordinary shares for the same duration.

Lloyds Banking Group plc’s ability to pay dividends is restricted under UK company law. Dividends may only be paid if distributable profits are available for that purpose. In the case of a public limited company, a dividend may only be paid if the amount of net assets is not less than the aggregate of the called-up share capital and undistributable reserves and if the payment of the dividend will not reduce the amount of the net assets to less than that aggregate. In addition, a company cannot pay a dividend if any of its UK insurance subsidiaries is insolvent on a regulatory valuation basis or, in the case of regulated entities, if the payment of a dividend results in regulatory capital requirements not being met. Similar restrictions exist over the ability of Lloyds Banking Group plc’s subsidiary companies to pay dividends to their immediate parent companies. Furthermore, in the case of Lloyds Banking Group plc, dividends may only be paid if sufficient distributable profits are available for distributions due in the financial year on certain preferred securities. The board has the discretion to decide whether to pay a dividend and the amount of any dividend. In making this decision, the board is mindful of the level of dividend cover and, consequently, profit growth may not necessarily result in increases in the dividend. The board recognises the importance attached by shareholders to the Company’s dividend. In the case of American Depositary Shares, dividends are paid through The Bank of New York Mellon which acts as paying and transfer agent.

The table below sets out the interim and final dividends which were declared in respect of the ordinary shares for fiscal years 2001 through 2009. The sterling amounts have been converted into US dollars at the Noon Buying Rate in effect on each payment date.


	Interim dividend	Interim dividend	Final dividend	Final dividend
	per share (£)	per share ($)	per share (£)	per share ($)

2002	0.107	0.167	0.235	0.374
2003	0.107	0.178	0.235	0.421
2004	0.107	0.190	0.235	0.447
2005	0.107	0.189	0.235	0.433
2006	0.107	0.202	0.235	0.468
2007	0.112	0.228	0.247	0.482
2008	0.114	0.203	—	—
2009	—	—	—	—

140

M EMORANDUM AND ARTICLES OF ASSOCIATION OF LLOYDS BANKING GROUP PLC

A summary of the material provisions of Lloyds Banking Group plc’s memorandum and articles of association is set out below. This has been updated from the summary that was incorporated into Lloyds Banking Group plc’s annual report on Form 20-F for the year ended 31 December 2008 filed with the SEC on 7 May 2009.

Lloyds Banking Group plc is incorporated in Scotland under the UK Companies Act 1985 with registered number SC95000.

As resolved at the 2009 Annual General Meeting and in accordance with changes in UK company law with effect from 1 October 2009, Lloyds Banking Group plc deleted all provisions of its Memorandum of Association which, by virtue of Section 28 of the Companies Act 2006 (the Companies Act), are to be treated as part of the Articles of Association, including those provisions dealing with the Company’s objects.

OBJECTS OF LLOYDS BANKING GROUP PLC

As permitted under recent changes in UK company law, the objects of Lloyds Banking Group plc are unrestricted.

VOTING RIGHTS

For the purposes of determining which persons are entitled to attend or vote at a meeting and how many votes such persons may cast, Lloyds Banking Group plc may specify in the notice of the meeting a time, not more than 48 hours before the time fixed for the meeting, by which a person must be entered on the register in order to have the right to attend or vote at the meeting. Every holder of ordinary shares who is entitled to be and is present in person (including any corporation by its duly authorised representative) at a general meeting of Lloyds Banking Group plc and is entitled to vote will have one vote on a show of hands and, on a poll, if present in person or by proxy, will have one vote for every such share held by him, save that a member will not be entitled to exercise the right to vote carried by such shares if he or any person appearing to be interested in the shares held by him has been duly served with a notice under section 793 of the Companies Act (requiring disclosure of interests in shares) and is in default in supplying Lloyds Banking Group plc with information required by such notice. The limited voting shares confer the right to receive notice of and to attend and speak at all general meetings of Lloyds Banking Group plc, but do not confer a right to vote unless the business of the meeting includes the consideration of a resolution:


•	to approve an acquisition or disposal by Lloyds Banking Group plc or any of its subsidiaries in circumstances in which the approval of shareholders in general meeting is either required by virtue of securities of Lloyds Banking Group plc being listed on a recognised exchange, or is sought by the directors, due to the significance of the transaction; or

•	for the winding-up of Lloyds Banking Group plc; or

•	to vary the rights of the limited voting shares.

In any such case, the holder may vote the limited voting shares only in respect of such resolution and will have the same rights with regard to the number and exercise of votes as a holder of ordinary shares but, in the case of a variation in the rights of limited voting shares, shall also have the protection of a requirement for approval of the variation by way of a special resolution at a separate class meeting of the holders of limited voting shares. Preference shares confer such rights as may be determined by the directors on allotment, but unless the directors otherwise determine, fully paid preference shares confer identical rights as to voting, capital dividends and otherwise, notwithstanding that they are denominated in different currencies and shall be treated as if they are one single class of shares. There are no limitations imposed by UK law or the Articles of Association of Lloyds Banking Group plc restricting the rights of non-residents of the UK or non-citizens of the UK to hold or vote shares of Lloyds Banking Group plc.

GENERAL MEETINGS

Lloyds Banking Group plc must give at least 21 days’ notice in writing of an annual general meeting. All other general meetings may be called by at least 14 days’ notice in writing. The directors may make arrangements to regulate the level of attendance at any place specified for the holding of a general meeting and, in any such case, shall direct that the meeting be held at a specified place, where the chairman of the meeting shall preside, and make arrangements for simultaneous attendance and participation by members and proxies at other locations. The chairman of a general meeting has express authority to adjourn the meeting if, in his opinion, it appears impracticable to hold or continue the meeting because of crowding or unruly conduct or because an adjournment is otherwise necessary for the proper conduct of the meeting. Annual general meetings of Lloyds Banking Group plc are to be held in Edinburgh or such other place in Scotland as the directors shall appoint.

DIVIDENDS AND OTHER DISTRIBUTIONS AND RETURN OF CAPITAL

The shareholders in general meeting may by ordinary resolution declare dividends to be paid to members of Lloyds Banking Group plc, but no dividends shall be declared in excess of the amount recommended by the directors. The directors may pay fixed dividends on any class of shares carrying a fixed dividend and may also from time to time pay dividends, interim or otherwise, on shares of any class. Except in so far as the rights attaching to any shares otherwise provide, all dividends shall be apportioned and paid pro rata according to the amounts paid up thereon. Subject to the rights attaching to any shares, any dividend or other monies payable in respect of a share may be paid in such currency or currencies as the directors may determine using such exchange rates as the directors may select.

The opportunity to elect to receive new shares instead of any cash dividend recommended by the directors, may be offered to shareholders provided that the directors shall have obtained in advance the shareholders’ approval to do so as required by the Articles of Association.

141

MEMORANDUM AND ARTICLES OF ASSOCIATION OF LLOYDS BANKING GROUP PLC

The limited voting shares do not confer a right to participate in any distribution of profits by way of dividend. For any other distributions, the limited voting shares shall be deemed to confer rights and interests in the profits equally with the holders of ordinary shares according to the amounts paid up on such limited voting shares and ordinary shares respectively otherwise than in advance of calls.

On any distribution by way of capitalisation, the amount to be distributed will be appropriated amongst the holders of ordinary shares and limited voting shares in proportion to their holdings of ordinary shares and limited voting shares ( pro rata to the amount paid up thereon). If the amount to be distributed is applied in paying up in full unissued ordinary shares and limited voting shares of Lloyds Banking Group plc, a shareholder will be entitled to receive bonus shares of the same class as the shares giving rise to his entitlement to participate in the capitalisation.

Any dividend unclaimed after a period of 12 years from the date of declaration of such dividend will be forfeited and revert to Lloyds Banking Group plc. No dividends or other monies payable on or in respect of a share shall bear interest against Lloyds Banking Group plc.

On a return of capital, whether in a winding-up or otherwise, the ordinary shares and the limited voting shares will rank equally in all respects and the preference shares will be entitled to the rights attaching to them on issue.

CONVERSION OF LIMITED VOTING SHARES

Each limited voting share will be converted into an ordinary share:


•	on the day following the last date on which an amount could become due and payable to a holder of limited voting shares under a deed of covenant in favour of the Lloyds TSB Foundations. A deed of covenant is a legal document which records the obligation of one person to pay a specified sum to another for a specified number of years; or

•	if an offer is made to shareholders (or to all such shareholders other than the offeror and/or any body corporate controlled by the offeror and/or any persons acting in concert with the offeror) to acquire the whole or any part of the issued ordinary share capital of Lloyds Banking Group plc and the right to cast more than 50 per cent of the votes which may ordinarily be cast on a poll at a general meeting of Lloyds Banking Group plc becomes or is certain to become vested in the offeror and/or any bodies corporate controlled by the offeror and/or any persons acting in concert with the offeror. The publication of a scheme of arrangement under the statutes providing for the acquisition by any person of the whole or part of the ordinary share capital of Lloyds Banking Group plc shall be deemed to be the making of an offer for this purpose.

The ordinary shares resulting from conversion will carry the right to receive all dividends and other distributions declared, made or paid on the ordinary share capital of Lloyds Banking Group plc by reference to a record date on or after the date of conversion and will rank equally in all other respects and form one class with the ordinary share capital of Lloyds Banking Group plc then in issue and fully paid.

Holders of limited voting shares will be entitled to participate in any offer made by way of rights to holders of ordinary shares as if the limited voting shares had been converted at the relevant record date.

VARIATION OF RIGHTS AND ALTERATION OF CAPITAL

Subject to the provisions of the Companies Act, the CREST Regulations and every other statute for the time being in force or any judgment or order of any court of competent jurisdiction concerning companies and affecting Lloyds Banking Group plc (the statutes), the rights attached to any class of shares for the time being in issue may (subject to their terms of issue) be varied, modified or abrogated with the consent in writing of the holders of not less than three-quarters in nominal value of the issued shares of that class or with the sanction of a special resolution passed at a separate meeting of the holders of shares of that class. At any such separate meeting, the provisions of the Articles of Association relating to general meetings will apply, but the necessary quorum at any such meeting will be two persons holding or representing by proxy at least one-third in nominal value of the issued shares of that class (except at an adjourned meeting, at which the quorum shall be any holder of shares of the class, present in person or by proxy) and any such person may demand a poll.

However, for so long as the limited voting shares have not been converted (as described above):


•	Lloyds Banking Group plc is prohibited from consolidating or subdividing any of the ordinary shares without consolidating or subdividing the limited voting shares in a like manner and to a like extent; and

•	Lloyds Banking Group plc will not create any new class of equity share capital, other than in connection with or pursuant to an employees’ share scheme approved by Lloyds Banking Group plc in general meeting, provided that the creation of equity share capital which carries (as compared with the Existing Ordinary Shares) only restricted voting or no voting rights and no greater rights as regards dividends or capital shall not be deemed to be the creation of a new class of equity share capital.

As a matter of UK law, Lloyds Banking Group plc may, by ordinary resolution, increase its share capital, consolidate and divide all or any of its shares into shares of larger amount, sub-divide all or any of its shares into shares of smaller amount and cancel any shares not taken or agreed to be taken by any person.

Subject to the provisions of the statutes, Lloyds Banking Group plc may, by special resolution, reduce its share capital, any capital redemption reserve, share premium account or other undistributable reserve in any way.

TRANSFER OF SHARES

All transfers of shares which are in certificated form may be effected by transfer in writing in any usual or common form or in any other form acceptable to the directors and must be executed by or on behalf of the transferor and, if the shares thereby transferred are not fully paid, by or on behalf of the transferee. The transferor will be deemed to remain the holder of the shares transferred until the name of the transferee is entered in the register of members of Lloyds Banking Group plc in respect thereof. All transfers of shares which are in uncertificated form may be effected by means of a relevant system.

The directors may, in the case of shares in certificated form, in their absolute discretion and without assigning any reason therefor, refuse to register any transfer of shares (not being fully paid shares) provided that, where any such shares are admitted to the Official List of the UK Financial Services Authority, such discretion may not be exercised in such a way as to prevent dealings in the shares of that class from taking place on an open and proper basis. The directors may also decline to register a transfer unless either:


•	the instrument of transfer complies with the requirements of the Articles of Association and the transfer is in respect of only one class of shares; or

•	the transfer is in favour of not more than four persons as the transferee.

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MEMORANDUM AND ARTICLES OF ASSOCIATION OF LLOYDS BANKING GROUP PLC

The directors shall refuse to register the transfer of any share on which Lloyds Banking Group plc has a lien and shall refuse to register the transfer of any limited voting share unless the same is:


•	between existing holders of limited voting shares; or

•	under a scheme established or order made by the Charity Commissioners or by the Court to a transferee having charitable objects; or

•	in the course of a winding-up to an institution having charitable objects which prohibit distributions of income and property to members to at least the same extent as is imposed on the transferor by its Memorandum of Association; or

•	at the direction of the crown to another charity having similar objects.

The Articles of Association otherwise contain no restrictions on the free transferability of fully paid shares.

Lloyds Banking Group plc’s shares are in registered form and the Articles of Association do not provide for bearer shares. The registration of share transfers may be suspended and the register may be closed at such times and for such periods as the directors may determine (not exceeding 30 days in any year), provided that if the shares are traded through an electronic trading system, the register may not be closed without the consent of the operator.

Subject to the statutes and the rules (as defined in the CREST Regulations), the directors may determine that any class of shares may be held in uncertificated form and that title to such shares may be transferred by means of an electronic trading system or that shares of any class should cease to be so held and so transferred.

DISCLOSURE OF HOLDINGS EXCEEDING CERTAIN PERCENTAGES

The Disclosure and Transparency Rules of the UK Financial Services Authority require Lloyds Banking Group plc shareholders to notify Lloyds Banking Group plc if the voting rights held by such Lloyds Banking Group plc shareholders (including by way of a certain financial instrument) reach, exceed or fall below 3 per cent and each 1 per cent threshold thereafter up to 100 per cent. Under the Disclosure and Transparency Rules, certain voting rights in Lloyds Banking Group plc may be disregarded.

Pursuant to the Companies Act, Lloyds Banking Group plc may also send a notice to any person whom Lloyds Banking Group plc knows or believes to be interested in Lloyds Banking Group plc’s shares, requiring that person to confirm whether he has such an interest and if so details of that interest.

Under the Articles of Association and UK law, if a person fails to comply with such a notice or provides information that is false in a material particular in respect of any shares (the default shares), the Lloyds Banking Group plc directors may serve a restriction notice on such a person. Such a restriction notice will state that the default shares and, if the Lloyds Banking Group plc directors determine, any other shares held by that person, shall not confer any right to attend or vote at any general meeting of Lloyds Banking Group plc.

In respect of a person with a 0.25 per cent or more interest in the issued shares of the class in question, the Lloyds Banking Group plc directors may direct by notice to such member that, subject to certain exceptions, no transfers of shares held by such person shall be registered and that any dividends or other payments on the shares shall be retained by Lloyds Banking Group plc pending receipt by Lloyds Banking Group plc of the information requested by the Lloyds Banking Group plc directors. Certain consequences of the issue of a restriction notice are outlined above.

MANDATORY TAKEOVER BIDS, SQUEEZE-OUT AND SELL-OUT RULES

Other than as provided by the Companies Act and the City Code, there are no rules or provisions relating to mandatory bids and/or squeeze-out and sell-out rules in relation to the ordinary shares.

UNTRACED MEMBERS

Lloyds Banking Group plc is empowered to sell, as the agent of a member, at the best price reasonably obtainable, any share registered in the name of a member remaining untraced for 12 years who fails to communicate with Lloyds Banking Group plc within three months following the publication of an advertisement of an intention to make such a disposal; provided that during the 12-year period at least three dividends have become payable and no dividend has been claimed.

Lloyds Banking Group plc shall be obliged to account to the member for the proceeds of the disposal. However, any net proceeds of sale unclaimed after 12 years from the date of sale shall be forfeited and shall revert to Lloyds Banking Group plc.

FORFEITURE AND LIEN

If a member fails to pay in full any call or instalment of a call on or before the due date for payment, then, following notice by the directors requiring payment of the unpaid amount with any accrued interest and any expenses incurred, such share may be forfeited by a resolution of the directors to that effect (including all dividends declared in respect of the forfeited share and not actually paid before forfeiture). A member whose shares have been forfeited will cease to be a member in respect of the shares, but will, notwithstanding the forfeiture, remain liable to pay to Lloyds Banking Group plc all monies which at the date of forfeiture were presently payable together with interest. The directors may at their absolute discretion enforce payment without any allowance for the value of the shares at the time of forfeiture or for any consideration received on their disposal or waive payment in whole or part.

Lloyds Banking Group plc has a first and paramount lien on every share (not being a fully paid share) for all monies (whether presently payable or not) called or payable at a fixed time in respect of such share, and the directors may waive any lien which has arisen and may resolve that any share shall for some limited period be exempt from such a lien, either wholly or partially.

A forfeited share becomes the property of Lloyds Banking Group plc, and it may be sold, re-allotted, otherwise disposed of or cancelled as the directors see fit. Any share on which Lloyds Banking Group plc has a lien may be sold on the terms set out in the Articles of Association. The proceeds of sale shall first be applied towards payment of the amount in respect of the lien insofar as it is still payable and then on surrender of the share certificate for cancellation (in the case of shares in certificated form), to the person entitled to the shares at the time of sale.

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MEMORANDUM AND ARTICLES OF ASSOCIATION OF LLOYDS BANKING GROUP PLC

WINDING-UP

If Lloyds Banking Group plc is wound up, the liquidator may, with the authority of a ordinary resolution, divide amongst the members in specie or kind the whole or any part of the assets of Lloyds Banking Group plc. The liquidator may for such purpose set such value as he deems fair upon any one or more class or classes of property and may determine how such division shall be carried out as between the members or different classes of members. The liquidator may vest any part of the assets in trustees upon such trusts for the benefit of members as the liquidator thinks fit, and the liquidation may be closed and Lloyds Banking Group plc dissolved, but so that no contributory shall be compelled to accept any shares or other property in respect of which there is a liability.

DIRECTORS

The business and affairs of Lloyds Banking Group plc shall be managed by the directors, who may exercise all such powers of Lloyds Banking Group plc as are not by the statutes or by the Articles of Association required to be exercised by Lloyds Banking Group plc in general meeting, subject to the Articles of Association, to the provisions of the statutes and to such regulations as may be set by special resolution of Lloyds Banking Group plc, but no regulation so made by Lloyds Banking Group plc will invalidate any prior act of the directors which would have been valid if such regulation had not been made.

The directors may confer upon any director holding any executive office any of the powers exercisable by them on such terms and conditions, and with such restrictions, as they think fit. The directors may also delegate any of their powers to committees. Any such committee shall have power to sub-delegate to sub-committees or to any person any of the powers delegated to it. Any such committee or sub-committee shall consist of one or more directors only. The meetings and proceedings of any such committee or sub-committee consisting of two or more persons shall be governed, with such changes as are appropriate, by the provisions of the Articles of Association regulating the meetings and proceedings of the directors.

The quorum necessary for the transaction of business of the directors may be fixed from time to time by the directors and unless so fixed at any other number shall be four. Questions arising at any meeting of the directors shall be determined by a majority of votes. In the case of an equality of votes, the chairman of the meeting shall have a second or casting vote.

DIRECTORS’ RETIREMENT

The Articles of Association provide that each director shall retire at the annual general meeting held in the third calendar year following the year in which he was elected or last re-elected.

DIRECTORS’ SHARE QUALIFICATION

A director is not required to hold any shares of Lloyds Banking Group plc by way of qualification.

DIRECTORS’ INDEMNITY/INSURANCE

So far as may be permitted by the statutes, any person who is or was at any time a director, officer, employee or trustee of Lloyds Banking Group plc (or any associated company) may be indemnified by Lloyds Banking Group plc against any liability incurred by him in connection with any negligence, default, breach of duty or breach of trust by him or any other liability incurred in the execution of his duties, the exercise of his powers or otherwise in connection with his duties, powers or offices. The directors of Lloyds Banking Group plc may also purchase and maintain insurance in respect of such liabilities. So far as may be permitted by the statutes, Lloyds Banking Group plc may also provide defence costs in relation to any criminal, civil or regulatory proceedings to which any current or former director, officer, employee or trustee of Lloyds Banking Group plc (or any associated company) is subject and do anything to enable any such a person to avoid incurring such expenditure.

AUTHORISATION OF DIRECTORS’ INTERESTS

Subject to the provisions of the statutes, the directors can authorise any matter which would or might otherwise constitute or cause a breach of the duty of a director to avoid a situation in which he has or can have a direct or indirect interest that conflicts, or may reasonably be expected at the time of authorisation to be a situation in which he has or can have a conflict, with the interests of Lloyds Banking Group plc.

Such authorisation of a matter shall be effective only if the matter in question shall have been proposed in writing for consideration at a meeting of the directors, in accordance with the board’s normal procedures, or in such other manner as the directors may determine.

Any authorisation of a matter under the Articles of Association shall be subject to such conditions or limitations as the directors may determine, whether at the time such authorisation is given or subsequently, and may be terminated by the directors at any time. A director shall comply with any obligations imposed on him pursuant to any such authorisation.

A director shall not, save as otherwise agreed by him, be accountable to Lloyds Banking Group plc for any benefit which he (or a person connected with him) derives from any matter authorised by the directors and any contract, transaction or arrangement relating thereto shall not be liable to be avoided on the grounds of any such benefit.

Where a director has an interest which can reasonably be regarded as likely to give rise to a conflict of interest, the director may, and shall if so requested by the directors, take such additional steps as may be necessary or desirable for the purpose of managing such conflict of interest, including compliance with any procedures laid down from time to time by the directors.

Lloyds Banking Group plc may by ordinary resolution ratify any contract, transaction or arrangement, or other proposal, not properly authorised under the Articles of Association.

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MEMORANDUM AND ARTICLES OF ASSOCIATION OF LLOYDS BANKING GROUP PLC

MATERIAL INTERESTS

Subject to the provisions of the statutes, the director (or a person connected with him), provided that the director has declared the nature and extent of any interest as required under the Articles of Association:


•	may be a director or other officer of, or be employed by, or otherwise interested (including by the holding of shares) in Lloyds Banking Group plc, a subsidiary undertaking of Lloyds Banking Group plc, any holding company of Lloyds Banking Group plc, a subsidiary undertaking of any such holding company, or any body corporate promoted by Lloyds Banking Group plc or in which Lloyds Banking Group plc is otherwise interested (a relevant company);

•	may be a party to, or otherwise interested in, any contract, transaction or arrangement with a relevant company;

•	may (and any firm of which he is a partner, employee or member may) act in a professional capacity for any relevant company (other than as auditor) and be remunerated therefor;

•	may have an interest which cannot reasonably be regarded as likely to give rise to a conflict of interest;

•	may have an interest, or a transaction or arrangement giving rise to such an interest, of which the director is not aware; and

•	may have any other interest authorised under the Articles of Association or by shareholder resolution.

Except as set out in the Articles of Association, a director shall not be entitled to vote nor be counted in the quorum in respect of any contract, transaction or arrangement, or any other proposal, in which he (or a person connected with him) is interested. Any vote of a director in respect of a matter where he is not entitled to vote shall be disregarded. A director shall not be counted in the quorum for a meeting of the directors in relation to any resolution on which he is not entitled to vote.

If a question arises at any time as to whether any interest of a director prevents him from voting, or being counted in the quorum, and such question is not resolved by his voluntarily agreeing to abstain from voting, such question shall be referred to the chairman of the meeting and his ruling in relation to any director other than himself shall be final and conclusive, provided that the nature or extent of the interest of such director has been fairly disclosed. If any such question shall arise in respect of the chairman of the meeting, the question shall be decided by resolution of the directors and the resolution shall be conclusive provided that the nature or extent of the interest of the chairman of the meeting has been fairly disclosed to the directors.

CONFIDENTIAL INFORMATION

If a director, otherwise than by virtue of his position as director, receives information in respect of which he owes a duty of confidentiality to a person other than Lloyds Banking Group plc, he shall not be required to disclose such information to Lloyds Banking Group plc or otherwise use or apply such confidential information for the purpose of or in connection with the performance of his duties as a director, provided that such an actual or potential conflict of interest arises from a permitted or authorised interest under the Articles of Association. This is without prejudice to any equitable principle or rule of law which may excuse or release the director from disclosing information, in circumstances where disclosure may otherwise be required under the Articles of Association.

REMUNERATION

The ordinary remuneration of the directors is determined by ordinary resolution of Lloyds Banking Group plc and is divisible among the directors as they may agree, or, failing agreement, equally. However, any director who holds office for only part of the period in respect of which remuneration is payable shall be entitled only to rank in such division for a proportion of the remuneration relating to the period during which he has held office. Any director who holds an executive office, or who serves on any committee of the directors, or who otherwise performs services which in the opinion of the directors are outside the scope of the ordinary duties of a director, may be paid extra remuneration by way of salary, commission or otherwise or may receive such other benefits as the directors may determine. The directors may repay to any director all such reasonable expenses as he may incur in attending and returning from meetings of the directors or of any committee of the directors or general meetings or otherwise in connection with the business of Lloyds Banking Group plc. The directors have the power to pay and agree to pay gratuities, pensions or other retirement, superannuation, death or disability benefits to, or to any person in respect of, any director or ex-director.

ELECTRONIC COMMUNICATIONS

Lloyds Banking Group plc has the right to offer shareholders the opportunity to have documents and information made available to them through Lloyds Banking Group plc’s website and in electronic form.

EXCHANGE CONTROLS

There are no UK laws, decrees or regulations that restrict Lloyds Banking Group plc’s export or import of capital, including the availability of cash and cash equivalents for use by Lloyds Banking Group, or that affect the remittance of dividends or other shareholders’ payments to non-UK holders of Lloyds Banking Group plc shares, except as set out in Taxation .

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T AXATION

UK TAXATION

The following discussion is intended only as a general guide to current UK tax legislation, what is understood to be current UK HM Revenue & Customs practice and the terms of the current UK/US income tax treaty (the Treaty), all of which are subject to change at any time, possibly with retroactive effect.

The Treaty for the avoidance of double taxation with respect to taxes on income entered into force following the exchange of instruments of ratification by the UK Parliament and the US Senate on 31 March 2003.

The UK HM Revenue & Customs is the UK government department responsible for assessing and collecting UK tax revenues. The discussion is intended as a general guide and only applies to persons who are the beneficial owners of their ordinary shares or ADSs. References below to a US holder are to that term as defined, and subject to the exclusions described in the introduction, below under US federal income tax considerations . It may not apply to certain shareholders or ADS holders, such as dealers in securities.

Tax can be complicated and individual circumstances may need to be considered in more detail. Any person who is in any doubt as to his tax position should consult his own professional adviser.

TAXATION OF CHARGEABLE GAINS

UK RESIDENTS

A disposal (or deemed disposal) of ordinary shares or ADSs by a shareholder or holder of ADSs resident or (in the case of an individual) ordinarily resident for tax purposes in the UK may, depending on the shareholder’s or ADS holder’s particular circumstances, and subject to any available exemption or relief, give rise to a chargeable gain or an allowable loss for the purposes of UK taxation on chargeable gains.

INDIVIDUALS, OTHER THAN US HOLDERS, TEMPORARILY NON-RESIDENT IN THE UK

A shareholder or ADS holder who is an individual and who has, on or after 17 March 1998, ceased to be resident and ordinarily resident for tax purposes in the UK for a period of less than five years of assessment and who disposes of ordinary shares or ADSs during that period may be liable, on return to the UK, to UK taxation on chargeable gains arising during the period of absence, subject to any available exemption, relief and/or foreign tax credit.

US HOLDERS

Subject to the provisions set out in the next paragraph in relation to temporary non-residents, US holders generally will not be liable for UK tax on chargeable gains unless they carry on a trade, profession or vocation in the UK through a branch or agency and the ordinary shares or ADSs are or have been used or held by or for the purposes of the branch or agency, in which case such US holder might, depending on individual circumstances, be liable to UK tax on chargeable gains on any disposition of ordinary shares or ADSs. An individual US holder who is only temporarily not resident in the UK may, under anti-avoidance legislation, still be liable for UK tax on chargeable gains realised, subject to any available exemption, relief and/or foreign tax credit.

A US holder who is an individual and who has, on or after 17 March 1998, ceased to be resident or ordinarily resident for tax purposes in the UK for a period of less than five years of assessment and who disposes of ordinary shares or ADSs during that period may be liable, on return to the UK, to UK taxation on chargeable gains arising during the period of absence, subject to any available exemption, relief and/or foreign tax credit.

OTHER NON-UK RESIDENT PERSONS

Subject to the provisions set out above under Individuals, other than US holders, temporarily non-resident in the UK , shareholders or ADS holders who are neither resident nor ordinarily resident in the UK generally will not be liable for UK tax on chargeable gains unless they carry on a trade, profession or vocation in the UK through a branch or agency and the ordinary shares or ADSs are or have been used or held by or for the purposes of the branch or agency, in which case such shareholder or ADS holder might, depending on individual circumstances, be liable to UK tax on chargeable gains on any disposition of ordinary shares or ADSs. An individual holder of ordinary shares or ADSs who is only temporarily not resident in the UK may, under anti-avoidance legislation, still be liable for UK tax on chargeable gains realised, subject to any available exemption, relief and/ or foreign tax credit.

TAXATION OF DIVIDENDS

UK RESIDENTS

Lloyds Banking Group plc will not be required to withhold tax at source when paying a dividend on the ordinary shares or ADSs.

An individual shareholder or ADS holder who is resident in the UK for tax purposes will be entitled to a tax credit in respect of any dividend received from Lloyds Banking Group plc and will be taxable on the gross dividend, which is the aggregate of the dividend received and related tax credit. The value of the tax credit will be equal to one-ninth of the dividend received (and, therefore, 10 per cent of the gross dividend). The gross dividend will be treated as an individual’s marginal taxable income. The tax credit will, however, be treated as discharging the individual’s liability to income tax in respect of the gross dividend, unless and except to the extent that the gross dividend falls above the threshold for the higher rate of income tax. A UK resident individual shareholder or ADS holder who is liable to income tax at the higher rate (40 per cent for the 2009-10 tax year) will be subject to tax at the rate applicable to dividends for such shareholders or ADS holders (32.5 per cent for the 2009-10 tax year) on the gross dividend. The tax credit will be set against but will not fully discharge such shareholders’ or ADS holders’ tax liability on the gross dividend and they will have to pay additional tax equal to 22.5 per cent of the gross dividend, being 25 per cent of the dividend received, to the extent that such sum, when treated as marginal income, falls above the threshold for the higher rate of income tax.

With effect from 6 April 2010, a new tax rate of 50 per cent will apply for taxable non-savings and savings income above £150,000. Dividends which would otherwise be taxable at the new 50 per cent rate would, however, be liable to income tax at a new rate of 42.5 per cent.

There will be no payment of the tax credit or any part of it to an individual whose liability to income tax on the dividend and the related tax credit is less than the tax credit.

UK resident shareholders or ADS holders who are not liable to UK tax on dividends, including pension funds and charities, will not be entitled to the payment of any tax credits in respect of dividends.

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TAXATION

Subject to certain exceptions, such as for dealers in securities and for some insurance companies with overseas business, UK resident corporate shareholders or ADS holders will generally not be subject to corporation tax in respect of dividends received from Lloyds Banking Group plc, but will not be entitled to the payment of any tax credit with respect to the dividends.

Shareholders who are within the charge to corporation tax will be subject to corporation tax on dividends paid by the Company, unless (subject to special rules for such shareholders that are small companies) the dividends fall within an exempt class and certain other conditions are met. It is expected that the dividends paid by the Company would generally be exempt. Such shareholders will not be able to claim repayment of tax credits attaching to dividends.

US HOLDERS

Lloyds Banking Group plc will not be required to withhold tax at source when paying a dividend on the ordinary shares or ADSs to a US holder.

OTHER NON-UK RESIDENT PERSONS

Lloyds Banking Group plc will not be required to withhold tax at source when paying a dividend on the ordinary shares or ADSs to a holder, other than a US holder, who is not resident for tax purposes in the UK.

Holders of ordinary shares or ADSs, other than US holders, who are not resident for tax purposes in the UK and who receive a dividend from Lloyds Banking Group plc will not have any further UK tax to pay in respect of the dividend, but will not normally be able to claim any additional payment in respect of the dividend from the UK HM Revenue & Customs under any applicable Double Tax Treaty.

STAMP DUTY AND STAMP DUTY RESERVE TAX

UK RESIDENTS, US HOLDERS AND OTHER NON-UK RESIDENT PERSONS

Any conveyance or transfer on sale of ordinary shares (whether effected using the CREST settlement system or not) will be subject to UK stamp duty or stamp duty reserve tax (SDRT). The transfer on sale of ordinary shares will be liable to ad valorem UK stamp duty or SDRT, generally at the rate of 0.5 per cent of the consideration paid (rounded up to the next multiple of £5 in the case of stamp duty). Stamp duty is usually the liability of the purchaser or transferee of the ordinary shares. An unconditional agreement to transfer such ordinary shares will be liable to SDRT, generally at the rate of 0.5 per cent of the consideration paid, but such liability will be cancelled, or, if already paid, refunded, if the agreement is completed by a duly stamped transfer within six years of the agreement having become unconditional. SDRT is normally the liability of the purchaser or transferee of the ordinary shares.

Where Lloyds Banking Group plc issues ordinary shares or a holder of ordinary shares transfers such shares to the custodian or nominee for the depositary to facilitate the issue of ADSs to him representing the ordinary shares or to a person providing clearance services (or their nominee or agent), a liability to UK stamp duty or SDRT at the rate of 1.5 per cent (rounded up to the next multiple of £5 in the case of the stamp duty) of either the issue price or, in the case of transfer, the listed price of the ordinary shares, calculated in sterling, will arise. Where a holder of ordinary shares transfers such shares to the custodian or nominee for the depositary or clearance service this charge will generally be payable by the person receiving the ADSs or transferring the ordinary shares into the clearance service.

On 1 October 2009, the European Court of Justice (ECJ) ruled that such a charge, when levied in respect of an issue of shares into a clearance service, was prohibited by Article 11(a) of Council Directive 69/335/EEC. On 9 December 2009, the UK HM Revenue & Customs announced that, with immediate effect, the 1.5 per cent charge to SDRT on the issue of shares into a clearance service or depository receipt system within the European Union would no longer be applied. However, the limitation of their announcement to issues of shares into clearance or depository receipt systems within the European Union is disputed. There may be further implications of this decision, and in particular for the issue of shares into systems outside the European Union and for the treatment of transfers of shares after they have been placed into clearance services or depositary receipt schemes.

No liability to stamp duty or SDRT will arise as a result of the cancellation of any ADSs with the ordinary shares that they represent being transferred to the ADS holder.

No liability to UK stamp duty or SDRT will arise on a transfer of ADSs provided that any document that effects such transfer is not executed in the UK and that it remains at all subsequent times outside the UK. An agreement to transfer ADSs will not give rise to a liability to SDRT.

US FEDERAL INCOME TAX CONSIDERATIONS

The following summary describes material US federal income tax consequences of the ownership and disposition of ADSs or ordinary shares to the US holders described below, but it does not purport to be a comprehensive description of all of the tax considerations that may be relevant to a decision to hold such securities. The summary applies only to US holders that hold ADSs or ordinary shares as capital assets and does not address special classes of holders, such as:


•	certain financial institutions;

•	dealers or traders in securities who use a market-to-market method of accounting;

•	holders holding ADSs or shares as part of a hedge, straddle, conversion or other integrated transaction;

•	holders whose functional currency for US federal income tax purposes is not the US dollar;

•	holders liable for alternative minimum tax;

•	holders who acquired ADSs or shares pursuant to the exercise of any employee stock option or otherwise as compensation;

•	tax-exempt entities, including ‘individual retirement accounts’ or ‘Roth IRAs’;

•	persons holding ADSs or shares in connection with a trade or business conducted outside of the United States;

•	partnerships or other entities classified as partnerships for US federal income tax purposes; or

•	holders that own or are deemed to own 10 per cent or more of the voting shares of Lloyds Banking Group plc.

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TAXATION

If an entity that is classified as a partnership for US federal income tax purposes holds ADSs or shares, the US federal income tax treatment of a partner will generally depend on the status of the partner and the activities of the partnership. Partnerships holding ADSs or shares and partners in such partnerships should consult their tax advisers as to the particular US federal income tax consequences of holding and disposing of the ADSs or shares.

The summary is based in part on representations of the Depositary and assumes that each obligation provided for in or otherwise contemplated by the Deposit Agreement or any other related document will be performed in accordance with its terms. The US Treasury has expressed concerns that parties to whom American depositary shares are pre-released, or intermediaries in the chain of ownership between holders and the issuer of the security underlying the American depositary shares, may be taking actions that are inconsistent with the claiming of foreign tax credits by US holders of American depositary shares. Such actions would also be inconsistent with the reduced rate of tax applicable to dividends received by certain non-corporate US holders. Accordingly, the availability of the reduced tax rate for dividends received by certain non-corporate US holders, described below, could be affected by actions taken by such parties or intermediaries.

This summary is based upon tax laws of the US including the Internal Revenue Code of 1986, as amended, (the Code), administrative pronouncements, judicial decisions and final, temporary and proposed Treasury Regulations, as well as the Treaty, all as of the date hereof, changes to any of which may affect the tax consequences described herein, possibly with retroactive effect. Prospective purchasers of the ADSs or ordinary shares should consult their tax advisers as to the US, UK or other tax consequences of the ownership and disposition of such securities in their particular circumstances, including the effect of any US state or local tax laws.

As used herein, a ‘US holder’ is a beneficial owner of ADSs or shares, that is, for US federal income tax purposes:


•	a citizen or resident of the United States;

•	a corporation, or other entity taxable as a corporation, created or organised in or under the laws of the United States or of any political subdivision thereof; or

•	an estate or trust the income of which is subject to US federal income taxation regardless of its source.

In general, a US holder who owns ADSs should be treated as the owner of the underlying shares represented by those ADSs for US federal income tax purposes. Accordingly, no gain or loss should be recognised if a US holder exchanges ADSs for the underlying shares represented by those ADSs.

TAXATION OF DISTRIBUTIONS

Distributions paid on ADSs or ordinary shares, other than certain pro rata distributions of ordinary shares, will generally be treated as dividends to the extent paid out of current or accumulated earnings and profits (as determined in accordance with US federal income tax principles). Because Lloyds Banking Group plc does not maintain calculations of its earnings and profits under US federal income tax principles, it is expected that distributions generally will be reported to US holders as dividends. The dividend will generally be foreign-source dividend income to US holders and will not be eligible for the dividends-received deduction generally allowed to US corporations under the Code.

Subject to applicable limitations and the discussion above regarding concerns expressed by the US Treasury, certain dividends paid by qualified foreign corporations to certain non-corporate US holders in taxable years beginning before 1 January 2011 are taxable at a maximum tax rate of 15 per cent. A foreign corporation is treated as a qualified foreign corporation with respect to dividends paid on stock that is readily tradable on a securities market in the United States, such as the New York Stock Exchange where the Company’s ADSs are traded. US holders should consult their tax advisers to determine whether the favourable rate will apply to dividends they receive and whether they are subject to any special rules that limit their ability to be taxed at this favourable rate.

The amount of a dividend will equal the US dollar value of the pounds sterling received, calculated by reference to the exchange rate in effect on the date such distribution is received by the Depository (in the case of ADSs) or by the US holder (in the case of shares) regardless of whether the payment is converted into US dollars on the date of receipt. If the pounds sterling received as a dividend are not converted into US dollars on the date of receipt, then the US holder’s tax basis in the pounds sterling received will equal such dollar amount and the US holder may realise a foreign exchange gain or loss on the subsequent conversion into US dollars. Generally, any gains or losses resulting from the conversion of pounds sterling into US dollars will be treated as US source ordinary income or loss.

TAXATION OF CAPITAL GAINS

Gain or loss realised by a US holder on a sale or exchange of ADSs or shares will be subject to US federal income tax as capital gain or loss in an amount equal to the difference between the US holder’s tax basis in the ADSs or shares and the amount realised on the disposition, in each case as determined in US dollars. Gains or losses, if any, will generally be US source and will be long-term if the ADSs or shares were held for more than one year.

INFORMATION REPORTING AND BACKUP WITHHOLDING

Dividends paid on, and the sale proceeds from, ADSs or shares that are made within the US or through certain US-related financial intermediaries generally are subject to information reporting requirements, and may be subject to backup withholding, unless the US holder:


•	is an exempt recipient, or

•	in the case of backup withholding, the US holder provides a correct taxpayer identification number and certifies that it is not subject to backup withholding.

The amount of any backup withholding from a payment to a US holder will be allowed as a credit against the holder’s US federal income tax liability and may entitle it to a refund, provided that the required information is timely furnished to the Internal Revenue Service.

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W HERE YOU CAN FIND MORE INFORMATION

The documents concerning the Lloyds Banking Group which are referred to herein may be inspected at the Securities and Exchange Commission (SEC). You may read and copy any document filed or furnished by the Group at the SEC’s public reference rooms in Washington D.C., New York, New York and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further information on the reference rooms. The SEC also maintains a website at www.sec.gov which contains, in electronic form, each of the reports and other information that the Group has filed electronically with the SEC.

E NFORCEABILITY OF CIVIL LIABILITIES

Lloyds Banking Group plc is a public limited company incorporated under the laws of Scotland. Most of Lloyds Banking Group plc’s directors and executive officers and certain of the experts named herein are residents of the United Kingdom. A substantial portion of the assets of Lloyds Banking Group plc, and a substantial portion of the assets of such persons, are located outside the United States. As a result, it may not be possible for investors to effect service of process within the United States upon all such persons or to enforce against them in US courts judgments obtained in such courts, including those predicated upon the civil liability provisions of the federal securities laws of the United States. Furthermore, Lloyds Banking Group plc has been advised by its solicitors that there is doubt as to the enforceability in the United Kingdom, in original actions or in actions for enforcement of judgments of US courts, of certain civil liabilities, including those predicated solely upon the federal securities laws of the United States.

149

R ISK FACTORS

Set out below are certain risk factors which could affect Lloyds Banking Group’s future results and cause them to be materially different from expected results. The factors discussed below should not be regarded as a complete and comprehensive statement of all potential risks and uncertainties Lloyds Banking Group’s businesses face. For information on Lloyds Banking Group’s risk management policies and procedures, see Operating and financial review and prospects – Risk management .

GOVERNMENT-RELATED RISKS

The Commissioners of Her Majesty’s Treasury (HM Treasury) is the largest shareholder of the Company. Through its shareholding in, and other relationships with, the Company, HM Treasury is in a position to exert significant influence over the Group and its business.

HM Treasury holds approximately 41.3 per cent of the ordinary share capital of the Company. This follows a dilution in February 2010 associated with the two exchange offers announced by the Group on 3 November 2009 (the Exchange Offers). In the longer term, the Exchange Offers could lead to further dilution of the HM Treasury shareholding through the potential conversion of the enhanced capital notes (the Enhanced Capital Notes or ECNs), into ordinary shares pursuant to their terms. It is not possible to calculate precisely the total dilutive effect any potential conversion of ECNs may have on HM Treasury’s ownership interest in the Company but HM Treasury is expected to remain a significant shareholder in the Company.

In the longer term, it may become necessary for the Group to raise further capital or seek the support of the UK Government. Any such capital raising or support from the UK Government could result in an increase in HM Treasury’s shareholding in the Company.

No formal ‘relationship agreement’ has been concluded between the Group and the UK Government in respect of its shareholding in the Company and no specific measures are in place to limit the level of control which may be exercised by HM Treasury. However, the relationship falls within the scope of the revised framework document between HM Treasury and UK Financial Investments Limited published on 13 July 2009. The framework document states that UKFI will manage the UK financial institutions in which HM Treasury holds an interest “on a commercial basis and will not intervene in day-to-day management decisions of the Investee Companies (as defined herein) (including with respect to individual lending or remuneration decisions)”. This document also makes it clear that such UK financial institutions will continue to be separate economic units with independent powers of decision and “will continue to have their own independent boards and management teams, determining their own strategies and commercial policies (including business plans and budgets).” Nevertheless, there is a risk that HM Treasury might seek to exert influence over the Group, and may disagree with the commercial decisions of the Group, including over such matters as the implementation of synergies, commercial and consumer lending policies and management of the Group’s assets and/or business.

There is also a risk that, through its interests in the Company, the UK Government and HM Treasury may be able to influence the Group in other ways that would have a material adverse effect on the Group’s business, including among other things, the election of directors, the appointment of senior management at the Company, staff remuneration policies, lending policies and commitments, management of the Group’s business including, in particular, management of the Group’s assets such as its existing retail and corporate loan portfolios, significant corporate transactions and the issue of new ordinary shares. Shareholders may disagree as to whether an action opposed or supported by HM Treasury is in the best interests of the Group generally. Furthermore, HM Treasury also has interests in other UK financial institutions, as well as an interest in the health of the UK banking industry and other industries generally, and those interests may not always be aligned with the commercial interests of the Group or its shareholders.

The Group is subject to European state aid obligations following the approval of its restructuring plan by the European Commission on 18 November 2009. The implementation of this restructuring plan may have consequences that are materially adverse to the interests of the Group. Moreover, should a third party successfully challenge the European Commission’s decision to approve the Group’s restructuring plan, or should the Group require additional state aid in the future, further restructuring measures could be required and these may be materially adverse to the interests of the Group.

As a result of HM Treasury’s investment in the Company in the context of the placing and open offer in November 2008, the Group has been required to cooperate with HM Treasury to submit a restructuring plan to the European Commission setting out the Group’s plans to restructure and return to a position of viability in which it no longer relies on state aid, including the aid received pursuant to its participation in HM Treasury’s credit guarantee scheme (the Credit Guarantee Scheme), which was announced on 8 October 2008.

On 18 November 2009 the European Commission, through its College of Commissioners, approved the Group’s restructuring plan. The principal elements of the plan address competition distortions from all elements of state aid that the Group has received, including HM Treasury’s participation in the placing and compensatory open offer in June 2009 and the rights issue in November 2009 (the Rights Issue), as well as any commercial benefit received by the Group following its announcement in March 2009 of the intention it held at that time to participate in GAPS. The approval also covers the Group’s ongoing participation in HM Treasury’s Credit Guarantee Scheme at current levels up to June 2010. The Company has agreed with HM Treasury in the deed of withdrawal relating to the Company’s withdrawal from GAPS (the GAPS Withdrawal Deed) that it will comply with the terms of the European Commission’s decision.

It is possible that a third party could challenge the decision of the College of Commissioners to approve the restructuring plan in the European Courts. The Group does not believe that any such challenge would be likely to succeed, but if it were to succeed the European Commission would need to reconsider its decision, which could result in more extensive remedies being applied including the disposal of a significantly larger proportion of the Group’s assets and/or a significantly more stringent divestment timetable or more onerous behavioural restrictions than those contemplated in the approved restructuring plan.

The Group will also be subject to a variety of risks as a result of implementing the restructuring plan. There is no assurance that the price that the Group receives for any assets sold pursuant to the restructuring plan will be at a level the Group considers adequate or which it could obtain in circumstances in which the Group was not required to sell such assets in order to implement a state aid restructuring plan or if such sale were not subject to the restrictions contained in the terms thereof. In particular, should the Group fail to complete the disposal of the retail banking business that the Group is required to divest within four years, a divestiture trustee would be appointed to conduct the sale, with a mandate to complete the disposal with no minimum price (including at a negative price). In implementing the plan, the Group will lose existing customers, deposits and other assets (both directly through the sale and potentially through damage to the rest of the Group’s business arising from implementing the restructuring plan) and the potential for realising additional associated revenues and margins that it otherwise might have achieved in the absence of such disposals. Such implementation may also result in disruption to the retained business, impacting on customers and separation costs which could potentially be substantial.

The effect of implementing the approved restructuring plan may be the emergence of one or more new viable competitors in the UK banking market or a material strengthening of one or more of the Group’s competitors in that market. There can be no assurance that the Group will be able to continue to compete as effectively (whether against existing or new or strengthened competitors) and maintain or improve its revenues and margins in the resulting competitive environment, which could adversely affect the Group’s results of operations and financial condition and its business generally. If any or all of the risks described in this paragraph, or any other currently unforeseen risks, materialise, there could be a negative impact, which could be material, on the Group’s business, operations and competitive position.

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Should the Group require any further state aid that was not covered in the European Commission’s approval decision of 18 November 2009, this may require the Group to commit to further restructuring measures. Any such measures could be materially adverse to the interests of the Group.

The Company has agreed to certain undertakings with HM Treasury in relation to the operation of its business in connection with the Company’s placing and open offers in November 2008 and May 2009, in connection with the Group’s participation in the Credit Guarantee Scheme and as part of its formerly proposed participation in GAPS. The implications of some of these undertakings remain unclear and they could have a material adverse effect on the Group’s results of operations, financial condition and prospects. The Company also agreed to certain other commitments in the GAPS Withdrawal Deed.

In connection with HM Treasury’s participation in the placing and open offers in November 2008 and May 2009, the Group’s participation in the Credit Guarantee Scheme and its possible participation in GAPS, the Company provided certain undertakings aimed at ensuring that the acquisition by HM Treasury of the Company’s shares and the participation of the Group in the UK Government funding scheme as part of its support for the banking industry is consistent with the European state aid clearance. The state aid rules aim to prevent companies from being given an artificial or unfair competitive advantage as a result of governmental assistance. It is the Group’s understanding that the undertakings are also aimed at supporting certain objectives of HM Treasury in providing assistance to the UK banking industry. These undertakings include (i) supporting UK Government policy in relation to mortgage lending and lending to businesses through to the end of February 2011, (ii) regulating the remuneration of management and other employees and (iii) regulating the rate of growth of the Group’s balance sheet. There is a risk that these undertakings or any further requirements introduced by HM Treasury could have a materially adverse effect on the operations of the Group.

On 6 March 2009, in connection with the Group’s then proposed participation in GAPS, the Company entered into a commitment to increase lending by £14 billion in the 12 months commencing 1 March 2009 to support UK businesses (£11 billion) and homeowners (£3 billion). As part of withdrawing from GAPS, the Company has agreed in the GAPS Withdrawal Deed to reaffirm its overall lending commitments and to maintain in the 12 months commencing 1 March 2010 similar levels of lending as in the 12 months commencing 1 March 2009, subject to adjustment of the lending commitments by agreement with the UK Government to reflect circumstances at the start of the 12 month period commencing 1 March 2010. On 23 March 2010, the Company entered into a commitment whereby it agreed to provide gross new lending to support UK businesses amounting to £44 billion and to support homeowners amounting to £23.1 billion, in respect of the year commencing 1 March 2010, in line with these requirements. The additional lending in 2009 and 2010 is subject to the Group’s prevailing commercial terms and conditions (including appropriate risk-adjusted pricing and satisfaction of risk acceptance criteria) and, in relation to mortgage lending, the Group’s standard credit and other acceptance criteria. The business lending commitment in 2010 is in addition subject to the availability of sufficient demand from customers who meet the above criteria and through the best endeavours of the Company, the availability of the capital, liquidity and funding position on acceptable terms necessary to support the level of lending that the Company has committed to during the 2010 commitment period.

This commitment could, however, limit the operational flexibility of the Group.

Future legislative and regulatory changes could force the Group to comply with certain operational restrictions, take steps to raise further capital, or divest assets.

In July 2009, the UK Government issued a White Paper (the White Paper) which builds on and responds to the previously published Turner Review (March 2009) and Bank of England Financial Stability Report (June 2009), both of which contained proposals for reform of the structure and regulation of the UK banking system.

Proposals in the White Paper included: enhanced regulatory powers for the FSA; introducing pre-funding for the UK’s deposit guarantee scheme by 2012; requiring banks to develop and maintain detailed plans for winding down (or resolution); and more stringent capital and liquidity requirements for systemically significant firms. The Government’s stated aim in linking capital requirements to the size and complexity of systemically significant firms, is that, ‘The capital requirements in place for systemically significant institutions would need to be sufficient to change incentives of banks to over-indulge in risky activities throughout the economic cycle. This should encourage them to reduce or at least better understand the riskier activities they undertake (for example, proprietary trading) and reduce the moral hazard problem by removing the incentive for firms to become systemically significant’.

A second Turner Review discussion paper (October 2009) developed issues highlighted for further discussion in the March review, specifically how to offset the moral hazard created by the existence of systemically important banks and the cumulative impact of changes to the capital and liquidity schemes. Key proposals include: using contingent capital which converts to equity when required; reducing the interconnectedness of large cross-border banks; restricting retail banks from engaging in proprietary trading activities; and emphasising the need to prioritise capital conservation and enhancement above employee bonus payments.

In November 2009 the draft Financial Services Bill was presented to Parliament and in April 2010 the Financial Services Act was passed. The Financial Services Act consolidated some of the proposals presented in the White Paper, in addition to enhancing the FSA’s disciplinary and enforcement powers. Specifically, the Financial Services Act provides the FSA with a new regulatory objective to contribute to UK financial stability, and new powers in respect of (inter alia) altering firms’ regulatory permissions, short selling, consumer redress schemes, recovery and resolution plans for authorised firms, disciplinary and enforcement proceedings (against firms and individuals) and the FSA’s remuneration rules. The FSA’s implementation of these changes, together with further proposals set out in the White Paper, Turner Reviews and elsewhere, if implemented, could have a significant impact on the operations, structure and costs of the Group.

There is a risk that further regulation or legislation that may be developed over time to implement these or new proposals could force the Group to divest core assets, withdraw from or not engage in some activities, and/or increase its capital. Such regulations or legislation, taken with the more regular and detailed reporting obligations which are expected to accompany regulatory reform, the development and maintenance of a wind down plan, and the move to pre-funding of the deposit protection scheme in the UK, would result in additional costs for the Group, and such costs could be material.

Such measures could have a material adverse effect on the Group’s results of operations, financial condition and prospects.

On 5 October 2009, the FSA published its new liquidity rules which significantly broaden the scope of the existing liquidity regime and are designed to enhance regulated firms’ liquidity risk management practices. Procedures to comply with the FSA’s liquidity proposals are already incorporated within the Group’s liquidity funding plans. These will result in more stringent requirements, which may lead to additional costs for the Group. See Risk factors – Financial soundness related risks – The Group’s businesses are subject to inherent risks concerning liquidity, particularly if the availability of traditional sources of funding such as retail deposits or the access to wholesale money markets continues to be limited or becomes more limited. The Group continues to be reliant on various government liquidity schemes and will face refinancing risk as transactions under these schemes mature , for a fuller discussion of liquidity risks affecting the Group.

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ACQUISITION RISKS

The Group may fail to realise the business growth opportunities, revenue benefits, cost synergies, operational efficiencies and other benefits anticipated from, or may incur unanticipated costs associated with, the acquisition of HBOS. As a consequence, the Group’s results of operations, financial condition and prospects may suffer.

The continued integration of the HBOS Group into the Group is complex, expensive and presents a number of challenges for the management of both the heritage Lloyds TSB Group, the HBOS Group and their respective staff and potentially their respective customers. The Group believes that it will achieve its reported anticipated cost synergies as well as other operating efficiencies and business growth opportunities, revenue benefits and other benefits from the acquisition of HBOS. However, these expected business growth opportunities, revenue benefits, cost synergies and other operational efficiencies and other benefits may not develop, including because the assumptions upon which the Group determined the acquisition of HBOS consideration may prove to be incorrect. For example, the expected cost synergies were calculated by the Group on the basis of the existing and projected cost and operating structures of the Group and its estimate of the existing and projected cost and operating structures of the HBOS Group. Statements of estimated synergies and other effectiveness and calculations of the costs of achieving them relate to future actions and circumstances which, by their nature, involve risks, uncertainties, contingencies and other factors. As a result, the synergies and other efficiencies referred to may not be achieved, or those achieved may be materially different from those estimated.

The Group may also face a number of other risks with respect to the acquisition of HBOS including: retaining key employees; redeploying resources in different areas of operations to improve efficiency; unifying financial reporting and internal control procedures; minimising the diversion of management attention from ongoing business concerns; overcoming integration challenges (particularly as the Company’s management may be unfamiliar with some aspects of the HBOS Group’s business and operations); and addressing possible differences between heritage Lloyds TSB’s and heritage HBOS’s business culture, risk management, compliance systems and processes, controls, procedures, systems, accounting practices and implementation of accounting standards.

Under any of these circumstances, the business growth opportunities, revenue benefits, cost synergies and other benefits anticipated by the Group to result from the acquisition of HBOS may not be achieved as expected, or at all, or may be delayed. To the extent that the Group incurs higher integration costs or achieves lower revenue benefits or fewer cost savings than expected, its operating results, financial condition and prospects may suffer.

BUSINESS AND ECONOMIC RISKS

The Group’s businesses are subject to inherent risks arising from general and sector-specific economic conditions in the UK and other markets in which it operates. Adverse developments, such as the severe dislocation in the global financial markets, recession, and further deterioration of general economic conditions, particularly in the UK, have already adversely affected the Group’s earnings and profits and could continue to cause its earnings and profitability to decline. In addition, any credit rating downgrades of sovereigns, particularly the United Kingdom, Spain and Republic of Ireland (or a perception that downgrades may occur) may severely destabilise the markets and could have a material adverse effect on the Group’s operating results, financial condition and prospects.

The Group’s businesses are subject to inherent risks arising from general and sector-specific economic conditions in the markets in which it operates, particularly the United Kingdom, in which the Group’s earnings are predominantly generated. Over approximately the past two and a half years, the global economy and the global financial system have been experiencing a period of significant turbulence and uncertainty. The very severe dislocation of the financial markets around the world, that began in August 2007 but substantially worsened in September 2008, triggered widespread problems at many large global and UK commercial banks, investment banks, insurance companies and other financial and related institutions. This dislocation has severely impacted general levels of liquidity, the availability of credit and the terms on which credit is available. This crisis in the financial markets led the UK Government and other governments to inject liquidity into the financial system and to require (and participate in) recapitalisation of the banking sector to reduce the risk of failure of certain large institutions and provide confidence to the market.

Despite this intervention, the volatility and market disruption in the banking sector has continued albeit with some easing since the second half of 2009. This market dislocation has also been accompanied by recessionary conditions and trends in many economies throughout the world, including the United Kingdom. The global economy has been in a severe recession, possibly the worst since World War II, although indications are that the UK has now emerged from its 18 month recession. The widespread and severe deterioration in the UK and virtually all other economies throughout the world, including, but not limited to, business and consumer confidence, unemployment trends, the state of the housing market, the commercial real estate sector, equity markets, bond markets, foreign exchange markets, commodity markets, counterparty risk, inflation, the availability and cost of credit, lower transaction volumes in key markets, the liquidity of the global financial markets and market interest rates, has already and could continue to reduce the level of demand for, and supply of, the Group’s products and services, lead to lower asset and other realisations and increased negative fair value adjustments and impairments of investments and other assets and materially and adversely impact its operating results, financial condition and prospects. While recent economic figures show a number of countries exiting recession, forecasts are that the recovery will be at a modest pace and is likely to be protracted. Any further significant deterioration in the UK and other economies in which the Group operates could have a material adverse impact on the future results of operations of the Group. Moreover, any return to economic growth may be modest and is likely to be insufficient to prevent unemployment rising further. The rate at which deterioration of the global and UK economies has occurred has proven very difficult to predict and this will apply to any further deterioration or any recovery.

Additionally, the profitability of the Group’s businesses could be affected by increased insurance and other claims arising from market factors such as increased unemployment which may continue even following a return to economic growth in the markets in which the Group operates. Significantly higher unemployment in the UK and elsewhere, reduced corporate profitability, reduced personal non-salary income levels, increased corporate insolvency rates, increased personal insolvency rates, increased tenant defaults and/or increased interest rates may reduce borrowers’ ability to repay loans and may cause prices of residential or commercial real estate or other asset prices to fall further, thereby reducing the collateral value on many of the Group’s loans. This, in turn, would cause increased impairments in the event of default. Poor general economic conditions, lack of market liquidity and lack of transparency of asset structures have depressed asset valuations for the Group and could continue to do so if there is a further deterioration in general economic conditions.

The Group has significant exposures, particularly by way of loans, in a number of overseas jurisdictions, notably Ireland, Spain, Australia and the United States, and is therefore subject to a variety of risks relating to the performance of these economies as well.

In addition, the Group’s businesses are subject to risks arising from the current UK macroeconomic environment, high and increasing levels of UK government debt and uncertainty around the outcome of the UK general election (including the possibility of a minority or coalition

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administration which may be unable to take decisive fiscal and other measures to reduce government debt levels resulting in heightened market uncertainty). Further, any downgrade of the UK sovereign credit rating or the perception that such a downgrade may occur may severely destabilise the markets and have a material adverse effect on the Group’s operating results, financial condition and prospects. This might also include impact on the Group’s own credit ratings, borrowing costs and ability to fund itself.

A UK sovereign downgrade or the perception that such a downgrade may occur would be likely to have a material effect in depressing consumer confidence, restricting the availability, and increasing the cost, of funding for individuals and companies, further depressing economic activity, increasing unemployment, reducing asset prices and consequently increasing the risk of a ‘double-dip’ recession.

These risks are exacerbated by concerns over the levels of the public debt of, and the weakness of the economies in, Italy, the Republic of Ireland, Greece, Portugal, and Spain in particular. Further instability in these countries or others within the Eurozone might lead to contagion, which may have a material adverse effect on the Group’s operating results, financial condition and prospects.

The exact nature of the risks faced by the Group is difficult to predict and guard against in view of (i) the severity of the global financial crisis, (ii) difficulties in predicting whether the recovery will be sustained and at what rate, and (iii) the fact that many of the related risks to the business are totally, or in part, outside the control of the Group.

The Group’s businesses are inherently subject to the risk of market fluctuations, which could materially adversely affect its operating results, financial condition and prospects.

The Group’s businesses are inherently subject to risks in financial markets and in the wider economy, including changes in, and increased volatility of, interest rates, inflation rates, credit spreads, foreign exchange rates, commodity, equity, bond and property prices and the risk that its customers act in a manner which is inconsistent with business, pricing and hedging assumptions.

Market movements have had and will have an impact on the Group in a number of key areas. For example, adverse market movements have had and would have an adverse effect, which could be material, upon the financial condition of the pension schemes of the Group. Banking and trading activities that are undertaken by the Group are subject to interest rate risk, foreign exchange risk, inflation risk and credit spread risk. For example, changes in interest rate levels, yield curves and spreads affect the interest rate margin realised between lending and borrowing costs. Since August 2007, there has been a period of unprecedented high and volatile interbank lending margins over official rates (to the extent banks have been willing to lend at all), which has exacerbated these risks. The margins over official rates have recently reduced to historically more normal levels but volatility and increases in margins may return. Competitive pressures on fixed rates or product terms in existing loans and deposits sometimes restrict the Group in its ability to change interest rates applying to customers in response to changes in official and wholesale market rates.

The insurance businesses of the Group face market risk arising, for example, from equity, bond and property markets in a number of ways depending upon the product and associated contract; for example, the annual management charges received in respect of investment and insurance contracts fluctuate, as do the values of the contracts, in line with the markets. Some of these risks are borne directly by the customer and some are borne by the insurance businesses. Some insurance contracts involve guarantees and options that have increased in value in the current adverse investment markets and may continue to do so. There is a risk that the insurance businesses will bear some of the cost of such guarantees and options. The insurance businesses also have capital directly invested in the markets that are exposed to market risk. The performance of the investment markets will thus have a direct impact upon the embedded value of insurance and investment contracts and the Group’s operating results, financial condition and prospects. Adverse market conditions affect investor confidence, which in turn can result in lower sales and/or reduced persistency.

Changes in foreign exchange rates affect the value of assets and liabilities denominated in foreign currencies and such changes and the degree of volatility with respect thereto may affect earnings reported by the Group. In the Group’s international businesses, earnings and net assets are denominated in local currency, which will fluctuate with exchange rates in pounds sterling terms. It is difficult to predict with any accuracy changes in economic or market conditions, and such changes could have a material adverse effect on the Group’s operating results, financial condition and prospects.

The Group’s businesses are conducted in highly competitive environments and the Group’s financial performance depends upon management’s ability to respond effectively to competitive pressures.

The markets for UK financial services, and the other markets within which the Group operates, are highly competitive, and management expects such competition to intensify in response to competitor behaviour, consumer demand, technological changes, the impact of consolidation, regulatory actions and other factors. Moreover, UK Government and/or European intervention in the banking sector may impact the competitive position of the Group relative to its international competitors which may be subject to different forms of government intervention, thus potentially putting the Group at a competitive disadvantage to local banks in such jurisdictions. Any combination of these factors could result in a reduction in profit. The Group’s financial performance and its ability to capture additional market share depends significantly upon the competitive environment and management’s response to it.

The Group’s financial performance may be materially and adversely affected by competition, including declining lending margins or competition for savings driving up funding costs which cannot be recovered from borrowers. Adverse persistency in the Group’s insurance business is a risk to current and future earnings.

A key part of the Group’s strategy involves building strong customer relationships in order to win a bigger share of its customers’ financial services spend. If the Group is not successful in retaining and strengthening customer relationships it will not be able to deliver on this strategy, and may lose market share, incur losses on some or all of its activities or fail to attract new and retain existing deposits, which could have a material adverse effect on its business, financial condition and results of operations.

Market conditions have resulted, and are expected to result in the future, in material changes to the estimated fair values of financial assets of the Group. Negative fair value adjustments have had, and may continue to have in the future, a further material adverse effect on the Group’s operating results, financial condition and prospects.

Financial markets have been subject to significant stress conditions resulting in steep falls in perceived or actual financial asset values, particularly due to the severe dislocation in the global financial markets.

The Group has material exposures to securities and other investments, including, but not limited to, asset-backed securities, structured investments and private equity investments, that are recorded at fair value and are therefore exposed to further negative fair value adjustments, particularly in view of market dislocation and the fragility of the economic recovery. Although the Board of Directors of the Company (the Board) believes that overall impairments for the Group have peaked, asset valuations in future periods, reflecting prevailing market conditions, may result in further

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negative changes in the fair values of the Group’s financial assets and these may also translate into increased impairments. In addition, the value ultimately realised by the Group for its securities and other investments may be lower than the current fair value. Any of these factors could require the Group to record further negative fair value adjustments, which may have a material adverse effect on its operating results, financial condition or prospects.

The Group has made asset redesignations as permitted by recent amendments to IAS 39 (‘Financial Instruments: Recognition and Measurement’). The effect of such redesignations has been, and would be, that any effect on the income statement of movements in the fair value of such redesignated assets that have occurred since 1 July 2008, in the case of assets redesignated prior to 1 November 2008, or may occur in the future, may not be recognised until such time as the assets become impaired or are disposed of.

In addition, to the extent that fair values are determined using financial valuation models, the data used by such models may not be available or may become unavailable due to changes in market conditions, particularly for illiquid assets, and particularly in times of substantial instability. In such circumstances, the Group’s valuation methodologies require it to make assumptions, judgements and estimates in order to establish fair value. These valuation models are complex and the assumptions used are difficult to make and are inherently uncertain, particularly in light of the uncertainty resulting from the current and ongoing crisis in the global financial markets, and any consequential impairments or write-downs could have a material adverse effect on the Group’s operating results, financial condition and prospects.

CREDIT-RELATED RISKS

The Group’s businesses are subject to inherent risks concerning borrower and counterparty credit quality which have affected and are expected to continue to affect the recoverability and value of assets on the Group’s balance sheet.

As one of the UK’s largest lenders with substantial business and operations overseas, the Group has exposures to many different products and counterparties, and the credit quality of its exposures can have a significant impact on its earnings. The Group makes both secured and unsecured loans to retail and corporate customers and the Group’s businesses are subject to inherent risks regarding the credit quality of, the recovery of loans to and amounts due from, customers and market counterparties. Adverse changes in the credit quality of the Group’s UK and/or international borrowers and counterparties, or in their behaviour, would be expected to reduce the value of the Group’s assets, and materially increase the Group’s write-downs and allowances for impairment losses.

The Group estimates and establishes reserves for credit risks and potential credit losses inherent in its credit exposure. This process, which is critical to its results and financial condition, requires difficult, subjective and complex judgements, including forecasts of how these economic conditions might impair the ability of its borrowers to repay their loans. As is the case with any such assessments, there is always a risk that the Group will fail to identify the proper factors or that it will fail to estimate accurately the impact of factors that it identifies.

As a result of the acquisition of HBOS, the composition of the Group’s wholesale portfolio has materially changed, with much larger sectoral concentrations (for example in real estate, leveraged lending, asset-backed securities and floating rate notes issued by financial institutions) and higher levels of credit risk including substantially greater exposures, particularly in Ireland, Australia and the United States.

At the time of the acquisition of HBOS, the average rating of the HBOS Group’s corporate lending portfolio was significantly weaker than that of the heritage Lloyds TSB Group, and this continues to be the case. HBOS had substantial lending to mid-sized and private companies, a greater exposure than the heritage Lloyds TSB Group to leveraged finance and subordinated loans, as well as significant exposure to the commercial real estate sector, including hotels and residential property developers, which has been particularly adversely affected by the recessionary environment. These concentrations in cyclically weak sectors, as well as exposure at various levels of the capital structure, mean that the heritage HBOS wholesale business is potentially exposed to high and volatile levels of impairments.

It should be noted that the heritage HBOS portfolio in Ireland is heavily exposed to the commercial and residential real estate sectors, which have been negatively impacted by the current economic recession, the portfolio in Australia has material exposure to real estate and leveraged lending, and in the United States there are notable exposures to sectors such as gaming and real estate which are cyclically weak and have been negatively impacted by the economic recession. As in the UK, the heritage HBOS portfolio overseas is also particularly exposed to a small number of long-term customer relationships and these single name concentrations place the Group at risk of loss should default occur.

UK house prices have declined significantly, albeit modest increases have been evident in recent months, reflecting a correction of severely inflated asset values, triggered by the economic downturn and lower availability of credit. Economic or other factors may lead to further contraction in the mortgage market and further decreases in housing prices. Many borrowers in the UK borrow on short-term fixed or discounted floating rates and when such rates expire the continued reduced supply and stricter terms of mortgages, together with the potential for higher mortgage rates, could lead to higher default and delinquency rates. The Group provides mortgages to buy-to-let investors where increasing unemployment, an excess supply of rental property or falls in rental demand could also impact the borrowers’ income and ability to service the loans. If interest rates rise, or the current economic recovery falters, causing further decreases in house prices and/or increases in unemployment, the Group’s retail portfolios could generate substantial impairment losses which could materially affect its operations, financial condition and prospects. Furthermore, the Group has direct exposure to self-certification and sub-prime mortgages in the UK and is therefore subject to the risks inherent in this type of mortgage lending in the event of decreases in house prices, increases in unemployment or a reduction in borrowers’ incomes and the risk that the Group has incorrectly assessed the credit quality or willingness to pay of borrowers as a result of incomplete or inaccurate disclosure by those borrowers. At present, mortgage default and delinquency rates are cushioned by unprecedented low rates of interest which have improved customer affordability, and this has created the risk of increased defaults and delinquency rates as the economy recovers from the recession and interest rates start to rise.

Although the Board believes that overall impairments for the Group have peaked, there is a risk of further increases in the impairment charges for some businesses and there remain ongoing concerns with regard to the outlook for the Irish economy in particular. Moreover, there remains a risk that further material impairments in the Group’s portfolios could come to light, particularly in the event of any further significant deterioration in the economic environment although the performance of some of the Group’s exposures might deteriorate further even in the absence of further economic decline, particularly in Ireland. Any such unforeseen material further impairments could have a material and adverse effect on the Group’s operations, financial condition and prospects.

Concentration of credit and market risk could increase the potential for significant losses.

The Group has exposure to concentration risk where its business activities focus particularly on a similar type of customer or product or geographic location including the UK market, which could be adversely affected by changes in economic conditions. Additionally, the heritage HBOS strategy of supporting UK entrepreneurs together with its joint venture model and its focus on commercial property lending has given rise to significant single

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name and risk capital exposure. Given the Group’s high concentrations of property exposure, further decreases in residential or commercial property values and/or further tenant defaults are likely to lead to higher impairment losses, which could materially affect its operations, financial condition and prospects.

The Group’s efforts to diversify or hedge its credit portfolio against concentration risks may not be successful and any concentration of credit risk could increase the potential for significant losses in its credit portfolio. In addition, the disruption in the liquidity or transparency of the financial markets may result in the Group’s inability to sell or syndicate securities, loans or other instruments or positions held, thereby leading to increased concentrations of such positions. These concentrations could expose the Group to losses if the mark-to-market value of the securities, loans or other instruments or positions declines causing the Group to take write-downs. Moreover, the inability to reduce the Group’s positions not only increases the market and credit risks associated with such positions, but also increases the level of risk-weighted assets on the Group’s balance sheet, thereby increasing its capital requirements and funding costs, all of which could adversely affect the Group’s operating results, financial condition and prospects. The acquisition of HBOS has in some cases increased the Group’s exposure to concentration risk, since the combination of two portfolios inevitably gives rise to some greater concentrations than would otherwise have been permitted. Market conditions at present mean that it is difficult to achieve sales to ameliorate these concentrations.

If the perceived creditworthiness of market counterparties does not improve or continues to deteriorate, the Group may be forced to record further credit valuation adjustments on securities insured or guaranteed by such parties, which could have a material adverse effect on the Group’s results of operations, financial condition and prospects.

The Group has credit exposure to market counterparties through securities insured or guaranteed by such parties and credit protection bought from such parties with respect to certain over-the-counter derivative contracts, mainly credit default swaps (CDSs) which are carried at fair value. The fair value of these underlying CDSs and other securities, and the Group’s exposure to the risk of default by the underlying counterparties, depend on the valuation and the perceived credit risk of the instrument insured or guaranteed or against which protection has been bought. Market counterparties have been adversely affected by their exposure to residential mortgage-linked products, and their perceived creditworthiness has deteriorated significantly since 2007. They may continue to be substantially adversely impacted by such or other events. Their creditworthiness may further deteriorate as a consequence of the deterioration of the value of underlying assets. Although the Group seeks to limit and manage direct exposure to market counterparties, indirect exposure may exist through other financial arrangements and counterparties. If the financial condition of market counterparties or their perceived creditworthiness deteriorates further, the Group may record further credit valuation adjustments on the underlying instruments insured by such parties in addition to those already recorded. Any primary or indirect exposure to the financial condition or creditworthiness of these counterparties could have a material adverse impact on the results of operations, financial condition and prospects of the Group.

The Group’s borrowing costs and access to the capital markets depend significantly on the Company’s credit ratings and market perception of the Company’s financial resilience and those of Lloyds TSB Bank plc, HBOS plc and Bank of Scotland plc and any deterioration could materially adversely affect the Group’s results of operations, financial condition and prospects.

As at 30 April 2010, the long-term credit ratings for the Company were A1 from Moody’s Investors Service Limited, A from Standard & Poor’s Ratings Services, AA- (AA minus) from Fitch Ratings Limited and A (high) from DBRS. As at 30 April 2010, the long-term credit ratings for Lloyds TSB Bank plc were Aa3 from Moody’s Investors Service Limited, A+ (A plus) from Standard & Poor’s Ratings Services, AA- (AA minus) from Fitch Ratings Limited and AA (low) from DBRS. As at 30 April 2010, the long-term credit ratings for HBOS plc were A1 from Moody’s Investors Service Limited, A from Standard & Poor’s Rating Services, AA- (AA minus) from Fitch Ratings Limited and AA (low) from DBRS. As at 30 April 2010, the long-term credit ratings for Bank of Scotland plc were Aa3 from Moody’s Investors Service Limited, A+ (A plus) from Standard & Poor’s Ratings Services, AA- (AA minus) from Fitch Ratings Limited and AA (low) from DBRS.

As at 30 April 2010, the Company also had short-term ratings of A-1 from Standard & Poor’s Ratings Services and F1+ from Fitch Ratings Limited. Lloyds TSB Bank plc had short-term ratings of P-1 from Moody’s Investors Service Limited, A-1 from Standard & Poor’s Ratings Services, F1+ from Fitch Ratings Limited and R-1 (middle) from DBRS. HBOS plc had short-term ratings of P-1 from Moody’s Investors Service Limited, A-1 from Standard & Poor’s Ratings Services, F1+ from Fitch Ratings Limited and R-1 (middle) from DBRS. Bank of Scotland plc had short-term ratings of P-1 from Moody’s Investors Service Limited, A-1 from Standard & Poor’s Ratings Services, F1+ from Fitch Ratings Limited and R-1 (middle) from DBRS.

Reduction in the credit ratings of the Group or deterioration in the capital market’s perception of the Group’s financial resilience, could significantly increase its borrowing costs, limit its access to the capital markets and trigger additional collateral requirements in derivative contracts and other secured funding arrangements. Therefore, any further reduction in credit ratings or deterioration of market perception could materially adversely affect the Group’s access to liquidity and competitive position, increase its funding costs and, hence, have a material adverse effect on the Group’s business, financial position and results of operations. These material adverse effects could also follow from a reduction in the credit ratings of Lloyds TSB Bank plc, HBOS plc or Bank of Scotland plc.

FINANCIAL SOUNDNESS RELATED RISKS

The Group’s businesses are subject to inherent risks concerning liquidity, particularly if the availability of traditional sources of funding such as retail deposits or the access to wholesale money markets continues to be limited or becomes more limited. The Group continues to be reliant on various government liquidity schemes and will face refinancing risk as transactions under these schemes mature.

The Group’s businesses are subject to risks concerning liquidity, which are inherent in banking operations. If access to liquidity is constrained for a prolonged period of time, this could affect the Group’s profitability. Whilst the Group expects to have sufficient access to liquidity to meet its funding requirements even in a stressed scenario, under extreme and unforeseen circumstances a prolonged and severe restriction on the Group’s access to liquidity (including government and central bank funding and liquidity support) could affect the Group’s ability to meet its financial obligations as they fall due or to fulfilits commitments to lend, and in such extreme circumstances the Group may not be in a position to continue to operate without additional funding support, which it may be unable to access, which could have a material impact on the Group’s solvency, including its ability to meet its regulatory minimum liquidity requirements. These risks can be exacerbated by many enterprise-specific factors, including an over-reliance on a particular source of funding (including, for example, securitisations, covered bonds, foreign markets and short-term and overnight money markets), changes in credit ratings, or market-wide phenomena such as market dislocation and major disasters. There is also a risk that corporate and institutional counterparties may look to reduce aggregate credit exposures to the Group or to all banks which could increase the Group’s cost of funding and limit its access to liquidity. In addition, the funding structure employed by the Group may prove to be inefficient giving rise to a level of

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funding cost that is not sustainable in the long run. The funding needs of the Group will increase to the extent that customers, including conduit vehicles of the Group, draw down under existing credit arrangements with the Group and such increases in funding needs may be material. In order to continue to meet its funding obligations and to maintain or grow its businesses generally, the Group relies on customer savings and transmission balances, as well as ongoing access to the global wholesale funding markets, central bank liquidity facilities (for example, Bank of England, European Central Bank and Federal Reserve Bank of New York) and the UK Government Credit Guarantee Scheme. The ability of the Group to access wholesale and retail funding sources on satisfactory economic terms is subject to a variety of factors, including a number of factors outside of its control, such as liquidity constraints, general market conditions, regulatory requirements, the encouraged or mandated repatriation of deposits by foreign wholesale or central bank depositors and loss of confidence in the UK banking system, any of which could affect the Group’s profitability or, in the longer term under extreme circumstances, its ability to meet its financial obligations as they fall due.

Medium-term growth in the Group’s lending activities will depend, in part, on the availability of retail funding on appropriate terms, for which there is increasing competition. See Risk factors – Business and economic risks – The Group’s businesses are conducted in highly competitive environments and the Group’s financial performance depends upon management’s ability to respond effectively to competitive pressures for a discussion of the competitive nature of the banking industry and competitive pressures that could have a negative impact on the availability of customer deposits and retail funding. This reliance has increased in the recent past given the difficulties in accessing wholesale funding. Increases in the cost of such funding will impact on the Group’s margins and affect profit, and a lack of availability of such retail deposit funding could impact on the Group’s future growth.

The ongoing availability of retail deposit funding is dependent on a variety of factors outside the Group’s control, such as general economic conditions and market volatility, the confidence of retail depositors in the economy in general and in the Group in particular, the financial services industry specifically and the availability and extent of deposit guarantees. These or other factors could lead to a reduction in the Group’s ability to access retail deposit funding on appropriate terms in the future. Any loss in consumer confidence in the banking businesses of the Group could significantly increase the amount of retail deposit withdrawals in a short space of time and this may have an adverse effect on the Group’s profitability. Should the Group experience an unusually high and unforeseen level of withdrawals, in such extreme circumstances the Group may not be in a position to continue to operate without additional funding support, which it may be unable to access, which could have a material impact on the Group’s solvency.

In addition, if the current difficulties in the wholesale funding markets are not resolved or central bank provision of liquidity to the financial markets is abruptly curtailed, it is likely that wholesale funding will prove even more difficult to obtain. Such liquidity constraints could affect the Group’s profitability. Whilst the Group expects to have sufficient access to liquidity to meet its funding requirements even in a stressed scenario, under extreme and unforeseen circumstances a prolonged and severe restriction on the Group’s access to these traditional sources of liquidity could have a material adverse effect on the Group’s business, financial position and results of operations, and in such extreme circumstances the Group may not be in a position to continue to operate without additional funding support, which it may be unable to access and which, in turn, could have a material impact on the Group’s solvency.

Whilst various governments, including the UK Government, and central banks have taken substantial measures to ease the crisis in liquidity, (for example, the UK Credit Guarantee Scheme), there can be no assurance that these measures will succeed in materially improving the liquidity position of major UK banks, including the Group in the longer term. In addition, the availability and the terms on which any such measures will continue to be made available to the Group in the longer term are uncertain. The Group does not have influence over the policy making behind such measures. Further, there can be no assurance that these conditions will not lead to an increase in the overall concentration risk and cost of funding of the Group. The Group has substantially relied on the Bank of England liquidity facilities as well as the UK Government funding scheme. The Group does not expect that there will be any extension or renewal of the Special Liquidity Scheme (which was closed for new transactions in January 2009) or the Credit Guarantee Scheme (which was closed for new issuance in February 2010). Accordingly, the Group will face a refinancing concentration during 2011 and 2012 associated with the maturity of the Special Liquidity Scheme transactions and Credit Guarantee Scheme issuance undertaken by the Group prior to the closure of those schemes. While the Group expects that the impact of this refinancing concentration can be mitigated by a combination of alternative funding over the course of the next two years and reductions in the Group’s net wholesale funding requirement over the same period, there can be no assurance that these mitigation efforts will be successful. Under the GAPS Withdrawal Deed, the Company has agreed to develop with the FSA a medium term funding plan aimed at reducing dependence on short term funding, to be regularly reviewed by the FSA and the Bank of England. If the Group’s funding plan is not successful in mitigating the impact of this refinancing concentration in 2011, the Group could at that time face serious liquidity constraints, which would have a material adverse impact on its solvency.

At the time of the acquisition of HBOS, the HBOS Group had a funding profile that involved the need to refinance a higher volume of maturing wholesale funding than that of heritage Lloyds TSB. As this continues to be the case, the funding profile of the Group involves substantially higher refinancing risk than the funding profile of heritage Lloyds TSB on a stand-alone basis. The Group will also continue to be dependent on its credit ratings in order to be able to attract wholesale investors into its debt issuance programmes; should the ratings fall, the cost of refinancing will increase and it may not be possible to refinance borrowings as they mature on favourable terms. Such increased refinancing risk, in isolation or in concert with the related liquidity risks noted above, could have a material adverse effect on the Group’s profitability and, in the longer term under extreme and unforeseen circumstances, its ability to meet its financial obligations as they fall due.

The Group has been and could continue to be negatively affected by the soundness and/or the perceived soundness of other financial institutions, which could result in significant systemic liquidity problems, losses or defaults by other financial institutions and counterparties, and which could materially adversely affect the Group’s results of operations, financial condition and prospects.

Against the backdrop of the lack of liquidity and the recent high cost of funds relative to official rates in the interbank lending market, which was unprecedented in recent history, the Group is subject to the risk of deterioration of the commercial soundness and/or perceived soundness of other financial services institutions within and outside the United Kingdom. Financial services institutions that deal with each other are interrelated as a result of trading, investment, clearing, counterparty and other relationships. This risk is sometimes referred to as ‘systemic risk’ and may adversely affect financial intermediaries, such as clearing agencies, clearing houses, banks, securities firms and exchanges with whom the Group interacts on a daily basis, all of which could have an adverse effect on the Group’s ability to raise new funding.

The Group routinely executes a high volume of transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds and other institutional clients, resulting in a significant credit concentration. The Group is exposed to counterparty risk as a result of recent financial institution failures and nationalisations and will continue to be exposed to the risk of loss if counterparty financial institutions fail or are otherwise unable to meet their obligations. A default by, or even concerns about the financial resilience of, one or more financial services institutions could lead to further significant systemic liquidity problems, or losses or defaults by other financial institutions, which could have a material and adverse effect on the Group’s results of operations, financial condition and prospects.

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RISK FACTORS

The Group is subject to the risk of having insufficient capital resources to meet the minimum required by regulators

The Group is subject to extensive regulation and regulatory supervision in relation to the levels of capital in its business. Currently, the Group meets and exceeds its regulatory capital requirements. The Group expects to continue to meet both its regulatory capital requirements and the additional capital requirements imposed by the FSA Stress Test. However, the FSA could apply increasingly stringent stress case scenarios in determining the required capital ratios for the Group and other banks, increase the minimum regulatory requirements imposed on the Group, introduce liquidity restrictions, introduce new ratios and/or change the manner in which it applies existing regulatory requirements to recapitalised banks including those within the Group. Specifically, in relation to the consultation papers issued by the Basel Committee on Banking Supervision (‘Strengthening the resilience of the banking sector’ and ‘International framework for liquidity risk measurement, standards and monitoring’), the Group is participating in the industry-wide consultation and calibration exercises taking place through 2010. In order to meet additional regulatory capital requirements, the Group may be forced to raise further capital.

Further, within the Group, the heritage Lloyds TSB and HBOS businesses may have approaches to the Basel II modelling of regulatory capital requirements which may differ according to the assumptions used. The two model methodologies are being aligned where appropriate. These models rely on a number of assumptions and changes to these assumptions and/or the methodologies adopted may result in changes to the Group’s combined reported level of regulatory capital.

The Group’s ability to maintain its targeted and regulatory capital ratios in the longer term could be affected by a number of factors, including net synergies and implementation costs following the acquisition of HBOS, and its level of risk-weighted assets, post-tax profit and fair value adjustments. In addition to the fair value adjustments, the Group’s core tier 1 capital ratio will be directly impacted by any shortfall in forecasted after-tax profit (which could result, most notably, from greater than anticipated asset impairments and/or adverse volatility relating to the insurance or lending businesses). Furthermore, under Basel II, capital requirements are inherently more sensitive to market movements than under previous regimes and capital requirements will increase if economic conditions or negative trends in the financial markets worsen.

If the regulatory capital requirements, liquidity restrictions or ratios applied to the Group are increased in the future, any failure of the Group to maintain such increased regulatory capital ratios could result in administrative actions or sanctions, which in turn may have a material adverse effect on the Group’s operating results, financial condition and prospects. A shortage of available capital would also affect the Group’s ability to pay dividends, continue organic growth or pursue acquisitions or other strategic opportunities. In particular, changes in regulatory capital requirements imposed by the Group’s regulators could cause the Group to defer the re-introduction of ordinary dividends or change its dividend policy.

The Group’s life assurance and general insurance businesses in the UK are subject to capital requirements prescribed by the FSA, and the Group’s life and general insurance companies outside the UK are subject to local regulatory capital requirements. In July 2007, the European Commission published a draft proposal for primary legislation to define broad ‘framework’ principles for Solvency II, a fundamental review of the capital adequacy regime for the European insurance industry. Solvency II aims to establish a revised set of EU-wide capital requirements where the required regulatory capital will be dependent upon the risk profile of the entities, together with risk management standards, that will replace the current Solvency I requirements. Solvency II is still in development, but there is a risk that the final regime could increase the amount of regulatory capital the Group’s life assurance and general insurance businesses are required to hold, thus decreasing the amount of capital available for other uses.

INSURANCE AND PENSION SCHEME RELATED RISKS

The Group’s insurance businesses and employee pension schemes are subject to risks relating to insurance claim rates, pension scheme benefit payment levels and changes in insurance customer and employee pension scheme member behaviour.

The life and pensions insurance businesses of the Group and its employee pension schemes are exposed to short-term and longer-term variability arising from uncertain longevity and ill-health rates. Adverse developments in any of these factors will increase the size of the Group’s insurance and employee pension scheme liabilities and may adversely affect the Group’s financial condition and results of operations.

Customer behaviour in the life and pensions insurance business may result in increased propensity to cease contributing to or cancel insurance policies at a rate in excess of business assumptions. The consequent reduction in policy persistency and fee income has an adverse impact upon the profitability of the life and pensions business of the Group. The behaviour of employee pension scheme members affects the levels of benefits payable from the schemes. For example, the rate at which members cease employment affects the aggregate amount of benefits payable by the schemes. This rate may differ from applicable business assumptions. Adverse variances may increase the size of the Group’s aggregate pension liabilities and may adversely affect the Group’s financial condition and results of operations.

The general insurance businesses of the Group are exposed to the risk of uncertain insurance claim rates. For example, extreme weather conditions can result in high property damage claims, higher levels of theft can increase claims on property, contents and motor vehicle insurance and changes to unemployment levels can increase claims on loan protection insurance. These claims rates may differ from business assumptions and negative developments may adversely affect the Group’s financial condition and results of operations.

UK banks recognise an insurance asset in their balance sheets representing the value of in-force business (VIF) in respect of long-term life assurance contracts, being insurance contracts and investment contracts with discretionary participation features. This asset represents the present value of future profits expected to arise from the portfolio of in-force life assurance contracts. Adoption of this accounting treatment results in the earlier recognition of profit on new business, but subsequently a lower contribution from existing business, when compared to the recognition of profits on investment contracts under IAS 39 (Financial Instruments: Recognition and Measurement). Differences between actual and expected experience may have a significant impact on the value of the VIF asset, as changes in experience can result in significant changes to modelled future cash flows. The VIF asset is calculated based on best-estimate assumptions made by management, including mortality experience and persistency. If these assumptions prove incorrect, the VIF asset could be materially reduced, which in turn could have a material adverse effect on the Group’s financial condition and results of operations.

Also, as further described in Risk factors – Business and economic risks – The Group’s businesses are inherently subject to the risk of market fluctuations, which could materially adversely affect its operating results, financial condition and prospects , the Group’s insurance assets are subject to the risk of market fluctuations.

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RISK FACTORS

LEGAL AND REGULATORY RISKS

The Group’s businesses are subject to substantial regulation, and regulatory and governmental oversight. Adverse regulatory developments or changes in government policy could have a significant material adverse effect on the Group’s operating results, financial condition and prospects.

The Group conducts its businesses subject to ongoing regulation and associated regulatory risks, including the effects of changes in the laws, regulations, policies, voluntary codes of practice and interpretations in the UK and the other markets where it operates. This is particularly the case in the current market environment, which is witnessing increased levels of government and regulatory intervention in the banking sector, which the Group expects to continue for the foreseeable future. Future changes in regulation, fiscal or other policies are unpredictable and beyond the control of the Group and could materially adversely affect the Group’s business.

Areas where changes could have an adverse impact include, but are not limited to:


(i)	the monetary, interest rate and other policies of central banks and regulatory authorities;

(ii)	general changes in government or regulatory policy, or changes in regulatory regimes that may significantly influence investor decisions in particular markets in which the Group operates, may change the structure of those markets and the products offered or may increase the costs of doing business in those markets;

(iii)	changes to prudential regulatory rules relating to capital adequacy and liquidity frameworks;

(iv)	external bodies applying or interpreting standards or laws differently to those applied by the Group historically;

(v)	changes in competition and pricing environments;

(vi)	further developments in requirements relating to financial reporting, corporate governance, conduct of business and employee compensation;

(vii)	expropriation, nationalisation, confiscation of assets and changes in legislation relating to foreign ownership; and

(viii)	other unfavourable political, military or diplomatic developments producing social instability or legal uncertainty which, in turn, may affect demand for the Group’s products and services.

In the United Kingdom and elsewhere, there is increased political and regulatory scrutiny of the banking industry and, in particular, retail banking. The UK Government, the FSA and other regulators in the United Kingdom or overseas may intervene further in relation to areas of industry risk already identified, or in new areas, which could adversely affect the Group.

Increased regulatory intervention may lead to requests from regulators to carry out wide ranging reviews of past sales and/or sales practices. In the United Kingdom, the Competition Commission, the FSA and the Office of Fair Trading (OFT) have recently carried out, or are currently conducting, several inquiries. Regulatory reviews and investigations may result in enforcement actions and public sanction, which could expose the Group to an increased risk of litigation in addition to financial penalties and/or the deployment of such regulatory tools as the relevant regulator deems appropriate in the circumstances.

In addition, the Group faces increased political and regulatory scrutiny as a result of the Group’s perceived size and systemic importance following the acquisition of HBOS. Such scrutiny may focus on, or include review of, the historical operations of the HBOS Group as well as the characteristics of the enlarged Group. The outcome of any regulatory review, proceeding or complaint against the Group, including HBOS, is inherently uncertain and difficult to predict. In clearing the acquisition of HBOS without a reference to the UK Competition Commission, the Secretary of State noted that there were some competition concerns identified by the OFT in the markets for personal current accounts and mortgages in Great Britain and the market for SME banking in Scotland. The OFT has also reiterated that it will consider whether to refer any banking markets to the Competition Commission if it identifies any prevention, restriction or distortion of competition.

In April 2009 the OFT indicated its intention to focus its efforts in the financial services markets on the banking sector, including credit, leasing and debt recovery activities. Amongst other plans, it has announced its intention to launch a review of the unsecured consumer credit sector in 2009.

The FSA published the Turner Review (‘A Regulatory Response to the Global Banking Crisis’) on 18 March 2009. The Turner Review assesses the various factors which contributed to the severe financial problems suffered by banks at the end of 2008, and then considers a wide range of proposals to counter these factors and reform global financial regulation. These proposals include significantly increasing banks’ minimum regulatory capital requirements, regulating banks’ liquidity requirements, requiring banks to establish capital buffers, a maximum growth leverage ratio to prevent banks’ excessive expansion, authorities’ power to obtain information on significant unregulated financial institutions, central counterparty clearing of credit derivatives, and a major shift in the supervisory approach of the FSA, with an increased focus on high impact, complex and systemically important firms, business models and approved persons’ technical skills. New arrangements for co-ordinated cross-border supervision of international and EU banking groups are also proposed. The FSA has also published a discussion paper intended to elicit market participants’ comments on many of the proposals contained in the Turner Review. The impact of the proposals on banks and their business models is likely, in the view of the Group, to be very significant. The fundamental changes to capital and liquidity requirements could have a substantial impact on the shape of banks’ business models. In the Group’s view, banks can also expect a shift from the previous ‘light touch’ principles-based regime to an intensive, and interventionist, rules-based regime. The cost of compliance with these proposals may well lead to reduced profitability, as well as to a lower return on equity.

The FSA published a Feedback Statement on the Turner Review and associated discussion paper on 30 September 2009. This continues the debate regarding how systemically important firms are dealt with, suggesting they should be required to produce recovery and resolution plans (‘living wills’) setting out how operations would be resolved in the event that the bank fails. Given the Group’s systemic importance this is highly significant. If a bank’s living will is deemed insufficient by the FSA and contains serious obstacles to resolution it could result in restructuring of the relevant bank’s group.

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RISK FACTORS

Amendments to a number of EU directives are being considered, including the Distance Marketing Directive, Markets in Financial Instruments Directive; Capital Requirements Directive, E-Money Directive, Undertakings for Collective Investment in Transferable Securities (UCITS) Directive and the Financial Groups Directive.

Compliance with any changes in regulation or with any regulatory intervention resulting from political or regulatory scrutiny may significantly increase the Group’s costs, impede the efficiency of its internal business processes, limit its ability to pursue business opportunities, or diminish its reputation. Any of these consequences could have a material adverse effect on the Group’s operating results, financial condition and prospects.

In the United Kingdom, firms within the Group are responsible for contributing to compensation schemes in respect of banks and other authorised financial services firms that are unable to meet their obligations to customers.

In the United Kingdom, the Financial Services Compensation Scheme (FSCS) was established under the FSMA and is the UK’s statutory fund of last resort for customers of authorised financial services firms. The FSCS can pay compensation to customers if a firm is unable, or likely to be unable, to pay claims against it. The FSCS is funded by levies on firms authorised by the FSA, including firms within the Group. The recent arrangements put in place to protect the depositors of Bradford & Bingley and other failed deposit-taking institutions involving the FSCS are expected to result in a significant increase in the levies made by the FSCS on the industry. The Group continues to provide for its share of the management expenses levy and the estimated interest cost on the FCSC borrowings. Going forward, further provisions in respect of these costs are likely to be necessary until the borrowings are repaid. The ultimate cost to the industry, which will also include the cost of any compensation payments made by the FSCS and, if necessary, the cost of meeting any shortfall after recoveries on the borrowings entered into by the FSCS, remains uncertain although it may be significant and the associated costs to the Group may have a material adverse effect on its results of operations and financial condition.

The FSA requires that UK deposit-taking institutions develop systems by 31 December 2010 to produce a Single Customer View (SCV), providing an aggregated view of each customer’s eligibility for compensation in the event of a failure. In the event that the Group fails to deliver such a project to the regulator’s standards or timetables, there is the risk of public sanction, financial penalty and/or the deployment by the FSA of such other regulatory tools as it deems appropriate to the circumstances. Other potential changes to the FSCS arrangements with the potential to require the Group to incur additional costs or expose the Group to risks may arise from ongoing discussions at the national and European Union levels around the future design of deposit protection schemes, including but not limited to potentially increasing the level of protection which is accorded to deposits and/or moving to pre-funding of compensation schemes. FSA intends to carry out a consultation exercise in the fourth quarter of 2010 before introducing any further proposals relating to the FSCS.

From 1 January 2010 (subject to the rules of the FSCS):


–	eligible deposit claimants remain entitled to receive 100 per cent. compensation for financial loss up to £50,000;

–	eligible investment business and mortgage advice and arranging claimants are entitled to receive 100 per cent. compensation for financial loss up to £50,000; and

–	eligible insurance claimants are entitled to receive 90 per cent. of the claim (except compulsory insurance for which it is 100 per cent. of the claim).

On 16 March 2009, the European Directive on Deposit Guarantee Schemes (1994/19/EC) was amended by Directive 2009/14/EC (the Amended Directive). The Amended Directive required EU Member States, by 30 June 2009, to increase the minimum level of coverage they provide for deposits from €20,000 to €50,000 and to reduce the payout period in the event of bank failure from three months to 20 days. Furthermore, by 31 December 2010, Member States must set coverage for the aggregate deposits of each depositor at €100,000.

The FSA announced further changes to the FSCS on 24 July 2009, which in part seek to implement the fast payout rules set out under the Amended Directive referred to above through a SCV. In addition, the other key changes announced by the FSA to the FSCS include the following:


–	Changing the payout of compensation to avoid customers who hold loans and deposits with the same institution having any debt deducted from their compensation;

–	Widening eligibility of the FSCS to include more individuals;

–	Introducing a requirement that deposit takers must disclose the existence of the FSCS and the level of protection it offers to help familiarise consumers with the services it provides; and

–	If an institution operates under a number of trading names, it must tell its customers which of the different trading names are covered by a particular authorisation.

The Group is exposed to various forms of legal and regulatory risk, including the risk of mis-selling financial products, acting in breach of legal or regulatory principles or requirements and giving negligent advice, any of which could have a material adverse effect on its results or its relations with its customers.

The Group is exposed to many forms of legal and regulatory risk, which may arise in a number of ways. Primarily:


(i)	certain aspects of the Group’s business may be determined by the authorities, the Financial Ombudsman Service (FOS) or the courts as not being conducted in accordance with applicable laws or regulations, or, in the case of FOS, with what is fair and reasonable in the Ombudsman’s opinion;

(ii)	the possibility of alleged mis-selling of financial products or the mishandling of complaints related to the sale of such products by or attributed to a member of the Group, resulting in disciplinary action or requirements to amend sales processes, withdraw products, or provide restitution to affected customers; all of which may require additional provisions;

(iii)	contractual obligations may either not be enforceable as intended or may be enforced against the Group in an adverse way;

(iv)	the Group holds accounts for a number of customers that might be or are subject to interest from various regulators and authorities including the Serious Fraud Office, those in the US and others. The Group is not aware of any current investigation into the Group as a result of any such enquiries but cannot exclude the possibility of the Group’s conduct being reviewed as part of any such investigations;

(v)	the intellectual property of the Group (such as trade names) may not be adequately protected; and

(vi)	the Group may be liable for damages to third parties harmed by the conduct of its business.

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RISK FACTORS

In addition, the Group faces risk where legal or regulatory proceedings, or other complaints are brought against it in the UK High Court or elsewhere, or in jurisdictions outside the UK, including other European countries and the United States (which may include class action lawsuits), for example, see note 52 to the consolidated financial statements. A major focus of US governmental policy relating to financial institutions in recent years has been combating money laundering and terrorist financing and enforcing compliance with US economic sanctions.

Failure to manage these risks adequately could impact the Group adversely, both financially and reputationally, through an adverse impact on the Group’s brands.

OPERATIONAL RISKS AND RELATED ISSUES

The Group could fail to attract or retain senior management or other key employees.

The Group’s success depends on the ability and experience of its senior management and other key employees. The loss of the services of certain key employees, particularly to competitors, could have a material adverse effect on the Group’s results of operations, financial condition and prospects. In addition, as the Group’s businesses develop, both in the UK and in other jurisdictions, future success will depend on the ability to attract and retain highly-skilled and qualified personnel, which cannot be guaranteed, particularly in light of the increased regulatory intervention in financial institutions and management compensation arrangements coming under government prescription. For example, the Group’s remuneration arrangements are subject to the FSA’s Rule and supporting Code on remuneration (which only apply to certain financial institutions), effective from 1 January 2010 for the 2009 performance year. In addition, in the GAPS Withdrawal Deed, the Company has acknowledged to HM Treasury its commitment to the principle that, from 2010, it should be at the leading edge of implementing the G20 principles, the FSA code and any remuneration provisions accepted by the Government from the Walker Review, provided that this principle shall always allow the Group to operate on a level playing field with its competitors. Furthermore, the Company has agreed with HM Treasury the specific deferral and clawback terms which will apply to any bonuses in respect of the 2009 performance year and these may affect the Group’s ability to offer competitive remuneration arrangements.

Therefore, depending on the nature of the remuneration arrangements developed, staff retention and recruitment may become more difficult. The failure to attract or retain a sufficient number of appropriate personnel could significantly impede the Group’s financial plans, growth and other objectives and have an adverse effect on its business, financial position and results of operations.

In addition, failure to manage trade union relationships effectively may result in disruption to the business and its operations causing potential financial and reputational loss.

Weaknesses or failures in the Group’s internal processes and procedures and other operational risks could materially adversely affect the Group’s results of operations, financial condition and prospects and could result in reputational damage.

Operational risks, through inadequate or failed internal processes and/or systems (including financial reporting and risk monitoring processes) or from people-related or external events, including the risk of fraud and other criminal acts carried out against the Group, are present in the Group’s businesses. The Group’s businesses are dependent on their ability to process and report accurately and efficiently a high volume of complex transactions across numerous and diverse products and services, in different currencies and subject to a number of different legal and regulatory regimes. Any weakness in such internal controls and processes could have a negative impact on the Group’s results or its ability to report adequately such results during the affected period. Furthermore, damage to the Group’s reputation (including to customer confidence) arising from actual or perceived inadequacies, weaknesses or failures in Group systems or processes could have a significant adverse impact on the Group’s businesses. Notwithstanding anything in this risk factor, this risk factor should not be taken as implying that either the Company or any relevant company within the Group will be unable to comply with its obligations as a company with securities admitted to the Official List or as a supervised firm regulated by the FSA (as the case may be).

Terrorist acts, other acts of war, geopolitical, pandemic or other such events could have a material adverse impact on the Group’s results of operations, financial condition and prospects.

Terrorist acts, other acts of war or hostility, geopolitical, pandemic or other such events and responses to those acts/events may create economic and political uncertainties, which could have a material adverse impact on UK and international economic conditions generally, and more specifically on the business and results of the Group in ways that cannot necessarily be predicted.

OTHER RISKS

The Group’s financial statements are based in part on assumptions and estimates which, if wrong, could cause losses in the future.

The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts of assets, liabilities, income and expenses. Due to the inherent uncertainty in making estimates, actual results reported in future periods may be based upon amounts which differ from those estimates. Estimates, judgements and assumptions are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected. The accounting policies deemed critical to the Group’s results and financial position, based upon materiality and significant judgements and estimates, include impairment of financial assets; valuation of financial instruments; pensions; goodwill; insurance and taxation; which are discussed in detail in ‘Critical Accounting Estimates and Judgements’ set out on pages F-19 to F-23 of this document.

If the judgements, estimates and assumptions used by the Group in preparing its consolidated financial statements are subsequently found to be incorrect, there could be a material impact on the Group’s results of operations and a corresponding impact on its funding requirements and capital ratios.

The Company is a holding company and as a result, is dependent on dividends from its subsidiaries to meet its obligations including its obligations with respect to its debt securities, and to provide funds for payment of dividends to shareholders.

Lloyds Banking Group plc is a non-operating holding company and as such the principal sources of its income are from operating subsidiaries who also hold the principal assets of the Group. As a separate legal entity, the Company relies on remittance of their dividends and other funds in order to be able to pay obligations to shareholders and debt holders as they fall due.

160

RISK FACTORS

Possible volatility in the price of Lloyds Banking Group plc ordinary shares.

The market price of the Lloyds Banking Group plc ordinary shares could be volatile and subject to significant fluctuations due to a variety of factors, including changes in market sentiment regarding Lloyds Banking Group plc ordinary shares (or securities similar to them), any regulatory changes affecting Lloyds Banking Group’s operations, variations in its operating results, developments in the industry or its competitors, the operating and share price performance of other companies in the industries and markets in which Lloyds Banking Group operates, or speculation about the Group’s business in the press, media or investment communities. Stock markets have from time to time, including recently and particularly with respect to certain financial institution shares, experienced significant price and volume fluctuations. Such fluctuations have affected market prices for securities, including the Lloyds Banking Group plc ordinary shares, and may be unrelated to the Group’s operating performance or prospects. Furthermore, the Group’s operating results and prospects from time to time may be below the expectations of market analysts and investors. Any of these events could result in a decline in the market prices of Lloyds Banking Group plc ordinary shares. In general, prospective investors should be aware that the value of an investment in Lloyds Banking Group plc ordinary shares may go down as well as up.

Failure to manage the risks associated with changes in taxation rates or law, or misinterpretation of the law, could materially and adversely affect the Group’s results of operations, financial condition and prospects.

Tax risk is the risk associated with changes in taxation rates or law, or misinterpretation of the law. This could result in increased charges, financial loss including penalties, and reputational damage. Failure to manage these risks adequately could impact the Group materially and adversely and could have a material negative impact on the Group’s performance.

Following the acquisition of HBOS, any further increase in HM Treasury’s shareholding percentage in the Company, or the aggregation of HM Treasury’s interests with that of other shareholders holding 5 per cent or more, could lead to the Group suffering adverse tax consequences.

Certain companies have material tax losses and reliefs which they anticipate carrying forward to reduce tax payable in the future and restrictions on the ability to utilise these losses and reliefs could affect the post-tax profitability and capital position of the Group.

Following the acquisition of HBOS, actions which could possibly cause the loss of these reliefs to occur would include any further increase in HM Treasury’s shareholding in Lloyds Banking Group plc, or the aggregation of HM Treasury’s interests with that of other shareholders holding 5 per cent or more. These actions, if coupled with the occurrence of certain specified events in relation to the Group companies (including a major change in the nature or conduct of a trade carried on by such a Group company or an increase in capital of such a Group company with an investment business) would, in the case of legacy HBOS Group companies, and could, in the case of legacy Lloyds TSB Group companies, cause restrictions on the ability to utilise these losses and reliefs.

The Company considers that it will be able to conduct its business, and the business of the Group, in a manner which avoids the occurrence of these specified events. However, the ability to do so cannot be predicted with any certainty at the date of this document.

161

F ORWARD LOOKING STATEMENTS

This annual report includes certain forward looking statements within the meaning of the US Private Securities Litigation Reform Act of 1995 with respect to the business, strategy and plans of Lloyds Banking Group and its current goals and expectations relating to its future financial condition and performance. Statements that are not historical facts, including statements about Lloyds Banking Group’s or its directors’ and/or management’s beliefs and expectations, are forward looking statements. Words such as ‘believes’, ‘anticipates’, ‘estimates’, ‘expects’, ‘intends’, ‘aims’, ‘potential’, ‘will’, ‘would’, ‘could’, ‘considered’, ‘likely’, ‘estimate’ and variations of these words and similar future or conditional expressions are intended to identify forward looking statements but are not the exclusive means of identifying such statements. By their nature, forward looking statements involve risk and uncertainty because they relate to events and depend upon circumstances that will occur in the future.

Examples of such forward looking statements include, but are not limited to, projections or expectations of the Group’s future financial position including profit attributable to shareholders, provisions, economic profit, dividends, capital structure, expenditures or any other financial items or ratios; statements of plans, objectives or goals of Lloyds Banking Group or its management including in respect of the integration of HBOS and the achievement of certain synergy targets; statements about the future business and economic environments in the United Kingdom (UK) and elsewhere including future trends in interest rates, foreign exchange rates, credit and equity market levels and demographic developments and any impact on the Group; statements about strategic goals, competition, regulation, disposals and consolidation or technological developments in the financial services industry; and statements of assumptions underlying such statements.

Factors that could cause actual results to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward looking statements made by Lloyds Banking Group or on Lloyds Banking Group’s behalf include, but are not limited to the risks identified above under Risk factors , as well as general economic conditions in the UK and internationally; inflation, deflation, interest rates, policies of the Bank of England and other G8 central banks and interest rate, exchange rate, market and monetary fluctuations; changing demographic developments including mortality and changing customer behaviour including consumer spending, saving and borrowing habits, borrower credit quality, technological changes, natural and other disasters, adverse weather and similar contingencies outside the Group’s control; inadequate or failed internal or external processes, people and systems; terrorist acts and other acts of war or hostility and responses to those acts, geopolitical, pandemic or other such events; changes in laws, regulations, taxation, government policies, including those relating to share ownership, or accounting standards or practices and similar contingencies outside Lloyds Banking Group’s control; the ability to derive cost savings and other benefits as well as mitigate exposures from the acquisition and integration of HBOS; inadequate or failed internal or external processes, people and systems; exposure to regulatory scrutiny, legal proceedings or complaints; changes in competition and pricing environments; the inability to hedge certain risks economically; the adequacy of loss reserves; the ability to secure new customers and develop more business from existing customers; the degree of borrower credit quality; the ability to achieve value-creating mergers and/or acquisitions at the appropriate time and prices and the success of Lloyds Banking Group in managing the risks of the foregoing.

Lloyds Banking Group may also make or disclose written and/or oral forward looking statements in reports filed with or furnished to the US Securities and Exchange Commission, Lloyds Banking Group annual reviews, half-year announcements, proxy statements, offering circulars, prospectuses, press releases and other written materials and in oral statements made by the directors, officers or employees of Lloyds Banking Group to third parties, including financial analysts. Except as required by law, the forward looking statements contained in this annual report are made as of the date hereof, and Lloyds Banking Group expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward looking statements contained in this annual report to reflect any change in Lloyds Banking Group’s expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

162

L LOYDS BANKING GROUP STRUCTURE

The following is a list of the significant subsidiaries of Lloyds Banking Group plc at 31 December 2009.


Name of subsidiary undertaking	Country of registration/ incorporation	Percentage of equity share capital and voting rights held	Nature of business	Registered office

Lloyds TSB Bank plc	England	100%	Banking and financial services	25 Gresham Street London EC2V 7HN
Scottish Widows plc	Scotland	100%*	Life assurance	69 Morrison Street Edinburgh EH3 8Y
HBOS plc	Scotland	100%	Holding company	The Mound Edinburgh EH1 1YZ
Bank of Scotland plc	Scotland	100%*	Banking and financial services	The Mound Edinburgh EH1 1YZ
Clerical Medical Investment Group Limited	England	100%*	Life assurance	33 Old Broad Street London EC2N 1HZ


*	Indirect interest

163

THIS PAGE IS INTENTIONALLY LEFT BLANK

164

I NDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS



Report of the Independent Registered Public Accounting Firm		F-2
Consolidated income statement for the three years ended 31 December 2009, 31 December 2008 and 31 December 2007		F-3
Consolidated statement of comprehensive income for the three years ended 31 December 2009, 31 December 2008 and 31 December 2007		F-4
Consolidated balance sheet at 31 December 2009 and 31 December 2008		F-5
Consolidated statement of changes in equity for the three years ended 31 December 2009, 31 December 2008 and 31 December 2007		F-7
Consolidated cash flow statement for the three years ended 31 December 2009, 31 December 2008 and 31 December 2007		F-8
Notes to the consolidated financial statements		F-9

F-1

R EPORT OF THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

TO THE SHAREHOLDERS OF LLOYDS BANKING GROUP PLC

In our opinion, the accompanying consolidated income statement, consolidated statement of comprehensive income, consolidated balance sheet, consolidated statement of changes in equity and consolidated cash flow statement present fairly, in all material respects, the financial position of Lloyds Banking Group plc and its subsidiaries (the Company) at 31 December 2009 and 2008 and the results of their operations and cash flows for each of the three years in the period ended 31 December 2009, in conformity with International Financial Reporting Standards (IFRSs) as issued by the International Accounting Standards Board (IASB). Also, in our opinion the Company maintained, in all material respects, effective internal control over financial reporting as of 31 December 2009, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organisations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the Management Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorisations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorised acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

As described in Corporate governance – Management report on internal control over financial reporting , management’s assessment of and conclusion on the effectiveness of internal control over financial reporting as of 31 December 2009 excludes internal controls over the HBOS plc business which was acquired in a purchase business combination on 16 January 2009, except for controls over certain assets where the progress of integration with the Company’s assets made it possible for these to be included. We have also excluded HBOS plc from our audit of internal control over financial reporting, except for controls over certain assets where the progress of integration with the Company’s assets made it possible for these to be included. The HBOS plc business which has not been included represented approximately 49 per cent of the Company’s total income and 56 per cent of the Company’s total assets for the year ended 31 December 2009.

PricewaterhouseCoopers LLP
Edinburgh, United Kingdom

25 February 2010, except for note 4 to the consolidated financial statements, as to which the date is 13 May 2010

F-2

C ONSOLIDATED INCOME STATEMENT

for the year ended 31 December 2009


			2009			2008 ¹			2007 ¹
	Note	£ million			£ million			£ million
Interest and similar income			28,238			17,569			16,874
Interest and similar expense			(19,212	)		(9,851	)		(10,775	)
Net interest income	5		9,026			7,718			6,099
Fee and commission income			4,254			3,231			3,224
Fee and commission expense			(1,517	)		(694	)		(600	)
Net fee and commission income	6		2,737			2,537			2,624
Net trading income	7		19,098			(9,186	)		3,123
Insurance premium income	8		8,946			5,412			5,430
Other operating income	9		5,490			528			942
Other income			36,271			(709	)		12,119
Total income			45,297			7,009			18,218
Insurance claims	10		(22,019	)		2,859			(7,522	)
Total income, net of insurance claims			23,278			9,868			10,696
Operating expenses	11		(15,984	)		(6,100	)		(5,568	)
Trading surplus			7,294			3,768			5,128
Impairment	12		(16,673	)		(3,012	)		(1,796	)
Share of results of joint ventures and associates	13		(752	)		4			10
Profit on sale of businesses	9		—			—			657
Gain on acquisition	14		11,173			—			—
Profit before tax			1,042			760			3,999
Taxation	15		1,911			38			(679	)
Profit for the year			2,953			798			3,320
Profit attributable to minority interests			126			26			32
Profit attributable to equity shareholders			2,827			772			3,288
Profit for the year			2,953			798			3,320
Basic earnings per share	16		7.5	p		6.7	p		28.9	p
Diluted earnings per share	16		7.5	p		6.6	p		28.7	p

The accompanying notes are an integral part of the consolidated financial statements.

¹ Restated for IFRS 2 (Revised)

F-3

C ONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

for the year ended 31 December 2009


		2009			2008 ¹			2007 ¹
	£ million			£ million			£ million
Profit for the year		2,953			798			3,320
Other comprehensive income
Movements in revaluation reserve in respect of available-for-sale financial assets, net of tax:
Change in fair value		1,936			(2,031	)		(436	)
Transferred to income statement in respect of disposals		(74	)		(19	)		(5	)
Transferred from income statement in respect of impairment		453			102			49
Other transfers to income statement		(67	)		(66	)		(6	)
		2,248			(2,014	)		(398	)
Movement in cash flow hedging reserve, net of tax:
Effective portion of changes in fair value taken to other comprehensive income		(382	)		(24	)		(14	)
Net gains transferred to the income statement		92			12			(1	)
		(290	)		(12	)		(15	)
Currency translation differences, net of tax		(219	)		(362	)		16
Other comprehensive income for the year, net of tax		1,739			(2,388	)		(397	)
Total comprehensive income for the year		4,692			(1,590	)		2,923

Total comprehensive income attributable to minority interests		107			54			31
Total comprehensive income attributable to equity shareholders		4,585			(1,644	)		2,892
Total comprehensive income for the year		4,692			(1,590	)		2,923

¹ Restated for IFRS 2 (Revised)

F-4

C ONSOLIDATED BALANCE SHEET

at 31 December 2009


			2009		2008
	Note	£ million		£ million
Assets
Cash and balances at central banks			38,994		5,008
Items in the course of collection from banks			1,579		946
Trading and other financial assets at fair value through profit or loss	17		150,011		45,064
Derivative financial instruments	18		49,928		28,884
Loans and receivables:
Loans and advances to banks	19		35,361		38,733
Loans and advances to customers	20		626,969		240,344
Debt securities	23		32,652		4,416
			694,982		283,493
Available-for-sale financial assets	25		46,602		55,707
Investment properties	26		4,757		2,631
Investments in joint ventures and associates	13		479		55
Goodwill	27		2,016		2,256
Value of in-force business	28		6,685		1,893
Other intangible assets	29		4,087		197
Tangible fixed assets	30		9,224		2,965
Current tax recoverable			680		300
Deferred tax assets	42		5,006		833
Other assets	31		12,225		5,801
Total assets			1,027,255		436,033

The accompanying notes are an integral part of the consolidated financial statements.

The directors approved the consolidated financial statements on 25 February 2010, except for note 4, as to which the date is 13 May 2010.


Sir Winfried Bischoff	J Eric Daniels	Tim J W Tookey
Chairman	Group Chief Executive	Group Finance Director

F-5

CONSOLIDATED BALANCE SHEET

at 31 December 2009


			2009		2008
Equity and liabilities	Note	£ million		£ million
Liabilities
Deposits from banks	32		82,452		66,514
Customer deposits	33		406,741		170,938
Items in course of transmission to banks			1,037		508
Trading and other financial liabilities at fair value through profit or loss	34		28,271		6,754
Derivative financial instruments	18		40,485		26,892
Notes in circulation			981		—
Debt securities in issue	35		233,502		75,710
Liabilities arising from insurance contracts and participating investment contracts	36		76,179		33,792
Liabilities arising from non-participating investment contracts	38		46,348		14,243
Unallocated surplus within insurance businesses	39		1,082		270
Other liabilities	40		29,320		11,456
Retirement benefit obligations	41		780		1,771
Current tax liabilities			51		—
Deferred tax liabilities	42		209		—
Other provisions	43		983		230
Subordinated liabilities	44		34,727		17,256
Total liabilities			983,148		426,334
Equity
Share capital	45		10,472		1,513
Share premium account	46		14,472		2,096
Other reserves	47		7,086		(2,476	)
Retained profits	48		11,248		8,260
Shareholders’ equity			43,278		9,393
Minority interests			829		306
Total equity			44,107		9,699
Total equity and liabilities			1,027,255		436,033

The accompanying notes are an integral part of the consolidated financial statements.

F-6

C ONSOLIDATED STATEMENT OF CHANGES IN EQUITY


	Attributable to equity shareholders

	Share capital and premium £ million			Other reserves £ million			Retained profits ¹ £ million			Minority interests £ million			Total ¹ £ million

Balance at 1 January 2007		2,695			336			8,124			352			11,507
Total comprehensive income		—			(396	)		3,288			31			2,923
Dividends		—			—			(1,957	)		(19	)		(1,976	)
Purchase/sale of treasury shares		—			—			(1	)		—			(1	)
Employee share option schemes:
Value of employee services		—			—			17			—			17
Proceeds from shares issued		35			—			—			—			35
Repayment of capital to minority shareholders		—			—			—			(80	)		(80	)

Balance at 31 December 2007		2,730			(60	)		9,471			284			12,425
Total comprehensive income		—			(2,416	)		772			54			(1,590	)
Dividends		—			—			(2,042	)		(29	)		(2,071	)
Private placement of ordinary shares		760			—			—			—			760
Purchase/sale of treasury shares		—			—			16			—			16
Employee share option schemes:
Value of employee services		—			—			43			—			43
Proceeds from shares issued		119			—			—			—			119
Repayment of capital to minority shareholders		—			—			—			(3	)		(3	)

Balance at 31 December 2008		3,609			(2,476	)		8,260			306			9,699
Total comprehensive income		—			1,758			2,827			107			4,692
Dividends		—			—			—			(116	)		(116	)
Issue of ordinary shares:
Placing and open offer		649			3,781			—			—			4,430
Issued on acquisition of HBOS		1,944			5,707			—			—			7,651
Placing and compensatory open offer		3,905			—			—			—			3,905
Rights issue		13,112			—			—			—			13,112
Issued to Lloyds TSB Foundations		41			—			—			—			41
Transfer to merger reserve		(1,000	)		1,000			—			—			—
Redemption of preference shares		2,684			(2,684	)		—			—			—
Purchase/sale of treasury shares		—			—			45			—			45
Employee share option schemes:
Value of employee services		—			—			116			—			116
Adjustment on acquisition		—			—			—			5,567			5,567
Extinguishment of minority interests		—			—			—			(5,035	)		(5,035	)

Balance at 31 December 2009		24,944			7,086			11,248			829			44,107

¹ Restated for IFRS 2 (Revised)

F-7

C ONSOLIDATED CASH FLOW STATEMENT
for the year ended 31 December 2009



	Note			2009 £ million			2008 ¹ £ million			2007 ¹ £ million

Profit before tax					1,042			760			3,999
Adjustments for:
Change in operating assets		55	(A )		61,942			(43,025	)		(16,982	)
Change in operating liabilities		55	(B )		(105,927	)		80,933			21,541
Non-cash and other items		55	(C )		8,907			(4,017	)		2,785
Tax received (paid)					301			(810	)		(859	)

Net cash (used in) provided by operating activities					(33,735	)		33,841			10,484

Cash flows from investing activities
Purchase of available-for-sale financial assets					(455,816	)		(144,680	)		(21,667	)
Proceeds from sale and maturity of available-for-sale financial assets					490,561			110,470			19,468
Purchase of fixed assets					(2,689	)		(1,436	)		(1,334	)
Proceeds from sale of fixed assets					2,129			579			982
Acquisition of businesses, net of cash acquired		55	(F )		16,227			(19	)		(8	)
Disposal of businesses, net of cash disposed		55	(G )		411			—			1,476

Net cash provided by (used in) investing activities					50,823			(35,086	)		(1,083	)

Cash flows from financing activities
Dividends paid to equity shareholders					—			(2,042	)		(1,957	)
Dividends paid to minority interests		55	(E )		(116	)		(29	)		(19	)
Interest paid on subordinated liabilities					(2,622	)		(771	)		(709	)
Proceeds from issue of subordinated liabilities		55	(E )		4,187			3,021			—
Proceeds from issue of ordinary shares		55	(E )		21,533			879			35
Repayment of subordinated liabilities		55	(E )		(6,897	)		(381	)		(300	)
Repayment of capital to minority shareholders		55	(E )		(33	)		(3	)		(80	)

Net cash provided by (used in) financing activities					16,052			674			(3,030	)

Effects of exchange rate changes on cash and cash equivalents					(210	)		1,440			82
Change in cash and cash equivalents					32,930			869			6,453
Cash and cash equivalents at beginning of year					32,760			31,891			25,438

Cash and cash equivalents at end of year		55	(D )		65,690			32,760			31,891

The accompanying notes are an integral part of the consolidated financial statements.

¹ Restated for IFRS 2 (Revised)

F-8

N OTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1 BASIS OF PREPARATION

The consolidated financial statements of Lloyds Banking Group plc (prior to 16 January 2009 known as Lloyds TSB Group plc) have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union (EU). IFRS comprises accounting standards prefixed IFRS issued by the International Accounting Standards Board (IASB) and those prefixed IAS issued by the IASB’s predecessor body as well as interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC) and its predecessor body. The EU endorsed version of IAS 39 Financial Instruments: Recognition and Measurement relaxes some of the hedge accounting requirements; the Group has not taken advantage of this relaxation, and therefore there is no difference in application to the Group between IFRS as adopted by the EU and IFRS as issued by the IASB.

The financial information has been prepared under the historical cost convention, as modified by the revaluation of investment properties, available-for-sale financial assets, trading securities and certain other financial assets and liabilities at fair value through profit or loss and all derivative contracts. The going concern of the Company and the Group is dependent on successfully funding their respective balance sheets and maintaining adequate levels of capital. In order to satisfy themselves that the Company and the Group have adequate resources to continue to operate for the foreseeable future, the directors have considered a number of key dependencies which are set out in Operating and financial review and prospects – Risk management – Principal risks and Operating and financial review and prospects – Financial soundness and additionally have considered projections for the Group’s capital and funding position. Having considered these, the directors consider that it is appropriate to continue to adopt the going concern basis in preparing the accounts.

To provide a more relevant presentation of the Group’s financial instruments, additional line items have been added to the consolidated balance sheet to show debt securities classified as loans and receivables separately. Comparatives have been reclassified to conform to the revised presentation.

The following IFRS pronouncements relevant to the Group have been adopted in these consolidated financial statements:


(i)	IAS 1 Presentation of Financial Statements . The revised standard prohibits the presentation of items of income and expense (that is ‘non-owner changes in equity’) in the statement of changes in equity, requiring ‘non-owner changes in equity’ to be presented separately from owner changes in equity. All non-owner changes in equity are required to be shown in a performance statement. Entities can choose whether to present one performance statement (the statement of comprehensive income) or two statements (the income statement and statement of comprehensive income). The Group has elected to present two statements: an income statement and a statement of comprehensive income. The financial statements have been prepared under the revised disclosure requirements; the application of this revised standard, which affects presentation only, has not had any impact on amounts recognised in these financial statements.

(ii)	Amendment to IFRS 2 Share-based Payment – ‘Vesting Conditions and Cancellations’ . This amendment to IFRS 2 restricts the definition of ‘vesting condition’ to a condition that includes an explicit or implicit requirement to provide services. Any other conditions are non-vesting conditions, which have to be taken into account to determine the fair value of the equity instruments granted. In the case that the award does not vest as the result of a failure to meet a non-vesting condition that is within the control of either the entity or the counterparty, this must be accounted for as a cancellation. The main impact of this amendment for the Group arises from cancellations by employees of contributions to the Group’s Save-As-You-Earn (SAYE) schemes; in the event of a cancellation the Group must recognise immediately the amount of the expense that would have otherwise been recognised over the remainder of the vesting period. Under the former IFRS 2, such cancellations would have resulted in the reversal of the costs recognised in current and prior periods in respect of the SAYE schemes concerned for the relevant employees. The amendment is applied retrospectively and has resulted in a restatement of the 2008 comparatives. The effect has been to increase operating expenses and reduce profit before tax by £43 million in 2009 (2008: £47 million; 2007: £1 million) but has had no effect on the Group’s balance sheet or shareholders’ equity as the increased expense is offset by movements in retained profits.

(iii)	Amendments to IFRS 7 Financial Instruments: Disclosures – ‘Improving Disclosures about Financial Instruments ’. The amendments require enhanced disclosures about fair value measurement and liquidity risk. In particular, the amendment requires disclosure of a three level fair value measurement hierarchy for financial instruments carried on the Group’s balance sheet at fair value. As the amendments only result in additional disclosures, the amendments have not had any impact on amounts recognised in these financial statements.

(iv)	IFRS 8 Operating Segments . This new standard replaces IAS 14 Segment Reporting and requires reporting of financial and descriptive information about operating segments which are based on how financial information is reported and evaluated internally. The segment information for the year ended 31 December 2009 and for the corresponding comparative period is presented in note 4. The application of this new standard, which affects disclosures only, has not had any impact for amounts recognised in these financial statements.

The application of the following IFRS pronouncements which all became effective in 2009 has had no material impact on these financial statements:


–	Amendments to IFRIC 9 Reassessment of Embedded Derivatives and IAS 39 Financial Instruments: Recognition and Measurement . This amendment clarifies that a reassessment of embedded derivatives is required whenever a financial asset has been reclassified out of the fair value through profit or loss category.

–	IFRIC 13 Customer Loyalty Programmes . This interpretation addresses accounting by entities who grant customer loyalty award credits to customers as part of sales transactions and which can be redeemed in the future for free or discounted goods or services. The majority of customer loyalty award schemes are operated by third parties.

–	IFRIC 16 Hedges of a Net Investment in a Foreign Operation . This interpretation provides guidance on accounting for hedges of net investments in foreign operations in an entity’s consolidated financial statements.

–	IAS 23 Borrowing Costs . This revised standard requires interest and other costs incurred in connection with the borrowing of funds to be recognised as an expense excepting that those which are directly attributable to the acquisition, construction or production of assets that take a substantial period of time to get ready for their intended use or sale must be capitalized as part of the cost of those assets.

–	Amendments to IAS 32 and IAS 1 Puttable Financial Instruments and Obligations Arising on Liquidation . The amendments require some puttable financial instruments (being those which give the holder the right to put the instrument back to the issuer for cash or another financial asset) and some financial instruments that impose on the entity an obligation to deliver to another party a pro rata share of the net assets of the entity only on liquidation to be classified as equity.

–	I mprovements to IFRSs (issued May 2008). Sets out minor amendments to IFRS standards as part of annual improvements process. Most amendments clarified existing practice.

Details of those IFRS pronouncements which will be relevant to the Group but which were not effective at 31 December 2009 and which have not been applied in preparing these financial statements are given in note 56.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

2 ACCOUNTING POLICIES

The Group’s accounting policies are set out below.

(A) CONSOLIDATION

The assets, liabilities and results of Group undertakings (including special purpose entities) are included in the financial statements on the basis of accounts made up to the reporting date. Group undertakings include subsidiaries, associates and joint ventures.

(1) SUBSIDIARIES

Subsidiaries include entities over which the Group has the power to govern the financial and operating policies which generally accompanies a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group; they are de-consolidated from the date that control ceases. Details of the principal subsidiaries are given in note 9 to the parent company financial statements.

Investment vehicles, such as Open Ended Investment Companies (OEICs), where the Group has control, typically through acting as fund manager and the life funds having a beneficial interest greater than 50 per cent, are consolidated. The minority unitholders’ interest is reported in other liabilities.

Intercompany transactions, balances and unrealised gains and losses on transactions between Group companies are eliminated.

The Group applies a policy of treating transactions with minority interests as transactions with parties external to the Group. Disposals to minority interests result in gains and losses for the Group that are recorded in the income statement. Purchases from minority interests result in goodwill, being the difference between any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary.

(2) JOINT VENTURES AND ASSOCIATES

Joint ventures are entities over which the Group has joint control under a contractual arrangement with other parties. Associates are entities over which the Group has significant influence, but not control or joint control, over the financial and operating policies. Significant influence is the power to participate in the financial and operating policy decisions of the entity and is normally achieved through holding between 20 per cent and 50 per cent of the voting share capital of the entity.

The Group utilises the venture capital exemption for investments where significant influence or joint control is present and the business unit operates as a venture capital business. These investments are designated at initial recognition at fair value through profit or loss. Otherwise, the Group’s investments in joint ventures and associates are accounted for by the equity method of accounting and are initially recorded at cost and adjusted each year to reflect the Group’s share of the post-acquisition results of the joint venture or associate based on audited accounts which are coterminous with the Group or made up to a date which is not more than three months before the Group’s reporting date. The share of any losses is restricted to a level that reflects an obligation to fund such losses.

(B) GOODWILL

Goodwill arises on business combinations, including the acquisition of subsidiaries, and on the acquisition of interests in joint ventures and associates; goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the identifiable assets, liabilities and contingent liabilities acquired. Where the fair value of the Group’s share of the identifiable assets, liabilities and contingent liabilities of the acquired entity is greater than the cost of acquisition, the excess is recognised immediately in the income statement.

Goodwill is recognised as an asset at cost and is tested at least annually for impairment. If an impairment is identified the carrying value of the goodwill is written down immediately through the income statement and is not subsequently reversed. Goodwill arising on acquisitions of associates and joint ventures is included in the Group’s investment in joint ventures and associates. At the date of disposal of a subsidiary, the carrying value of attributable goodwill is included in the calculation of the profit or loss on disposal except where it has been written off directly to reserves in the past.

(C) OTHER INTANGIBLE ASSETS

Other intangible assets include brands, core deposit intangibles, purchased credit card relationships, customer-related intangibles and capitalised software enhancements. Intangible assets which have been determined to have a finite useful life are amortised on a straight line basis over their estimated useful life as follows:



Capitalised software enhancements		up to 5 years
Brands (which have been assessed as having finite lives)		10-15 years
Customer-related intangibles		up to 10 years
Core deposit intangibles		up to 8 years
Purchased credit card relationships		5 years

Intangible assets with finite useful lives are reviewed at each reporting date to assess whether there is any indication that they are impaired. If any such indication exists the recoverable amount of the asset is determined and in the event that the asset’s carrying amount is greater than its recoverable amount, it is written down immediately. Certain brands have been determined to have an indefinite useful life and are not amortised. Such intangible assets are reassessed annually to reconfirm that an indefinite useful life remains appropriate. In the event that an indefinite life is inappropriate a finite life is determined and an impairment review is performed on the asset.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

2 ACCOUNTING POLICIES continued

(D) REVENUE RECOGNITION

Interest income and expense are recognised in the income statement for all interest-bearing financial instruments, except for those classified at fair value through profit or loss, using the effective interest method. The effective interest method is a method of calculating the amortised cost of a financial asset or liability and of allocating the interest income or interest expense over the expected life of the financial instrument. The effective interest rate is the rate that exactly discounts the estimated future cash payments or receipts over the expected life of the financial instrument or, when appropriate, a shorter period, to the net carrying amount of the financial asset or financial liability.

The effective interest rate is calculated on initial recognition of the financial asset or liability by estimating the future cash flows after considering all the contractual terms of the instrument but not future credit losses. The calculation includes all amounts expected to be paid or received by the Group including expected early redemption fees and related penalties and premiums and discounts that are an integral part of the overall return. Direct incremental transaction costs related to the acquisition, issue or disposal of a financial instrument are also taken into account in the calculation. Once a financial asset or a group of similar financial assets has been written down as a result of an impairment loss, interest income is recognised using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss (see accounting policy 2(H)).

Fees and commissions which are not an integral part of the effective interest rate are generally recognised when the service has been provided. Loan commitment fees for loans that are likely to be drawn down are deferred (together with related direct costs) and recognised as an adjustment to the effective interest rate on the loan once drawn. Where it is unlikely that loan commitments will be drawn, loan commitment fees are recognised over the life of the facility. Loan syndication fees are recognised as revenue when the syndication has been completed and the Group retains no part of the loan package for itself or retains a part at the same effective interest rate for all interest-bearing financial instruments, including loans and advances, as for the other participants.

Dividend income is recognised when the right to receive payment is established.

Revenue recognition policies specific to life insurance and general insurance business are detailed below (see accounting policy 2(O)).

(E) FINANCIAL ASSETS AND LIABILITIES

On initial recognition, financial assets are classified into fair value through profit or loss, available-for-sale financial assets or loans and receivables. Financial liabilities are measured at amortised cost, except for trading liabilities and other financial liabilities designated at fair value through profit or loss on initial recognition which are held at fair value. Purchases and sales of securities and other financial assets and liabilities are recognised on trade date, being the date that the Group is committed to purchase or sell an asset.

(1) FINANCIAL INSTRUMENTS AT FAIR VALUE THROUGH PROFIT OR LOSS

Financial instruments are classified at fair value through profit or loss where they are trading securities or where they are designated at fair value through profit or loss by management. Derivatives are carried at fair value (see accounting policy 2(F)).

Trading securities are debt securities and equity shares acquired principally for the purpose of selling in the short term or which are part of a portfolio which is managed for short-term gains. Such securities are classified as trading securities and recognised in the balance sheet at their fair value. Gains and losses arising from changes in their fair value together with interest coupons and dividend income are recognised in the income statement within net trading income in the period in which they occur.

Other financial assets and liabilities at fair value through profit or loss are designated as such by management upon initial recognition. Such assets and liabilities are carried in the balance sheet at their fair value and gains and losses arising from changes in fair value together with interest coupons and dividend income are recognised in the income statement within net trading income in the period in which they occur. Financial assets and liabilities are designated at fair value through profit or loss on acquisition in the following circumstances:


–	it eliminates or significantly reduces the inconsistent treatment that would otherwise arise from measuring the assets and liabilities or recognising gains or losses on different bases. The main type of financial assets designated by the Group at fair value through profit or loss are assets backing insurance contracts and investment contracts issued by the Group’s life insurance businesses. Fair value designation allows changes in the fair value of these assets to be recorded in the income statement along with the changes in the value of the associated liabilities, thereby significantly reducing the measurement inconsistency had the assets been classified as available-for-sale financial assets.

–	the assets and liabilities are part of a group which is managed, and its performance evaluated, on a fair value basis in accordance with a documented risk management or investment strategy, with management information also prepared on this basis. As noted in accounting policy 2(A)(2), certain of the Group’s investments are managed as venture capital investments and evaluated on the basis of their fair value and these assets are designated at fair value through profit or loss.

–	where the assets and liabilities contain one or more embedded derivatives that significantly modify the cash flows arising under the contract and would otherwise need to be separately accounted for.

The fair values of assets and liabilities traded in active markets are based on current bid and offer prices respectively. If the market is not active the Group establishes a fair value by using valuation techniques. These include the use of recent arm’s length transactions, reference to other instruments that are substantially the same, discounted cash flow analysis, option pricing models and other valuation techniques commonly used by market participants. Refer to note 3 (Critical accounting estimates and judgements: Valuation of financial instruments) and note 53(3) (Financial instruments: Fair values of financial assets and liabilities) for details of valuation techniques and significant inputs to valuation models.

The Group is permitted to reclassify, at fair value at the date of transfer, non-derivative financial assets (other than those designated at fair value through profit or loss by the entity upon initial recognition) out of the trading category if they are no longer held for the purpose of being sold or repurchased in the near term, as follows:


–	if the financial assets would have met the definition of loans and receivables (but for the fact that they had to be classified as held for trading at initial recognition), they may be reclassified into loans and receivables where the Group has the intention and ability to hold the assets for the foreseeable future or until maturity;

–	if the financial assets would not have met the definition of loans and receivables, they may be reclassified out of the held for trading category into available-for-sale financial assets in ‘rare circumstances’.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

2 ACCOUNTING POLICIES continued

(2) AVAILABLE-FOR-SALE FINANCIAL ASSETS

Debt securities and equity shares that are not classified as trading securities, at fair value through profit or loss or as loans and receivables are classified as available-for-sale financial assets and are recognised in the balance sheet at their fair value, inclusive of transaction costs. Available-for-sale financial assets are those intended to be held for an indeterminate period of time and may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices. Gains and losses arising from changes in the fair value of investments classified as available-for-sale are recognised directly in other comprehensive income, until the financial asset is either sold, becomes impaired or matures, at which time the cumulative gain or loss previously recognised in other comprehensive income is recognised in the income statement. Interest calculated using the effective interest method and foreign exchange gains and losses on debt securities denominated in foreign currencies are recognised in the income statement.

The Group is permitted to transfer, at fair value at the date of transfer, a financial asset from the available-for-sale category to the loans and receivables category where that asset would have met the definition of loans and receivables at the time of reclassification (if the financial asset had not been designated as available-for-sale) and where there is both the intention and ability to hold that financial asset for the foreseeable future. For assets transferred, gains or losses recognised in equity in respect of these assets as at the date of transfer are amortised to profit or loss over the remaining life of the asset using the effective interest method.

(3) LOANS AND RECEIVABLES

Loans and receivables include loans and advances to banks and customers and eligible assets including those transferred into this category out of the fair value through profit or loss or available-for-sale financial assets categories. Loans and receivables are initially recognised when cash is advanced to the borrowers at fair value inclusive of transaction costs or, for eligible assets transferred into this category, their fair value at the date of transfer. Financial assets classified as loans and receivables are accounted for at amortised cost using the effective interest method (see accounting policy 2(D)) less provision for impairment (see accounting policy 2(H)).

The Group has entered into securitisation and similar transactions to finance certain loans and advances to customers. These loans and advances to customers continue to be recognised by the Group, together with a corresponding liability for the funding.

(4) BORROWINGS

Borrowings (which include deposits from banks, customer deposits, debt securities in issue and subordinated liabilities) are recognised initially at fair value, being their issue proceeds net of transaction costs incurred. These instruments are subsequently stated at amortised cost using the effective interest method.

Preference shares and other instruments which carry a mandatory coupon or are redeemable on a specific date are classified as financial liabilities. The coupon on these instruments is recognised in the income statement as interest expense.

An exchange of financial liabilities on substantially different terms is accounted for as an extinguishment of the original financial liability and the recognition of a new financial liability. The difference between the carrying amount of a financial liability extinguished and the new financial liability is recognised in profit or loss together with any related costs or fees incurred.

When a financial liability is exchanged for an equity instrument, the new equity instrument is recognised at fair value and any difference between the original carrying value of the liability and the fair value of the new equity is recognised in the profit or loss together with any related costs or fees incurred.

(5) SALE AND REPURCHASE AGREEMENTS

Securities sold subject to repurchase agreements (repos) continue to be recognised on the balance sheet where substantially all of the risks and rewards are retained. Funds received under these arrangements are included in deposits from banks, customer deposits, or trading liabilities. Conversely, securities purchased under agreements to resell (reverse repos), where the Group does not acquire substantially all of the risks and rewards of ownership, are recorded as loans and receivables or trading securities. The difference between sale and repurchase price is treated as interest and accrued over the life of the agreements using the effective interest method.

Securities lent to counterparties are retained in the financial statements. Securities borrowed are not recognised in the financial statements, unless these are sold to third parties, in which case the obligation to return them is recorded at fair value as a trading liability.

(6) DERECOGNITION OF FINANCIAL ASSETS AND LIABILITIES

Financial assets are derecognised when the contractual right to receive cash flows from those assets has expired or when the Group has transferred its contractual right to receive the cash flows from the assets and either:


–	substantially all of the risks and rewards of ownership have been transferred; or

–	the Group has neither retained nor transferred substantially all the risks and rewards, but has transferred control.

Financial liabilities are derecognised when they are extinguished (ie when the obligation is discharged), cancelled or expire.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

2 ACCOUNTING POLICIES continued

(F) DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGE ACCOUNTING

All derivatives are recognised at their fair value. Fair values are obtained from quoted market prices in active markets, including recent market transactions, and using valuation techniques, including discounted cash flow and option pricing models, as appropriate. Derivatives are carried in the balance sheet as assets when their fair value is positive and as liabilities when their fair value is negative. Refer to note 3 (Critical accounting estimates and judgements: Valuation of financial instruments) and note 53(3) (Financial instruments: Fair values of financial assets and liabilities) for details of valuation techniques and significant inputs to valuation models.

Changes in the fair value of any derivative instrument that is not part of a hedging relationship are recognised immediately in the income statement.

Derivatives embedded in financial instruments and insurance contracts (unless the embedded derivative is itself an insurance contract) are treated as separate derivatives when their economic characteristics and risks are not closely related to those of the host contract and the host contract is not carried at fair value through profit or loss. These embedded derivatives are measured at fair value with changes in fair value recognised in the income statement. In accordance with IFRS 4 Insurance Contracts , a policyholder’s option to surrender an insurance contract for a fixed amount is not treated as an embedded derivative.

The method of recognising the movements in the fair value of the derivatives depends on whether they are designated as hedging instruments and, if so, the nature of the item being hedged. Hedge accounting allows one financial instrument, generally a derivative such as a swap, to be designated as a hedge of another financial instrument such as a loan or deposit or a portfolio of the same. At the inception of the hedge relationship, formal documentation is drawn up specifying the hedging strategy, the hedged item and the hedging instrument and the methodology that will be used to measure the effectiveness of the hedge relationship in offsetting changes in the fair value or cash flow of the hedged risk. The effectiveness of the hedging relationship is tested both at inception and throughout its life and if at any point it is concluded that it is no longer highly effective in achieving its documented objective, hedge accounting is discontinued.

The Group designates certain derivatives as either: (1) hedges of the fair value of the particular risks inherent in recognised assets or liabilities (fair value hedges); (2) hedges of highly probable future cash flows attributable to recognised assets or liabilities (cash flow hedges); or (3) hedges of net investments in foreign operations (net investment hedges). These are accounted for as follows:

(1) FAIR VALUE HEDGES

Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the income statement, together with the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk; this also applies if the hedged asset is classified as an available-for-sale financial asset. If the hedge no longer meets the criteria for hedge accounting, changes in the fair value of the hedged item attributable to the hedged risk are no longer recognised in the income statement. The cumulative adjustment that has been made to the carrying amount of the hedged item is amortised to the income statement using the effective interest method over the period to maturity.

(2) CASH FLOW HEDGES

The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in other comprehensive income in the cash flow hedge reserve. The gain or loss relating to the ineffective portion is recognised immediately in the income statement. Amounts accumulated in equity are reclassified to the income statement in the periods in which the hedged item affects profit or loss. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised in the income statement when the forecast transaction is ultimately recognised in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the income statement.

(3) NET INVESTMENT HEDGES

Hedges of net investments in foreign operations are accounted for similarly to cash flow hedges. Any gain or loss on the hedging instrument relating to the effective portion of the hedge is recognised in other comprehensive income, the gain or loss relating to the ineffective portion is recognised immediately in the income statement. Gains and losses accumulated in equity are included in the income statement when the foreign operation is disposed of. The hedging instrument in net investments hedges may include non-derivative liabilities as well as derivative financial instruments.

(G) OFFSET

Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right of set-off and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously. In certain situations, even though master netting agreements exist, the lack of management intention to settle on a net basis results in the financial assets and liabilities being reported gross on the balance sheet.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

2 ACCOUNTING POLICIES continued

(H) IMPAIRMENT OF FINANCIAL ASSETS

(1) ASSETS ACCOUNTED FOR AT AMORTISED COST

At each balance sheet date the Group assesses whether, as a result of one or more events occurring after initial recognition and prior to the balance sheet date, there is objective evidence that a financial asset or group of financial assets has become impaired.

The criteria that the Group uses to determine that there is objective evidence of an impairment loss include:


–	Delinquency in contractual payments of principal and/or interest;

–	Indications that the borrower or group of borrowers is experiencing significant financial difficulty;

–	Restructuring of debt to reduce the burden on the borrower;

–	Breach of loan covenants or conditions; and

–	Initiation of bankruptcy or individual voluntary arrangement proceedings.

For impaired debt instruments which are classified as loans and receivables, impairment losses are recognised in subsequent periods when it is determined that there has been a further negative impact on expected future cash flows. A reduction in fair value caused by general widening of credit spreads would not, of itself, result in additional impairment.

The estimated period between a loss occurring and its identification is determined by local management for each identified portfolio. In general, the periods used vary between two months and twelve months.

If there is objective evidence that an impairment loss has been incurred, an allowance is established which is calculated as the difference between the balance sheet carrying value of the asset and the present value of estimated future cash flows discounted at that asset’s original effective interest rate. If an asset has a variable interest rate, the discount rate used for measuring the impairment loss is the current effective interest rate.

For the Group’s portfolios of smaller balance homogenous loans, such as the residential mortgage, personal lending and credit card portfolios, allowances are calculated for groups of assets taking into account historical cash flow experience. For the Group’s other lending portfolios, allowances are established on a case-by-case basis. The calculation of the present value of the estimated future cash flows of a collateralised asset or group of assets reflects the cash flows that may result from foreclosure less the costs of obtaining and selling the collateral, whether or not foreclosure is probable.

If there is no objective evidence of individual impairment the asset is included in a group of financial assets with similar credit risk characteristics and collectively assessed for impairment. Segmentation takes into account such factors as the type of asset, industry, geographical location, collateral type, past-due status and other relevant factors. These characteristics are relevant to the estimation of future cash flows for groups of such assets as they are indicative of the borrower’s ability to pay all amounts due according to the contractual terms of the assets being evaluated. Future cash flows are estimated on the basis of the contractual cash flows of the assets in the Group and historical loss experience for assets with similar credit risk characteristics. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the period on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currently. The methodology and assumptions used for estimating future cash flows are reviewed regularly by the Group to reduce any differences between loss estimates and actual loss experience.

If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, such as an improvement in the borrower’s credit rating, the allowance is adjusted and the amount of the reversal is recognised in the income statement.

A loan or advance is normally written off, either partially or in full, against the related allowance when the proceeds from realising any available security have been received or there is no realistic prospect of recovery (as a result of the customer’s insolvency, ceasing to trade or other reason) and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off decrease the amount of impairment losses recorded in the income statement.

Equity securities acquired in exchange for loans in order to achieve an orderly realisation are accounted for as a disposal of the loan and an acquisition of equity securities. Where control is obtained over an entity as a result of the transaction, the entity is consolidated; where the Group has significant influence over an entity as a result of the transaction, the investment is accounted for by the equity method of accounting (see accounting policy 2(A)). Any subsequent impairment of the assets or business acquired is treated as an impairment of the relevant asset or business and not as an impairment of the original instrument.

(2) AVAILABLE-FOR-SALE FINANCIAL ASSETS

The Group assesses at each balance sheet date whether there is objective evidence that an available-for-sale financial asset is impaired. In addition to the criteria for financial assets accounted for at amortised cost set out above, this assessment involves reviewing the current financial circumstances (including creditworthiness) and future prospects of the issuer assessing the future cash flows expected to be realised and, in the case of equity shares, considering whether there has been a significant or prolonged decline in the fair value of the asset below its cost. If an impairment loss has been incurred, the cumulative loss measured as the difference between the acquisition cost (net of any principal repayment and amortisation) and the current fair value, less any impairment loss on that asset previously recognised, is reclassified from equity to the income statement. For impaired debt instruments, impairment losses are recognised in subsequent periods when it is determined that there has been a further negative impact on expected future cash flows; a reduction in fair value caused by general widening of credit spreads would not, of itself, result in additional impairment. If, in a subsequent period, the fair value of a debt instrument classified as available-for-sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognised, an amount not greater than the original impairment loss is credited to the income statement; any excess is taken to other comprehensive income. Impairment losses recognised in the income statement on equity instruments are not reversed through the income statement.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

2 ACCOUNTING POLICIES continued

(I) INVESTMENT PROPERTY

Investment property comprises freehold and long leasehold land and buildings that are held either to earn rental income or for capital appreciation or both. The Group’s investment property primarily relates to property held for long-term rental yields and capital appreciation within the life insurance funds. Investment property is carried in the balance sheet at fair value, being the open market value as determined in accordance with the guidance published by the Royal Institution of Chartered Surveyors. If this information is not available, the Group uses alternative valuation methods such as discounted cash flow projections or recent prices. These valuations are reviewed at least annually by an independent valuation expert. Investment property being redeveloped for continuing use as investment property, or for which the market has become less active, continues to be measured at fair value. Changes in fair value are recognised in the income statement as net trading income for investment property within the life insurance funds and as other operating income for other investment property.

(J) TANGIBLE FIXED ASSETS

Tangible fixed assets are included at cost less accumulated depreciation. The value of land (included in premises) is not depreciated. Depreciation on other assets is calculated using the straight-line method to allocate the difference between the cost and the residual value over their estimated useful lives, as follows:

Premises (excluding land):


–	Freehold/long and short leasehold premises: shorter of 50 years or the remaining period of the lease

–	Leasehold improvements: shorter of 10 years or, if lease renewal is not likely, the remaining period of the lease

Equipment:

–	Fixtures and furnishings: 10-20 years

–	Other equipment and motor vehicles: 2-8 years

The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date.

Assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. In the event that an asset’s carrying amount is determined to be greater than its recoverable amount it is written down immediately. The recoverable amount is the higher of the asset’s fair value less costs to sell and its value in use.

(K) LEASES

(1) AS LESSEE

The leases entered into by the Group are primarily operating leases. Operating lease rentals payable are charged to the income statement on a straight-line basis over the period of the lease.

When an operating lease is terminated before the end of the lease period, any payment made to the lessor by way of penalty is recognised as an expense in the period of termination.

(2) AS LESSOR

Assets leased to customers are classified as finance leases if the lease agreements transfer substantially all the risks and rewards of ownership to the lessee but not necessarily legal title. All other leases are classified as operating leases. When assets are subject to finance leases, the present value of the lease payments, together with any unguaranteed residual value, is recognised as a receivable, net of provisions, within loans and advances to banks and customers. The difference between the gross receivable and the present value of the receivable is recognised as unearned finance lease income. Finance lease income is recognised in interest income over the term of the lease using the net investment method (before tax) so as to give a constant rate of return on the net investment in the leases. Unguaranteed residual values are reviewed regularly to identify any impairment.

Operating lease assets are included within tangible fixed assets at cost and depreciated over their estimated useful lives, which equates to the lives of the leases, after taking into account anticipated residual values. Operating lease rental income is recognised on a straight-line basis over the life of the lease.

The Group evaluates non-lease arrangements such as outsourcing and similar contracts to determine if they contain a lease which is then accounted for separately.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

2 ACCOUNTING POLICIES continued

(L) PENSIONS AND OTHER POST-RETIREMENT BENEFITS

The Group operates a number of post-retirement benefit schemes for its employees including both defined benefit and defined contribution pension plans. A defined benefit scheme is a pension plan that defines an amount of pension benefit that an employee will receive on retirement, dependent on one or more factors such as age, years of service and salary. A defined contribution plan is a pension plan into which the Group pays fixed contributions; there is no legal or constructive obligation to pay further contributions.

Full actuarial valuations of the Group’s principal defined benefit schemes are carried out every three years with interim reviews in the intervening years; these valuations are updated to 31 December each year by qualified independent actuaries, or in the case of the Scottish Widows Retirement Benefits Scheme, by a qualified actuary employed by Scottish Widows. For the purposes of these annual updates scheme assets are included at their fair value and scheme liabilities are measured on an actuarial basis using the projected unit credit method adjusted for unrecognised actuarial gains and losses. The defined benefit scheme liabilities are discounted using rates equivalent to the market yields at the balance sheet date on high-quality corporate bonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating to the terms of the related pension liability.

The Group’s income statement charge includes the current service cost of providing pension benefits, the expected return on the schemes’ assets, net of expected administration costs, and the interest cost on the schemes’ liabilities. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are not recognised unless the cumulative unrecognised gain or loss at the end of the previous reporting period exceeds the greater of 10 per cent of the scheme assets or liabilities (the corridor approach). In these circumstances the excess is charged or credited to the income statement over the employees’ expected average remaining working lives. Past service costs are charged immediately to the income statement, unless the charges are conditional on the employees remaining in service for a specified period of time (the vesting period). In this case, the past service costs are amortised on a straight-line basis over the vesting period.

The Group’s balance sheet includes the net surplus or deficit, being the difference between the fair value of scheme assets and the discounted value of scheme liabilities at the balance sheet date adjusted for any cumulative unrecognised actuarial gains or losses. Surpluses are only recognised to the extent that they are recoverable through reduced contributions in the future or through refunds from the schemes.

The Group recognises the effect of material changes to the terms of its defined benefit pension plans which reduce future benefits as curtailments; gains and losses are recognised in the income statement when the curtailments occur.

The costs of the Group’s defined contribution plans are charged to the income statement in the period in which they fall due.

(M) SHARE-BASED COMPENSATION

The Group operates a number of equity-settled, share-based compensation plans in respect of services received from certain of its employees. The value of the employee services received in exchange for equity instruments granted under these plans is recognised as an expense over the vesting period of the instruments, with a corresponding increase in equity. This expense is determined by reference to the fair value of the number of equity instruments that are expected to vest. The fair value of equity instruments granted is based on market prices, if available, at the date of grant. In the absence of market prices, the fair value of the instruments at the date of grant is estimated using an appropriate valuation technique, such as a Black-Scholes option pricing model. The determination of fair values excludes the impact of any non-market vesting conditions, which are included in the assumptions used to estimate the number of options that are expected to vest. At each balance sheet date, this estimate is reassessed and if necessary revised. Any revision of the original estimate is recognised in the income statement over the remaining vesting period, together with a corresponding adjustment to equity. Cancellations by employees of contributions to the Group’s Save As You Earn plans are treated as non-vesting conditions and in accordance with the revised IFRS 2 the Group recognises, in the year of cancellation, the amount of the expense that would have otherwise been recognised over the remainder of the vesting period. Modifications are assessed at the date of modification and any incremental charges are charged to the income statement over any remaining vesting period.

(N) TAXATION

Current income tax which is payable on taxable profits is recognised as an expense in the period in which the profits arise.

For the Group’s long-term insurance businesses, the tax charge is analysed between tax that is payable in respect of policyholders’ returns and tax that is payable on equity holders’ returns. This allocation is based on an assessment of the rates of tax which will be applied to the returns under current UK tax rules.

Deferred tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, deferred tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred tax is determined using tax rates that have been enacted or substantially enacted by the balance sheet date which are expected to apply when the related deferred tax asset is realised or the deferred tax liability is settled.

Deferred tax assets are recognised where it is probable that future taxable profit will be available against which the temporary differences can be utilised. Income tax payable on profits is recognised as an expense in the period in which those profits arise. The tax effects of losses available for carry forward are recognised as an asset when it is probable that future taxable profits will be available against which these losses can be utilised. Deferred tax related to gains and losses on the fair value re-measurement of available-for-sale investments and cash flow hedges, where these gains and losses are recognised in other comprehensive income, is also recognised in other comprehensive income. Such deferred tax is subsequently transferred to the income statement together with the deferred gain or loss.

Deferred and current tax assets and liabilities are offset when they arise in the same tax reporting group and where there is both a legal right of offset and the intention to settle on a net basis or to realise the asset and settle the liability simultaneously.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

2 ACCOUNTING POLICIES continued

(O) INSURANCE

The Group undertakes both life insurance and general insurance business.

Products sold by the life insurance business are classified into three categories:

Insurance contracts – these contracts transfer significant insurance risk and may also transfer financial risk. The Group defines significant insurance risk as the possibility of having to pay benefits on the occurrence of an insured event which are significantly more than the benefits payable if the insured event were not to occur. These contracts may or may not include discretionary participation features.

Investment contracts containing a discretionary participation feature (participating investment contracts) – these contracts do not transfer significant insurance risk, but contain a contractual right which entitles the holder to receive, in addition to the guaranteed benefits, further additional discretionary benefits or bonuses that are likely to be a significant proportion of the total contractual benefits and the amount and timing of which is at the discretion of the Group and based upon the performance of specified assets.

Non-participating investment contracts – these contracts do not transfer significant insurance risk or contain a discretionary participation feature.

The general insurance business issues only insurance contracts.

(1) LIFE INSURANCE BUSINESS

(I) ACCOUNTING FOR INSURANCE AND PARTICIPATING INVESTMENT CONTRACTS

PREMIUMS AND CLAIMS

Premiums received in respect of insurance and participating investment contracts are recognised as revenue when due except for unit-linked contracts on which premiums are recognised as revenue when received. Claims are recorded as an expense on the earlier of the maturity date or the date on which the claim is notified.

LIABILITIES


–	Insurance and participating investment contracts in the Group’s with-profit funds

Liabilities of the Group’s with-profit funds, including guarantees and options embedded within products written by these funds, are stated at their realistic values in accordance with the Financial Services Authority’s realistic capital regime, except that projected transfers out of the funds into other Group funds are recorded in unallocated surplus (see below). Further details on the realistic capital regime are given on page 91. Changes in the value of these liabilities are recognised through insurance claims.


–	Insurance and participating investment contracts which are not unit-linked or in the Group’s with-profit funds

A liability for contractual benefits that are expected to be incurred in the future is recorded when the premiums are recognised. The liability is calculated by estimating the future cash flows over the duration of in-force policies and discounting them back to the valuation date allowing for probabilities of occurrence. The liability will vary with movements in interest rates and with the cost of life insurance and annuity benefits where future mortality is uncertain.

Assumptions are made in respect of all material factors affecting future cash flows, including future interest rates, mortality and costs.

Changes in the value of these liabilities are recognised in the income statement through insurance claims.


–	Insurance and participating investment contracts which are unit-linked

Liabilities for unit-linked insurance contracts and participating investment contracts are stated at the bid value of units plus, an additional allowance where appropriate (such as for any excess of future expenses over charges). The liability is increased or reduced by the change in the unit prices and is reduced by policy administration fees, mortality and surrender charges and any withdrawals. Changes in the value of the liability are recognised in the income statement through insurance claims. Benefit claims in excess of the account balances incurred in the period are also charged through insurance claims. Revenue consists of fees deducted for mortality, policy administration and surrender charges.

UNALLOCATED SURPLUS

Any amounts in the with-profit funds not yet determined as being due to policyholders or shareholders are recognised as an unallocated surplus which is shown separately from liabilities arising from insurance contracts and participating investment contracts.

(II) ACCOUNTING FOR NON-PARTICIPATING INVESTMENT CONTRACTS

The Group’s non-participating investment contracts are primarily unit-linked. These contracts are accounted for as financial liabilities whose value is contractually linked to the fair values of financial assets within the Group’s unitised investment funds. The value of the unit-linked financial liabilities is determined using current unit prices multiplied by the number of units attributed to the contract holders at the balance sheet date. Their value is never less than the amount payable on surrender, discounted for the required notice period where applicable. Investment income allocated to non-participating investment contracts are included in insurance claims.

Deposits and withdrawals are not accounted for through the income statement but are accounted for directly in the balance sheet as adjustments to the non-participating investment contract liability.

The Group receives investment management fees in the form of an initial adjustment or charge to the amount invested. These fees are in respect of services rendered in conjunction with the issue and management of investment contracts where the Group actively manages the consideration received from its customers to fund a return that is based on the investment profile that the customer selected on origination of the contract. These services comprise an indeterminate number of acts over the lives of the individual contracts and, therefore, the Group defers these fees and recognises them over the estimated lives of the contracts, in line with the provision of investment management services.

Costs which are directly attributable and incremental to securing new non-participating investment contracts are deferred. This asset is subsequently amortised over the period of the provision of investment management services and is reviewed for impairment in circumstances where its carrying amount may not be recoverable. If the asset is greater than its recoverable amount it is written down immediately through fee and commission expense in the income statement. All other costs are recognised as expenses when incurred.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

2 ACCOUNTING POLICIES continued

(III) VALUE OF IN-FORCE BUSINESS

The Group recognises as an asset the value of in-force business in respect of insurance contracts and participating investment contracts. The asset represents the present value of the shareholders’ interest in the profits expected to emerge from those contracts written at the balance sheet date. This is determined after making appropriate assumptions about future economic and operating conditions such as future mortality and persistency rates and includes allowances for both non-market risk and for the realistic value of financial options and guarantees. Each cash flow is valued using the discount rate consistent with that applied to such a cash flow in the capital markets. The asset in the consolidated balance sheet is presented gross of attributable tax and movements in the asset are reflected within other operating income in the income statement.

The Group’s contractual rights to benefits from providing investment management services in relation to non-participating investment contracts acquired in business combinations and portfolio transfers is measured at fair value at the date of acquisition. The resulting asset is amortised over the estimated lives of the contracts. At each reporting date an assessment is made to determine if there is any indication of impairment. Where impairment exists, the carrying value of the asset is reduced to its recoverable amount and the impairment loss recognised in the income statement.

(2) GENERAL INSURANCE BUSINESS

The Group both underwrites and acts as intermediary in the sale of general insurance products. Underwriting premiums are included in insurance premium income, net of refunds, in the period in which insurance cover is provided to the customer; premiums received relating to future periods are deferred in the balance sheet within liabilities arising from insurance contracts and participating investment contracts and only credited to the income statement when earned. Broking commission is recognised when the underwriter accepts the risk of providing insurance cover to the customer. Where appropriate, provision is made for the effect of future policy terminations based upon past experience.

The underwriting business makes provision for the estimated cost of claims notified but not settled and claims incurred but not reported at the balance sheet date. The provision for the cost of claims notified but not settled is based upon a best estimate of the cost of settling the outstanding claims after taking into account all known facts. In those cases where there is insufficient information to determine the required provision, statistical techniques are used which take into account the cost of claims that have recently been settled and make assumptions about the future development of the outstanding cases. Similar statistical techniques are used to determine the provision for claims incurred but not reported at the balance sheet date. Claims liabilities are not discounted.

(3) LIABILITY ADEQUACY TEST

At each balance sheet date liability adequacy tests are performed to ensure the adequacy of insurance and participating investment contract liabilities net of related deferred cost assets and value of in-force business. In performing these tests current best estimates of discounted future contractual cash flows and claims handling and policy administration expenses, as well as investment income from the assets backing such liabilities, are used. Any deficiency is immediately charged to the income statement, initially by writing off the relevant assets and subsequently by establishing a provision for losses arising from liability adequacy tests.

(4) REINSURANCE

Contracts entered into by the Group with reinsurers under which the Group is compensated for losses on one or more contracts issued by the Group and that meet the classification requirements for insurance contracts are classified as reinsurance contracts held.

The benefits to which the Group is entitled under its reinsurance contracts held are recognised as reinsurance assets. These assets consist of short-term balances due from reinsurers as well as longer term receivables that are dependent on the expected claims and benefits arising under the related reinsured contracts. Amounts recoverable from or due to reinsurers are measured consistently with the amounts associated with the reinsured contracts and in accordance with the terms of each reinsurance contract and are regularly reviewed for impairment. Premiums payable for reinsurance contracts are recognised as an expense when due within insurance premium income. Changes in the reinsurance recoverable assets are recognised in the income statement through insurance claims.

(P) FOREIGN CURRENCY TRANSLATION

Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the ‘functional currency’). The consolidated financial statements are presented in sterling, which is the Company’s functional and presentation currency.

Foreign currency transactions are translated into the appropriate functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement, except when recognised in other comprehensive income as qualifying cash flow or net investment hedges. Non-monetary assets that are measured at fair value are translated using the exchange rate at the date that the fair value was determined. Translation differences on equities and similar non-monetary items held at fair value through profit and loss are recognised in profit or loss as part of the fair value gain or loss. Translation differences on available-for-sale non-monetary financial assets, such as equity shares, are included in the fair value reserve in equity unless the asset is a hedged item in a fair value hedge.

The results and financial position of all group entities that have a functional currency different from the presentation currency are translated into the presentation currency as follows:


–	The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on the acquisition of a foreign entity, are translated into sterling at foreign exchange rates ruling at the balance sheet date.

–	The income and expenses of foreign operations are translated into sterling at average exchange rates unless these do not approximate to the foreign exchange rates ruling at the dates of the transactions in which case income and expenses are translated at the dates of the transactions.

Foreign exchange differences arising on the translation of a foreign operation are recognised in other comprehensive income and accumulated in a separate component of equity together with exchange differences arising from the translation of borrowings and other currency instruments designated as hedges of such investments (see accounting policy 2(F)(3)). On disposal of a foreign operation, the cumulative amount of exchange differences relating to that foreign operation are reclassified from equity and included in determining the profit or loss arising on disposal.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

2 ACCOUNTING POLICIES continued

(Q) PROVISIONS

Provisions are recognised in respect of present obligations arising from past events where it is probable that outflows of resources will be required to settle the obligations and they can be reliably estimated.

The Group recognises provisions in respect of vacant leasehold property where the unavoidable costs of the present obligations exceed anticipated rental income.

Contingent liabilities are possible obligations whose existence depends on the outcome of uncertain future events or those present obligations where the outflows of resources are uncertain or cannot be measured reliably. Contingent liabilities are not recognised in the financial statements but are disclosed unless they are remote.

(R) SHARE CAPITAL

(1) SHARE ISSUE COSTS

Incremental costs directly attributable to the issue of new shares or options or to the acquisition of a business are shown in equity as a deduction, net of tax, from the proceeds.

(2) DIVIDENDS

Dividends paid on the Group’s ordinary shares are recognised as a reduction in equity in the period in which they are paid.

(3) TREASURY SHARES

Where the Company or any member of the Group purchases the Company’s share capital, the consideration paid is deducted from shareholders’ equity as treasury shares until they are cancelled. Where such shares are subsequently sold or reissued, any consideration received is included in shareholders’ equity.

(S) CASH AND CASH EQUIVALENTS

For the purposes of the cash flow statement, cash and cash equivalents comprise cash and non-mandatory balances with central banks and amounts due from banks with a maturity of less than three months.

3 CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS

The preparation of the Group’s financial statements requires management to make judgements, estimates and assumptions in applying the accounting policies that affect the reported amounts of assets, liabilities, income and expenses. Due to the inherent uncertainty in making estimates, actual results reported in future periods may be based upon amounts which differ from those estimates. Estimates, judgements and assumptions are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

The significant judgements made by management in applying the Group’s accounting policies and the key sources of estimation uncertainty in these financial statements, which together are deemed critical to the Group’s results and financial position, are discussed below.

ALLOWANCE FOR IMPAIRMENT LOSSES ON LOANS AND RECEIVABLES

The Group’s accounting policy for losses arising on financial assets classified as loans and receivables is described in note 2(H)(1). The allowance for impairment losses on loans and receivables is management’s best estimate of losses incurred in the portfolio at the balance sheet date. Impairment allowances are established to recognise incurred impairment losses in the Group’s loan portfolios carried at amortised cost. In determining whether an impairment has occurred at the balance sheet date the Group considers whether there is any observable data indicating that there has been a measurable decrease in the estimated future cash flows or their timings. Where this is the case, the impairment loss is the difference between the carrying value of the loan and the present value of the estimated future cash flows discounted at the loan’s original effective interest rate.

At 31 December 2009 gross loans and receivables totalled £710,362 million (2008: £287,220 million) against which impairment allowances of £15,380 million (2008: £3,727 million) had been made (see note 24). Impairment allowances are made up of two components, those determined individually and those determined collectively.

INDIVIDUAL COMPONENT

All impaired loans which exceed a certain threshold, principally within the Group’s Wholesale division, are individually assessed for impairment having regard to expected future cash flows including those that could arise from the realisation of security. The determination of these allowances often requires the exercise of considerable judgement by management involving matters such as local economic conditions and the resulting trading performance of the customer and the value of the security held, for which there may not be a readily accessible market. In particular, significant judgement is required by management in the current economic environment in assessing the borrower’s cash flows and debt servicing capability together with the realisable value of commercial real estate collateral. The actual amount of the future cash flows and their timing may differ significantly from the assumptions made for the purposes of determining the impairment allowances and consequently these allowances can be subject to variation as time progresses and the circumstances of the customer become clearer.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

3 CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS continued

COLLECTIVE COMPONENT

Impairment allowances for portfolios of smaller balance homogenous loans, such as residential mortgages, personal loans and credit card balances that are below the individual assessment thresholds, and for loan losses that have been incurred but not separately identified at the balance sheet date, are determined on a collective basis. Collective impairment allowances are calculated on a portfolio basis using models which take into account factors such as historical experience of accounts progression through the various stages of delinquency, historical loss rates, the credit quality of the portfolio, and the value of any collateral held, which is estimated, where appropriate, using indices such as house price indices.

The calculation of the collective impairment allowance is therefore subject to estimation uncertainty. The variables used in the collective impairment models are kept under regular review to ensure that as far as possible they reflect current economic circumstances. However, significant management judgement is applied in assessing whether current economic conditions and borrowers’ behaviour are fully reflected in the historical loss data and other inputs to the impairment models.

The collective impairment allowance is sensitive to changes in economic and credit conditions, including the interdependency of house prices, unemployment rates, interest rates, borrowers’ behaviour, and consumer bankruptcy trends. It is, however, inherently difficult to estimate how changes in one or more of these factors might impact the collective impairment allowance.

Given the relative size of the Group’s mortgage portfolio, a key variable is UK house prices which determine the collateral value supporting loans in such portfolios. The value of this collateral is estimated by applying changes in house price indices to the original assessed value of the property. If average house prices within the Group’s mortgage portfolio were 10 per cent lower than those estimated at 31 December 2009, the house price index related impact on the impairment charge would be an increase of approximately £350 million.

In the Wholesale division, the collective unimpaired provision is sensitive to the time between the loss event and the date the impairment is recognised. This is known as the loss emergence period (LEP). If the LEP moved by one month in respect of the loan portfolio assessed for collective unimpaired provisions, this would result in an increase in the collective unimpaired provision of approximately £420 million.

IMPAIRMENT OF AVAILABLE-FOR-SALE FINANCIAL ASSETS

In determining whether an impairment loss has been incurred in respect of an available-for-sale financial asset, the Group performs an objective review of the current financial circumstances and future prospects of the issuer and, in the case of equity shares, considers whether there has been a significant or prolonged decline in the fair value of that asset below its cost. This consideration requires management judgement. Among factors considered by the Group is whether the decline in fair value is a result of a change in the quality of the asset or a downward movement in the market as a whole. An assessment is performed of the future cash flows expected to be realised from the asset, taking into account, where appropriate, the quality of underlying security and credit protection available. The increase in the fair value of available-for-sale financial assets during the year was £2,234 million (2008: reduction of £2,721 million). Impairment losses in respect of available-for-sale financial assets transferred from reserves to the income statement totalled £602 million (2008: £130 million).

VALUATION OF FINANCIAL INSTRUMENTS

Financial instruments classified by management as trading and other financial assets and liabilities at fair value through profit or loss, derivative financial instruments and available-for-sale financial assets are carried at fair value which is determined as being the amount for which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Management judgement is required in determining the appropriate classification of financial instruments.

In 2009, the Group adopted ‘ Amendments to IFRS 7 ‘Financial Instruments: Disclosures – Improving Disclosures about Financial Instruments ’ which, among other matters, established a three level valuation hierarchy for disclosure of fair value measurements of financial instruments carried on the Group’s balance sheet at fair value.

Management judgement is required in determining the categorisation of the Group’s financial instruments that are carried at fair value. Financial instruments categorised as level 1 are valued using quoted market prices and therefore there is less judgement applied in determining fair value. However, the fair value of financial instruments categorised as level 2 and level 3 is determined using valuation techniques including discounted cash flow analysis and valuation models. These require management judgement and therefore contain significant estimation uncertainty (note 53).

In particular significant judgement is required by management in determining appropriate assumptions to be used for level 3 financial instruments. At 31 December 2009, the Group classified £7,460 million of financial assets and £235 million of financial liabilities as level 3 (note 53).

The largest asset class classified as level 3 is the Group’s venture capital and unlisted equity investments. Venture capital investments are valued using International Private Equity and Venture Capital (IPEV) Guidelines which require significant management judgement in determining appropriate earnings multiples to be applied in determining fair value. Unlisted equity investments are valued using a number of different techniques which require management to select the most appropriate assumptions, including earnings multiples, valuations relative to net assets, and estimated future cash flows. Certain of the Group’s asset-backed securities and derivatives, principally where there is no trading activity in such securities, are also classified as level 3. Fair value is determined using valuation models which require significant judgement in determining appropriate values for inputs including prepayment rates, probability of default, loss given default and yield curves.

The valuation techniques used are set out in note 53 on page F-96. This provides details of the inputs into valuation models that have the potential to significantly impact the value determined, sets out the assumptions used for those inputs and provides the effects of applying reasonably possible alternative assumptions.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

3 CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS continued

TAXATION

At 31 December 2009 the Group carried deferred tax assets on its balance sheet of £5,006 million (2008: £833 million) and deferred tax liabilities of £209 million (2008: £nil) (note 42).

This statutory presentation takes into account the ability of the Group to net deferred tax assets and liabilities only where there is a legally enforceable right of offset. Note 42 also presents the Group’s deferred tax assets and liabilities by tax category. The largest category of deferred tax asset which contains significant estimation uncertainty and which requires management judgement in assessing its recoverability relates to tax losses carried forward. At 31 December 2009, the Group recognised a deferred tax asset of £5,925 million (2008: £856 million) in respect of tax losses carried forward. The significant increase reflects the taxable losses generated by certain Group companies, primarily Bank of Scotland plc in the last two years and Lloyds TSB Bank plc during 2009.

Applicable accounting standards permit the recognition of deferred tax assets only to the extent that it is probable that future taxable profits will be available to utilise the tax losses carried forward. The assessment of future taxable profits involves significant estimation uncertainty, principally relating to an assessment of management’s projections of future taxable income based on business plans and ongoing tax planning strategies. These projections include assumptions about the future strategy of the Group, the economic and regulatory environment in which the Group operates, future tax legislation, customer behaviour, and the ability of the Group to deliver expected integration benefits, amongst other variables. At 31 December 2009, management has concluded that future taxable profits generated by the Group companies with tax losses carried forward are expected to be sufficient to utilise the tax losses carried forward in full.

At 31 December 2009 the Group carried an asset for current tax recoverable of £680 million (2008: £300 million) and current tax liabilities of £51 million (2008: £nil). In determining the carrying value of these balances, management have taken account of tax issues that are subject to ongoing discussion with HM Revenue & Customs and other tax authorities. Inherent in this is management’s assessment of legal and professional advice, case law and other relevant guidance. The determination of the outcome of such matters requires significant management judgement in assessing the various risks and applying appropriate probability weightings in determining the carrying value of current and deferred tax balances.

PENSIONS

The net liability recognised in the balance sheet at 31 December 2009 in respect of the Group’s retirement benefit obligations was £780 million (2008: £1,771 million) of which £619 million (2008: £1,657 million) related to defined benefit pension schemes. As explained in note 2(L), the Group adopts the corridor approach to pensions accounting and consequently does not recognise actuarial losses of £2,936 million (2008: £267 million). The defined benefit pension schemes’ gross deficit totalled £3,555 million (2008: £1,924 million) representing the difference between the schemes’ liabilities and the fair value of the related assets at the balance sheet date.

The schemes’ liabilities are calculated using the projected unit credit method, which takes into account projected earnings increases, using actuarial assumptions that give the best estimate of the future cash flows that will arise under the scheme liabilities. The resulting estimated cash flows are discounted at a rate equivalent to the market yield at the balance sheet date on high quality bonds with a similar duration and currency to the schemes’ liabilities. In order to estimate the future cash flows, a number of financial and non-financial assumptions are made by management, changes to which could have a material impact upon the overall deficit or the net cost recognised in the income statement.

Two important assumptions are the rate of inflation and the expected lifetime of the schemes’ members. The assumed rate of inflation affects the rate at which salaries are projected to grow and therefore the size of the pension that employees receive upon retirement and also the rate at which pensions in payment increase. Over the longer term rates of inflation can vary significantly. At 31 December 2009 it was assumed that the rate of inflation would be 3.4 per cent per annum (2008: 3.0 per cent), although if this was increased by 0.2 per cent the overall deficit would increase by approximately £795 million and the annual cost by approximately £69 million. A reduction of 0.2 per cent would reduce the overall deficit by approximately £763 million and the annual cost by approximately £60 million.

The cost of the benefits payable by the schemes will also depend upon the longevity of the members. Assumptions are made regarding the expected lifetime of scheme members based upon recent experience, however given the rate of advance in medical science and increasing levels of obesity, it is uncertain whether they will ultimately reflect actual experience. Assumptions used by management reflect recent longevity experience and extrapolate the improving trend. An increase of one year in the expected lifetime of scheme members would increase the overall deficit by approximately £590 million and the annual cost by approximately £79 million; a reduction of one year would reduce the overall deficit by approximately £603 million and the annual cost by approximately £76 million.

The size of the overall deficit is also sensitive to changes in the discount rate, which is affected by market conditions and therefore potentially subject to significant variations. At 31 December 2009 the discount rate used was 5.7 per cent (2008: 6.3 per cent); a reduction of 0.2 per cent would increase the overall deficit by approximately £985 million and the annual cost by approximately £82 million, while an increase of 0.2 per cent would reduce the net deficit by approximately £937 million and the annual cost by approximately £68 million.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

3 CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS continued

FAIR VALUE OF IDENTIFIABLE NET ASSETS OF HBOS

The acquisition of the HBOS Group in January 2009 was accounted for in accordance with applicable accounting standards which require the recognition of the identifiable assets acquired and liabilities assumed at their acquisition-date fair values. As part of this process, it is also necessary to identify and recognise certain assets and liabilities which are not included on the acquiree’s balance sheet, for example the value of the internally generated brands and other intangible assets.

The exercise to fair value the HBOS Group balance sheet was inherently highly subjective and required management to make a number of assumptions and estimates. The overall effect was to reduce the book value of the assets acquired by £11,975 million, after the recognition of brands and other intangibles not previously included on the HBOS Group balance sheet totalling £4,650 million. This was offset by a reduction in the value of the HBOS Group’s liabilities of £13,216 million, resulting in a net increase in the value of the net assets acquired of £1,241 million (note 14).

The fair value adjustments to the HBOS Group’s assets principally reflect a reduction of £13,512 million in the value of customer lending. For a significant proportion of these balances there was no active market and therefore in determining the acquisition-date fair values discounted cash flow models have been used. The calculations were performed using benchmark interest rates and market-based credit spreads for the different lending portfolios, having regard to management’s view of the level of expected credit losses. The size of the adjustment reflects the market-wide reduction in interest rates since the lending was originated and a deterioration in the credit quality of the portfolio in the worsening economic environment.

The reduction in the value of the HBOS Group’s liabilities was largely due to the lower values attributed to debt instruments issued by HBOS, for example commercial paper, medium-term notes and subordinated debt. In many cases market prices were available to value these instruments and the lower fair values reflect market concern in January 2009 over the creditworthiness of HBOS.

During 2009, the effects of the fair value adjustments have started to unwind and be recognised in the Group’s income statement. The determination of the extent to which the adjustments unwind often requires significant judgement principally relating to the assessment of the extent to which losses incurred subsequent to the date of acquisition were expected and consequently reflected in the fair value adjustment made to write down the value of the lending. In the period since the acquisition impairment losses of £6,859 million have been incurred which were reflected in the acquisition fair value adjustments.

GOODWILL

At 31 December 2009 the Group carried goodwill on its balance sheet totalling £2,016 million (2008: £2,256 million), all of which relates to acquisitions made a number of years ago.

The Group reviews the goodwill for impairment at least annually or when events or changes in economic circumstances indicate that impairment may have taken place. The impairment review is performed by projecting future cash flows, excluding finance and tax, based upon budgets and plans and making appropriate assumptions about rates of growth and discounting these using a rate that takes into account prevailing market interest rates and the risks inherent in the business. If the present value of the projected cash flows is less than the carrying value of the underlying net assets and related goodwill an impairment charge is required in the income statement. This calculation requires the exercise of significant judgement by management; if the estimates made prove to be incorrect or performance does not meet expectations which affects the amount and timing of future cash flows, goodwill may become impaired in future periods. Further details are given in note 27.

The Group’s goodwill is allocated to cash generating units in the Insurance division (Scottish Widows) and in the Asset Finance business in the Wholesale division. Goodwill attributable to the Group’s Asset Finance business, for which an impairment charge was recognised in the Group’s financial statements for the year ended 31 December 2008, has been reviewed for impairment due to the continuing uncertainties over the short-term macroeconomic environment. As a consequence, the carrying value of the consumer finance cash generating unit within Asset Finance has been reassessed and has resulted in the related element of the goodwill being written off and the Group recognising a further impairment charge of £240 million in the year ended 31 December 2009. Further details are given in note 27.

LIFE INSURANCE BUSINESS

The Group carries in its balance sheet a value in-force asset, representing the present value of future profits expected to arise from the portfolio of in-force life insurance and participating investment contracts, of £5,140 million at 31 December 2009 (2008: £1,893 million). The Group also recognises an acquired value in-force asset of £1,545 million at 31 December 2009 (2008: nil) representing contractual rights to benefits from providing investment management services in relation to non-participating investment contracts acquired in business combinations and portfolio transfers. The methodology used to value these assets is set out in note 2(O)(1). The valuation or recoverability of these assets requires assumptions to be made about future economic and operating conditions. These assumptions are inherently uncertain and changes could significantly affect the value attributed to these assets.

At 31 December 2009 the Group carried substantial liabilities to holders of life, pensions and investment contracts in its balance sheet. Liabilities arising from insurance contracts and participating investment contracts were £56,800 million and £18,089 million respectively (2008: £21,518 million and £11,619 million) and those arising from non-participating investment contracts totalled £46,348 million (2008: £14,243 million). The methodology used to value the liabilities is described in note 2(O)(1). Elements of the liability valuations require assumptions to be made about future investment returns, future mortality rates and future policyholder behaviour.

The process for determining key assumptions that have been made for life insurance assets and liabilities at 31 December 2009 is detailed in notes 28 and 36. The impact on profit before tax of changes in key assumptions is detailed in note 37.

F-22

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

3 CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS continued

GENERAL INSURANCE BUSINESS

At 31 December 2009 the Group held a provision of £502 million (2008: £183 million) in respect of the estimated cost of claims notified but not settled and claims incurred but not reported at the balance sheet date. The methodology for valuing these liabilities, which includes the use of statistical techniques, is described in note 2(O)(2).

While management believes that the liability carried at year end is adequate, the application of statistical techniques requires significant judgement. An increase of 10 per cent in the cost of claims would result in the recognition of an additional loss of approximately £48 million. Similarly, an increase of 10 per cent in the ultimate number of such claims would lead to an additional loss of approximately £44 million; some relief would arise from reinsurance contracts held.

4 SEGMENTAL ANALYSIS

The Group is a leading financial services group, whose businesses provide a wide range of banking and financial services in the UK and in certain locations overseas.

The group executive committee has been determined to be the chief operating decision maker for the Group. The Group’s operating segments reflect its organisational and management structures. The group executive committee reviews the Group’s internal reporting based around these segments in order to assess performance and allocate resources. This assessment includes a consideration of each segment’s net interest revenue and consequently the total interest income and expense for all reportable segments is presented on a net basis. The segments are differentiated by the type of products provided, by whether the customers are individuals or corporate entities and by the geographical location of the customer.

Inter-segment services are generally recharged at cost, with the exception of the internal commission arrangements between the UK branch and other distribution networks and the insurance product manufacturing businesses within the Group, where a profit margin is also charged. Inter-segment lending and deposits are generally entered into at market rates, except that non-interest bearing balances are priced at a rate that reflects the external yield that could be earned on such funds.

For those derivative contracts entered into by business units for risk management purposes, the business unit retains the amount that would have been recognised on an accrual accounting basis (an amount equal to the interest element of the next payment on the swap) and transfers the remainder of the fair value of the swap to the central group segment where the resulting accounting volatility is managed though the establishment of hedge accounting relationships. Any change in fair value of the hedged instrument attributable to the hedged risk is also recorded within the central group segment. This allocation of the fair value of the swap and change in fair value of the hedged instrument attributable to the hedged risk avoids accounting asymmetry in segmental results and records volatility in the central group segment where it is managed and provides a fair presentation of the segments’ operating performance. It is the basis on which the segments are managed and measured internally and is the basis of the Group’s internal segmental reporting to the board.

Segmental analysis for 2009 and 2008

During 2009, following the acquisition of HBOS, the Group’s activities were reorganised into four financial reporting segments: Retail, Wholesale, Wealth and International and Insurance. Consequently, the comparative information has been restated to be consistent with the reorganised structure of the Group. The segmental results and comparatives are presented on the basis reviewed by the chief operating decision maker in 2009 (the combined businesses basis) and therefore include the pre-acquisition results of HBOS for 2008 and for the period from 1 January 2009 to 16 January 2009.

The Retail division, with its brands including Lloyds TSB, Halifax, Bank of Scotland, Birmingham Midshires and Cheltenham & Gloucester, is a UK provider of current accounts, savings, personal loans, credit cards and mortgages serving over 30 million customers through a large branch network in the UK. The division is also a general insurance and bancassurance distributor selling a wide range of long-term savings, investment and general insurance products.

The Wholesale division serves in excess of a million businesses ranging from start-ups and small enterprises to global corporations, with a range of propositions fully segmented according to customer need. The enlarged division, following the acquisition of HBOS, comprises Corporate Markets, Treasury and Trading and Asset Finance. Corporate Markets comprises Corporate, Commercial, Corporate Real Estate, Specialist Finance and Wholesale Markets.

Wealth and International was created to give increased focus and momentum to the Group’s private banking and asset management activities and to closely co-ordinate the management of its international businesses. Wealth comprises the Group’s private banking, wealth and asset management businesses in the UK and overseas. International comprises corporate, commercial, asset finance and retail businesses in Australia, Ireland and continental Europe.

The Insurance division is a bancassurance provider in the UK providing a wide range of long-term savings, investment and protection products, together with individual and corporate pensions. It is also a distributor of payment protection and home insurance in the UK. The division consists of three business units: life, pensions and investments UK; life, pensions and investments Europe; and general insurance.

Other includes the results of managing the Group’s technology platforms, branch and head office property estate, operations (including payments, banking operations and collections) and procurement services, the costs of which are predominantly recharged to the other divisions. It also reflects other items not recharged to the divisions, including hedge ineffectiveness.

F-23

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

4 SEGMENTAL ANALYSIS continued

Retail
£m

Wholesale
£m

Wealth and
International
£m

Insurance
£m

Other
£m

Combined
businesses
basis total
£m

Year ended 31 December 2009

Net interest income

7,970

4,710

1,217

(287

)

(884

)

12,726

Other income (net of fee and commission expense)

1,804

4,199

1,128

2,944

1,800

11,875

Total income

9,774

8,909

2,345

2,657

916

24,601

Insurance claims

—

(637

)

—

(637

)

Total income, net of insurance claims

9,774

8,909

2,345

2,020

916

23,964

Operating expenses

(4,566

)

(4,106

)

(1,544

)

(974

)

(419

)

(11,609

)

Trading surplus

5,208

4,803

801

1,046

497

12,355

Impairment

(4,227

)

(15,683

)

(4,078

)

—

(23,988

)

Share of results of joint ventures and associates

)

(720

)

(21

)

(22

)

(767

)

Profit (loss) before tax and fair value unwind

975

(11,600

)

(3,298

)

1,024

499

(12,400

)

Fair value unwind

407

6,897

942

(49

)

(2,097

)

6,100

Profit (loss) before tax

1,382

(4,703

)

(2,356

)

975

(1,598

)

(6,300

)

External revenue

14,221

5,965

2,859

3,780

(2,224

)

24,601

Inter-segment revenue

(4,447

)

2,944

(514

)

(1,123

)

3,140

—

Segment revenue

9,774

8,909

2,345

2,657

916

24,601

Segment external assets

383,588

394,057

94,051

135,814

19,745

1,027,255

Segment customer deposits

224,149

153,389

29,037

—

166

406,741

Other segment items reflected in income

statement above:

Depreciation and amortisation

196

1,284

152

147

1,863

Movement in value of in-force business

—

)

1,097

—

1,092

Defined benefit scheme charges

190

112

156

537

Other segment items:

Additions to tangible fixed assets

2,969

255

487

3,829

Investments in joint ventures and associates at end of year

189

123

(14

)

151

479

F-24

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

4 SEGMENTAL ANALYSIS continued


	Retail £m			Wholesale £m			Wealth and International £m			Insurance £m			Other £m			Combined businesses basis total £m

Year ended 31 December 2008
Net interest income		8,454			5,752			1,314			(345	)		(272	)		14,903
Other income (net of fee and
commission expense)		2,739			(302	)		1,191			3,493			(188	)		6,933

Total income		11,193			5,450			2,505			3,148			(460	)		21,836
Insurance claims		—			—			—			(481	)		—			(481	)

Total income, net of insurance claims		11,193			5,450			2,505			2,667			(460	)		21,355
Operating expenses		(4,963	)		(4,591	)		(1,476	)		(1,129	)		(77	)		(12,236	)

Trading surplus (deficit)		6,230			859			1,029			1,538			(537	)		9,119
Impairment		(3,695	)		(10,394	)		(731	)		—			(60	)		(14,880	)
Share of results of joint ventures and associates		7			(944	)		(21	)		2			4			(952	)

Profit (loss) before tax		2,542			(10,479	)		277			1,540			(593	)		(6,713	)

External revenue		15,228			(150	)		1,883			6,020			(1,145	)		21,836
Inter-segment revenue		(4,035	)		5,600			622			(2,872	)		685			—

Segment revenue		11,193			5,450			2,505			3,148			(460	)		21,836

Segment external assets		393,827			517,269			86,394			127,249			1,979			1,126,718

Segment customer deposits		216,282			157,941			34,095			—			844			409,162

Other segment items reflected in income
statement above:
Depreciation and amortisation		197			1,603			71			80			343			2,294
Movement in value of in-force business		—			—			—			(625	)		—			(625	)
Defined benefit scheme charges		163			106			31			36			(1	)		335
Other segment items:
Additions to tangible fixed assets		127			2,241			254			411			735			3,768
Investments in joint ventures and associates at end of year		78			1,032			117			(38	)		50			1,239

F-25

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

4 SEGMENTAL ANALYSIS continued

RECONCILIATION OF COMBINED BUSINESSES BASIS TO STATUTORY RESULTS

The combined businesses basis is the basis on which financial information is presented to the chief operating decision maker which excludes certain items included in the statutory results. The table below reconciles the statutory results to the combined businesses basis.


	Lloyds Banking Group statutory £m				Removal of:

			Pre-acquisition results of HBOS £m		Acquisition related ¹ £m		Volatility £m		Insurance gross up £m		Fair value unwind £m		Combined businesses basis £m

Year ended 31 December 2009
Net interest income	9,026		243		—		11		1,280		2,166		12,726
Other income	36,271		(1,123	)	—		(479	)	(21,659	)	(1,135	)	11,875

Total income	45,297		(880	)	—		(468	)	(20,379	)	1,031		24,601
Insurance claims	(22,019	)	1,349		—		—		20,318		(285	)	(637	)

Total income, net of insurance claims	23,278		469		—		(468	)	(61	)	746		23,964
Operating expenses	(15,984	)	(293	)	4,589		—		61		18		(11,609	)

Trading surplus (deficit)	7,294		176		4,589		(468	)	—		764		12,355
Impairment	(16,673	)	(456	)	—		—		—		(6,859	)	(23,988	)
Share of results of joint ventures and
associates	(752	)	—		—		(10	)	—		(5	)	(767	)
Gain on acquisition	11,173		—		(11,173	)	—		—		—		—
Fair value unwind	—		—		—		—		—		6,100		6,100

Profit (loss) before tax	1,042		(280	)	(6,584	)	(478	)	—		—		(6,300	)


¹	Includes gain on acquisition, integration costs, amortisation of purchased intangibles and goodwill impairment.


							Removal of:

	Statutory basis ¹ £m		HBOS statutory £m		Reclassifi- cations £m		Results of BankWest and St. Andrews £m		Volatility £m		Amortisation of purchased intangibles and goodwill impairments £m		Insurance gross up £m		Combined businesses basis £m

Year ended 31 December 2008
Net interest income	7,718		8,171		1,906		(524	)	(9	)	—		(2,359	)	14,903
Other income	(709	)	(4,559	)	(234	)	(148	)	2,358		—		10,225		6,933

Total income	7,009		3,612		1,672		(672	)	2,349		—		7,866		21,836
Insurance claims	2,859		6,192		(1,570	)	—		—		—		(7,962	)	(481	)

Total income, net of insurance claims	9,868		9,804		102		(672	)	2,349		—		(96	)	21,355
Operating expenses	(6,100	)	(6,880	)	—		400		—		258		86		(12,236	)

Trading surplus (deficit)	3,768		2,924		102		(272	)	2,349		258		(10	)	9,119
Impairment	(3,012	)	(12,050	)	—		182		—		—		—		(14,880	)
Share of results of joint ventures and
associates	4		(956	)	—		—		—		—		—		(952	)
Non-operating income	—		56		(56	)	—		—		—		—		—
Loss on disposal	—		(799	)	(46	)	845		—		—		—		—

Profit (loss) before tax	760		(10,825	)	—		755		2,349		258		(10	)	(6,713	)

Assets As at 31 December 2008	Statutory basis £m		HBOS statutory £m		Reclassifi- cations £m		Lloyds TSB and HBOS share issues ² £m		Fair value adjustments £m		Consolidation adjustments £m				Reported basis £m

	436,033		689,917		15,198		16,770		(11,975	)	(19,225	)			1,126,718


1	Restated for IFRS 2 (Revised).

2	Includes £4,500 million of ordinary share capital and £1,000 million of preference shares issued by Lloyds TSB Group plc to HM Treasury on 13 January 2009 and 15 January 2009, respectively and £8,500 million of ordinary share capital and £3,000 million of preference shares issued by HBOS plc to HM Treasury on 15 January 2009 (net of costs).

F-26

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

4 SEGMENTAL ANALYSIS continued

Segmental analysis for 2008 and 2007

The information to restate 2007 on a combined businesses basis is not readily available and the Group has determined that the cost to develop it was excessive. Therefore segmental information for 2007 is presented on the continuing businesses basis used by the chief operating decision maker in 2008 to assess the Group’s operations. In order to provide comparability with the segmental information for 2007 the Group has also presented its segmental information for 2008 on a continuing businesses basis.

At 31 December 2008 the Group’s activities were organised into three segments: UK Retail Banking, Insurance and Investments and Wholesale and International Banking. Services provided by UK Retail Banking encompass the provision of banking and other financial services to personal customers, private banking and mortgages. Insurance and Investments offers life assurance, pensions and savings products, general insurance and asset management services. Wholesale and International Banking provides banking and related services for major UK and multinational companies, banks and financial institutions, and small and medium-sized UK businesses. It also provides asset finance to personal and corporate customers, manages the Group’s activities in financial markets through its treasury function and provides banking and financial services in some overseas locations.

As part of its transition to Basel II on 1 January 2008, the Group has updated its capital and liquidity pricing methodology. The main difference in this approach is to allocate a greater share of certain funding costs, previously allocated to the Central group items segment, to individual divisions. To enable a meaningful period-on-period comparison, the segmental analysis for the year ended 31 December 2007 has been restated to reflect these changes.



	UK Retail Banking £m			Insurance and Investments £m			Wholesale and International Banking £m			Central Group Items ¹ £m			Inter-segment eliminations £m			Continuing businesses excluding insurance gross up ¹

Year ended 31 December 2008
Net interest income		4,110			(62	)		3,303			(293	)		—			7,058
Other income (net of fee and commission expense)		1,766			1,749			829			(203	)		—			4,141

Total income		5,876			1,687			4,132			(496	)		—			11,199
Insurance claims		—			(193	)		—			—			—			(193	)

Total income, net of insurance claims		5,876			1,494			4,132			(496	)		—			11,006
Operating expenses		(2,611	)		(591	)		(2,350	)		(77	)		—			(5,629	)

Trading surplus		3,265			903			1,782			(573	)		—			5,377
Impairment		(1,472	)		(2	)		(1,508	)		(30	)		—			(3,012	)
Share of results of joint ventures and associates		—			—			—			4			—			4

Profit (loss) before tax		1,793			901			274			(599	)		—			2,369


1 Restated for IFRS 2 (Revised)

External revenue		9,804			3,236			7,679			1,025			—			21,744
Inter-segment revenue		1,002			185			2,395			1,152			(4,734	)		—

Segment revenue		10,806			3,421			10,074			2,177			(4,734	)		21,744

Segment external assets		127,502			66,549			238,832			3,150			—			436,033

Segment customer deposits		85,926			2,103			82,909			—			—			170,938

Other segment items reflected in income statement above:
Depreciation and amortisation		215			50			421			—			—			686
Movement in value of in-force business		—			(325	)		—			—			—			(325	)
Defined benefit scheme charges		103			21			85			(45	)		—			164
Other segment items:
Additions to tangible fixed assets		167			236			837			196			—			1,436

F-27

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

4 SEGMENTAL ANALYSIS continued



	UK Retail Banking £m			Insurance and Investments £m			Wholesale and International Banking £m			Central Group Items ¹ £m			Inter-segment eliminations £m			Continuing businesses excluding insurance gross up ¹

Year ended 31 December 2007
Net interest income		3,695			(106	)		2,380			(368	)		—			5,601
Other income (net of fee and commission expense)		1,797			1,741			1,644			352			—			5,534

Total income		5,492			1,635			4,024			(16	)		—			11,135
Insurance claims		—			(302	)		—			—			—			(302	)

Total income, net of insurance claims		5,492			1,333			4,024			(16	)		—			10,833
Operating expenses		(2,548	)		(611	)		(2,152	)		(7	)		—			(5,318	)

Trading surplus		2,944			722			1,872			(23	)		—			5,515
Impairment		(1,224	)		—			(572	)		—			—			(1,796	)
Share of results of joint ventures and associates		—			—			—			10			—			10

Profit (loss) before tax		1,720			722			1,300			(13	)		—			3,729


¹ Restated for IFRS 2 (Revised)

External revenue		9,132			3,164			9,924			290			—			22,510
Inter-segment revenue		958			230			1,487			1,591			(4,266	)		—

Segment revenue		10,090			3,394			11,411			1,881			(4,266	)		22,510

Segment external assets		115,012			73,377			163,294			1,663			—			353,346

Segment customer deposits		82,081			2,153			72,321			—			—			156,555

Other segment items reflected in income statement above:
Depreciation and amortisation		205			51			371			—			—			627
Movement in value of in-force business		—			(77	)		—			—			—			(77	)
Defined benefit scheme charges		114			31			91			(60	)		—			176
Other segment items:
Additions to tangible fixed assets		80			458			604			178			—			1,320

RECONCILIATION OF CONTINUING BUSINESSES BASIS TO STATUTORY RESULTS


				Removal of

	Statutory ¹ £m			Volatility £m			Provision for historic US dollar payments £m		Financial Services Compensation Scheme levy £m		Goodwill impairment £m		Continuing businesses ¹ £m			Removal of insurance gross up £m			Continuing businesses excluding insurance gross up ¹ £m

Net interest income		7,718			(9	)		—		—		—		7,709			(651	)		7,058
Other income		(709	)		1,226			—		—		—		517			3,624			4,141

Total income		7,009			1,217			—		—		—		8,226			2,973			11,199
Insurance claims		2,859			—			—		—		—		2,859			(3,052	)		(193	)

Total income, net of insurance claims		9,868			1,217			—		—		—		11,085			(79	)		11,006
Operating expenses		(6,100	)		—			180		122		100		(5,698	)		69			(5,629	)

Trading surplus		3,768			1,217			180		122		100		5,387			(10	)		5,377
Impairment		(3,012	)		—			—		—		—		(3,012	)		—			(3,012	)
Share of results of joint ventures and associates		4			—			—		—		—		4			—			4

Profit before tax		760			1,217			180		122		100		2,379			(10	)		2,369


1	Restated for IFRS 2 (Revised)

F-28

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

4 SEGMENTAL ANALYSIS continued


				Removal of

2007	Statutory ¹ £m			Volatility £m			Discontinued businesses £m			Profit on sale of businesses £m			Settlement of overdraft claims £m		Continuing businesses ¹ £m			Removal of insurance gross up £m			Continuing businesses excluding insurance gross up ¹ £m

Net interest income		6,099			(7	)		(70	)		—			—		6,022			(421	)		5,601
Other income		12,119			506			(858	)		—			—		11,767			(6,233	)		5,534

Total income		18,218			499			(928	)		—			—		17,789			(6,654	)		11,135
Insurance claims		(7,522	)		—			605			—			—		(6,917	)		6,615			(302	)

Total income, net of insurance claims		10,696			499			(323	)		—			—		10,872			(39	)		10,833
Operating expenses		(5,568	)		—			161			—			76		(5,331	)		13			(5,318	)

Trading surplus		5,128			499			(162	)		—			76		5,541			(26	)		5,515
Impairment		(1,796	)		—			—			—			—		(1,796	)		—			(1,796	)
Share of results of joint ventures and associates		10			—			—			—			—		10			—			10
Profit on sale and closure of businesses		657			—			—			(657	)		—		—			—			—

Profit before tax		3,999			499			(162	)		(657	)		76		3,755			(26	)		3,729


¹	Restated for IFRS 2 (Revised).

GEOGRAPHICAL AREAS

The Group’s activities are focused in the UK and the analyses of income and assets below are based on the location of the branch or entity recording the income or assets.


2009	UK £m	Non-UK £m	Total £m

Total income	42,572	2,725	45,297

Total assets	916,734	110,521	1,027,255

There was no individual non-UK country contributing more than 5 per cent of total income or total assets.

As the activities of the Group were predominantly carried out in the UK prior to the acquisition of HBOS, no comparative geographical analysis is presented.

5 NET INTEREST INCOME


	Weighted average effective interest rate

		2009 %	2008 %	2007 %	2009 £m		2008 £m		2007 £m

Interest and similar income:
Loans and advances to customers		3.58	6.33	6.89	24,171		13,808		13,209
Loans and advances to banks		1.18	4.74	5.14	769		1,847		2,025
Debt securities held as loans and receivables		3.68	2.52	—	1,469		61		—
Lease and hire purchase receivables		6.01	7.62	6.34	852		706		602

Interest receivable on loans and receivables		3.43	6.11	6.58	27,261		16,422		15,836
Available-for-sale financial assets		1.78	4.58	4.83	977		1,147		1,038

Total interest and similar income		3.32	5.98	6.44	28,238		17,569		16,874

Interest and similar expense:
Deposits from banks		0.95	3.65	5.00	(883	)	(1,540	)	(1,919	)
Customer deposits		1.23	3.27	3.58	(4,410	)	(4,932	)	(5,085	)
Debt securities in issue		2.56	4.10	5.08	(6,318	)	(2,227	)	(2,680	)
Subordinated liabilities		10.05	5.82	5.65	(4,325	)	(896	)	(741	)
Liabilities under sale and repurchase agreements		1.95	4.45	4.81	(1,655	)	(256	)	(155	)

Interest payable on liabilities held at amortised cost		2.13	3.67	4.24	(17,591	)	(9,851	)	(10,580	)
Other		14.92	—	4.28	(1,621	)	—		(195	)

Total interest and similar expense		2.30	3.61	4.24	(19,212	)	(9,851	)	(10,775	)

Net interest income					9,026		7,718		6,099

Included within interest receivable is £971 million (2008: £435 million; 2007: £395 million) in respect of impaired financial assets. Net interest income also includes a charge of £121 million (2008: charge of £16 million; 2007: credit of £1 million) transferred from the cash flow hedging reserve (see note 47).

F-29

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

6 NET FEE AND COMMISSION INCOME


	2009 £m			2008 £m			2007 £m

Fee and commission income:
Current accounts		1,088			707			693
Insurance broking		539			549			648
Credit and debit card fees		765			581			536
Trust and other fiduciary fees		395			413			362
Other		1,467			981			985

		4,254			3,231			3,224
Fee and commission expense		(1,517	)		(694	)		(600	)

Net fee and commission income		2,737			2,537			2,624

As discussed in note 2(D), fees and commissions which are an integral part of the effective interest rate form part of net interest income shown in note 5. Fees and commissions relating to instruments that are held at fair value through profit or loss are included within net trading income shown in note 7.

7 NET TRADING INCOME


	2009 £m			2008 £m			2007 £m

Foreign exchange translation gains		283			66			34
Gains on foreign exchange trading transactions		488			75			159

Total foreign exchange		771			141			193
Investment property losses (note 26)		(214	)		(1,058	)		(321	)
Securities and other gains (losses)		18,541			(8,269	)		3,251

Net trading income		19,098			(9,186	)		3,123

Securities and other gains (losses) comprise net gains (losses) arising on assets and liabilities held at fair value through profit or loss and for trading as follows:


	2009 £m			2008 £m			2007 £m
Net income (expense) arising on assets held at fair value through profit or loss:
Debt securities, loans and advances		4,297			938			696
Equity shares		11,475			(7,759	)		2,422
Total net income (expense) arising on assets held at fair value through profit or loss		15,772			(6,821	)		3,118
Net expense arising on liabilities held at fair value through
profit or loss – debt securities in issue		(125	)		(232	)		(153	)
Total net gains (losses) arising on assets and liabilities held at fair value through profit or loss		15,647			(7,053	)		2,965
Net gains (losses) on financial instruments held for trading		2,894			(1,216	)		286
Securities and other gains (losses)		18,541			(8,269	)		3,251

F-30

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

8 INSURANCE PREMIUM INCOME


	2009 £m			2008 £m			2007 £m
Life insurance
Gross premiums		7,768			4,841			4,937
Ceded reinsurance premiums		(308	)		(41	)		(98	)
Net earned premiums		7,460			4,800			4,839
Non-life insurance
Gross premiums written		1,390			651			632
Ceded reinsurance premiums		(101	)		(23	)		(23	)
Net premiums		1,289			628			609
Change in provision for unearned premiums (note 36(2))		171			(16	)		(18	)
Change in provision for ceded unearned premiums (note 36(2))		26			—			—
Net earned premiums		1,486			612			591
Total net earned premiums		8,946			5,412			5,430

Life insurance gross written premiums can be further analysed as follows:


	2009 £m	2008 £m	2007 £m


Life and pensions	7,070	4,182	4,233
Annuities	685	645	689
Other	13	14	15

Gross premiums	7,768	4,841	4,937

Non-life insurance gross written premiums can be further analysed as follows:


	2009 £m	2008 £m	2007 £m

Credit protection	417	203	212
Home	968	441	412
Health	5	7	8

	1,390	651	632

F-31

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

9 OTHER OPERATING INCOME


	2009 £m		2008 £m			2007 £m

Operating lease rental income		1,509		392			393
Rental income from investment properties (note 26)		358		209			227
Other rents receivable		51		32			31
Gains less losses on disposal of available-for-sale financial assets (note 47)		97		19			5
Movement in value of in-force business (note 28)		1,169		(325	)		(93	)
Gain on capital transactions		1,498		—			—
Other income		808		201			379

		5,490		528			942

GAIN ON CAPITAL TRANSACTIONS

During 2009, as part of the Group’s management of capital, the Group exchanged certain existing subordinated debt securities for new securities as described below. These exchanges resulted in a gain on extinguishment of the existing liability of £1,498 million, being the difference between the carrying amount of the security extinguished and the fair value of the new security together with related fees and costs.

In the first half of 2009, undated subordinated notes issued by a number of Group companies were exchanged for innovative tier 1 securities and senior unsecured notes issued by Lloyds TSB Bank plc. These exchanges resulted in a gain of £745 million.

In July 2009, dated and undated subordinated liabilities issued by Clerical Medical Finance plc were exchanged for senior unsecured notes issued by Lloyds TSB Bank plc resulting in a gain of £30 million.

In November 2009, as part of the restructuring plan that was a requirement for European Commission approval of state aid received by the Group, the Group agreed to suspend the payment of coupons and dividends on certain of the Group’s preference shares and preferred securities for the two year period from 31 January 2010 to 31 January 2012. This suspension gave rise to a partial extinguishment of the original liability, equivalent to the present value of the suspended cash flows. During December 2009, as part of the Group’s recapitalisation and exit from GAPS, preference shares, preferred securities and undated subordinated notes were exchanged for enhanced capital notes. These exchanges, together with the partial extinguishment of liabilities arising from the suspension of payments of coupons, resulted in a gain of £723 million.

PROFIT ON SALE OF BUSINESSES IN 2007

During 2007 the Group completed the sale of the business and assets of Lloyds TSB Bank plc’s company registration business, Lloyds TSB Registrars; the sale of Abbey Life Assurance Company Limited, a UK life operation which had been closed to new business since 2000; and the sale of The Dutton-Forshaw Group Limited, a medium-size car dealership. In addition, provision was made for payments under an indemnity given in relation to a business sold in an earlier year. The businesses sold in 2007 did not represent separate material lines of business and consequently they were not treated as discontinued operations.

The total profit of £657 million is disclosed separately in the Group’s income statement.

F-32

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

10 INSURANCE CLAIMS

Insurance claims comprise:


	2009 £m			2008 £m			2007 £m
Life insurance and participating investment contracts
Claims and surrenders:
Gross		(8,010	)		(4,710	)		(5,432	)
Reinsurers’ share		146			65			73

		(7,864	)		(4,645	)		(5,359	)
Change in insurance and participating investment contract liabilities (note 36(1)):
Change in gross liabilities		(5,922	)		4,332			58
Change in reinsurers’ share of liabilities		177			40			(20	)
		(5,745	)		4,372			38
Change in non-participating investment contract liabilities
Change in gross liabilities		(7,458	)		3,041			(2,013	)
Change in reinsurers’ share of liabilities		—			—			—
		(7,458	)		3,041			(2,013	)
Change in unallocated surplus (note 39)		(318	)		284			114
Total life insurance and participating investment contracts		(21,385	)		3,052			(7,220	)
Non-life insurance
Claims and claims paid:
Gross		(542	)		(219	)		(250	)
Reinsurers’ share		16			7			—
		(526	)		(212	)		(250	)
Change in liabilities (note 36(2)):
Gross		(111	)		24			(58	)
Reinsurers’ share		3			(5	)		6
		(108	)		19			(52	)
Total non-life insurance		(634	)		(193	)		(302	)
Total insurance claims (expense) credit		(22,019	)		2,859			(7,522	)
Life insurance gross claims can also be analysed as follows:
Deaths		(637	)		(289	)		(296	)
Maturities		(2,107	)		(1,888	)		(1,516	)
Surrenders		(4,225	)		(1,960	)		(2,994	)
Annuities		(710	)		(516	)		(568	)
Other		(331	)		(57	)		(58	)
		(8,010	)		(4,710	)		(5,432	)

A non-life insurance claims development table is included in note 36.

F-33

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

11 OPERATING EXPENSES


	2009 £m		2008 ¹ £m		2007 ¹ £m
Staff costs:
Salaries		4,369		2,230		2,128
Social security costs		383		176		167
Pensions and other post-retirement benefit schemes (note 41)		744		235		238
Restructuring costs		412		14		67
Other staff costs		767		323		305
		6,675		2,978		2,905
Premises and equipment:
Rent and rates		569		318		304
Hire of equipment		20		16		16
Repairs and maintenance		226		151		154
Other		341		165		145
		1,156		650		619
Other expenses:
Communications and data processing		668		455		462
Advertising and promotion		335		194		192
Professional fees		540		229		279
Other		1,310		808		481
		2,853		1,686		1,414
Depreciation and amortisation:
Depreciation of tangible fixed assets (note 30)		1,716		648		594
Amortisation of acquired value of in-force non-participating investment contracts (note 28)		75		—		—
Amortisation of other intangible assets (note 29)		769		38		36
		2,560		686		630
Goodwill impairment (note 27)		240		100		—
Total operating expenses excluding GAPS fee		13,484		6,100		5,568
GAPS fee		2,500		—		—
Total operating expenses		15,984		6,100		5,568

The average number of persons on a headcount basis employed by the Group during the year was as follows:


	2009		2008		2007
UK		125,109		64,355		67,616
Overseas		6,891		2,118		1,937
		132,000		66,473		69,553


¹	Restated for IFRS 2 (Revised)

The UK government has published draft legislation which, when enacted, will introduce a bank payroll tax of 50 per cent applicable to discretionary bonuses and other amounts over £25,000 awarded to bank employees in the period 9 December 2009 to 5 April 2010. The legislation has yet to be finalised and there remain significant uncertainties over aspects of its detailed application and the Group continues to assess its ultimate liability in respect of all of its schemes. However, in accordance with the requirements of IAS 19 ‘Employee Benefits’ the Group has provided in full for the estimated cost of the bank payroll tax; the amount is not significant.

F-34

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

11 OPERATING EXPENSES continued


	2009 £m		2008 ¹ £m		2007 ¹ £m
Fees payable for the audit of the Company’s current year annual report		2.2		1.1		1.0
Fees payable for other services:
Audit of the Company’s subsidiaries pursuant to legislation		18.8		8.5		8.3
Other services supplied pursuant to legislation		4.2		3.0		2.7
Total audit fees		25.2		12.6		12.0
Other services – audit related fees		5.3		5.3		1.1
Total audit and audit related fees		30.5		17.9		13.1
Services relating to taxation		1.0		0.5		0.7
Other non-audit fees:
Services relating to corporate finance transactions		0.3		0.4		0.7
Other services		8.9		0.7		0.1
Total other non-audit fees		9.2		1.1		0.8
Total fees payable to the Company’s auditors by the Group		40.7		19.5		14.6

During the year, the auditors also earned fees payable by entities outside the consolidated Lloyds Banking Group in respect of the following:


	2009 £m		2008 £m		2007 £m
Audits of Group pension schemes		0.3		0.2		0.2
Audits of the unconsolidated Open Ended Investment Companies managed by the Group		0.6		0.5		0.4
Reviews of the financial position of corporate and other borrowers		19.3		1.4		2.8
Acquisition due diligence and other work performed in respect of potential
venture capital investments		1.4		1.0		0.6


¹	The allocation of fees between those payable for the audit of the Company’s current year audit and those for the audit of the Company’s subsidiaries has been restated. There is no change in total fees payable.

Other non-audit fees include the costs associated with the Group’s preparations for ensuring the HBOS Group complies fully with the requirements of the Sarbanes-Oxley Act by 31 December 2010.

The following types of services are included in the categories listed above:

Audit fees: This category includes fees in respect of the audit of the Group’s annual financial statements and other services in connection with regulatory filings. Other services supplied pursuant to legislation relate primarily to the costs associated with the Sarbanes-Oxley Act audit requirements together with the cost of the audit of the Group’s Form 20-F filing.

Audit related fees: This category includes fees in respect of services for assurance and related services that are reasonably related to the performance of the audit or review of the financial statements, for example acting as reporting accountants in respect of prospectuses and circulars required by the UKLA listing rules.

Services relating to taxation: This category includes tax compliance and tax advisory services.

Other non-audit fees: This category includes due diligence relating to corporate finance, including venture capital transactions and other assurance and advisory services.

It is the Group’s policy to use the auditors on assignments in cases where their knowledge of the Group means that it is neither efficient nor cost effective to employ another firm of accountants. Such assignments typically relate to the provision of advice on tax issues, assistance in transactions involving the acquisition and disposal of businesses and accounting advice.

The Group has procedures that are designed to ensure auditor independence, including that fees for audit and non-audit services are approved in advance. This approval can be obtained either on an individual engagement basis or, for certain types of non-audit services, particularly those of a recurring nature, through the approval of a fee cap covering all engagements of that type provided the fee is below that cap. All statutory audit work as well as non-audit assignments where the fee is expected to exceed the relevant fee cap must be pre-approved by the audit committee on an individual engagement basis. On a quarterly basis, the audit committee receives a report detailing all pre-approved services and amounts paid to the auditors for such pre-approved services.

F-35

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

12 IMPAIRMENT


	2009		2008	2007
	£m		£m	£m
Impairment losses on loans and receivables:
Loans and advances to banks	(3	)	135	(1	)
Loans and advances to customers	15,783		2,584	1,722
Debt securities classified as loans and receivables	248		157	—
Total impairment losses on loans and receivables (note 24)	16,028		2,876	1,721
Impairment of available-for-sale financial assets	602		130	70
Other credit risk provisions (note 43)	43		6	5
Total impairment charged to the income statement	16,673		3,012	1,796

13 INVESTMENTS IN JOINT VENTURES AND ASSOCIATES

The Group’s share of results of and investments in joint ventures and associates comprises:


	Joint ventures						Associates						Total
	2009			2008			2009			2008			2009			2008
		£m			£m			£m			£m			£m			£m
Income		708			29			5			16			713			45
Expenses		(544	)		(22	)		(96	)		(17	)		(640	)		(39	)
Impairment		(272	)		—			(114	)		—			(386	)		—
Insurance claims		(465	)		—			—			—			(465	)		—
Profit (loss) before tax		(573	)		7			(205	)		(1	)		(778	)		6
Tax		24			(2	)		2			—			26			(2	)
Share of post-tax results		(549	)		5			(203	)		(1	)		(752	)		4
Current assets		2,754			68			605			89			3,359			157
Non-current assets		4,662			11			1,611			44			6,273			55
Current liabilities		(2,175	)		(17	)		(494	)		(86	)		(2,669	)		(103	)
Non-current liabilities		(4,871	)		(7	)		(1,613	)		(47	)		(6,484	)		(54	)
Share of net assets		370			55			109			—			479			55
At 1 January		55			50			—			9			55			59
Adjustment on acquisition		956			—			219			—			1,175			—
Additional investments		140			—			12			—			152			—
Acquisitions		3			—			60			—			63			—
Disposals		(199	)		—			(39	)		(6	)		(238	)		(6	)
Share of post-tax results		(549	)		5			(203	)		(1	)		(752	)		4
Dividends paid		(21	)		—			—			(2	)		(21	)		(2	)
Exchange and other adjustments		(15	)		—			60			—			45			—
At 31 December		370			55			109			—			479			55

The Group’s share of income and expenses of joint ventures and associates in 2007 were not significant and so no disclosure is made.

The Group’s unrecognised share of losses of associates for the year is £64 million (2008: £nil; 2007: £nil) and of joint ventures is £424 million (2008: £nil; 2007: £nil). For entities making losses, subsequent profits earned are not recognised until previously unrecognised losses are extinguished. The Group’s unrecognised share of losses net of unrecognised profits on a cumulative basis of associates is £64 million (2008: £nil) and of joint ventures is £424 million (2008: £nil).

The Group’s principal joint venture investments at 31 December 2009 were:


	Nature of	Type of		Statutory accounts	Principal area of
	business	shares held	Group’s interest	made up to	operations
esure Holdings Limited (see below)	Insurance	Ordinary	70%	31 December	UK
		Preference	100%
Sainsbury’s Bank plc	Banking	Ordinary	50%	31 December	UK

All of the interests in the joint ventures above are incorporated in the UK. All interests in joint ventures are held by subsidiaries. Where entities have statutory accounts drawn up to a date other than 31 December management accounts are used when accounting for them by the Group.

Subsequent to the year end, on 11 February 2010 the Group announced the sale of its 70 per cent stake in esure to a management buyout vehicle.

F-36

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

14 GAIN ON ACQUISITION

On 16 January 2009, the Group acquired 100 per cent of the ordinary share capital of HBOS plc, which together with its subsidiaries undertakes banking, insurance and other financial services related activities in the UK and in certain overseas locations.

The table below sets out the fair value of the identifiable net assets acquired.

At the time of the recommended offer for HBOS in September 2008, it had become increasingly difficult for HBOS to raise funds in wholesale markets and their board sought to restore confidence and stability through an agreement to be acquired by Lloyds TSB Group plc announced on 18 September 2008 at the original terms of 0.833 Lloyds TSB Group plc shares for each HBOS share. However turbulence in the markets continued and the UK Government decided in October 2008 that it would be appropriate for the UK banking sector to increase its level of capitalisation. As a consequence of the recapitalisation of HBOS and the impact of the deteriorating market conditions the terms of the final agreed offer were revised down to a ratio of 0.605 per HBOS share.

As the fair value of the identifiable net assets acquired was greater than the total consideration paid, negative goodwill arises on the acquisition. The negative goodwill is recognised as ‘Gain on acquisition’ in the income statement for the year ended 31 December 2009.


	Book value as at 16 January 2009 £m		Fair value adjustments £m			Fair value as at 16 January 2009 £m
Assets
Cash and balances at central banks		2,123		—			2,123
Items in the course of collection from banks		523		—			523
Trading and other financial assets at fair value through profit or loss		83,857		—			83,857
Derivative financial instruments		54,840		(808	)		54,032
Loans and receivables:
Loans and advances to banks		15,751		43			15,794
Loans and advances to customers		450,351		(13,512	)		436,839
Debt securities		39,819		(1,411	)		38,408
Available-for-sale financial assets		27,151		—			27,151
Investment properties		3,002		—			3,002
Investments in joint ventures and associates		1,152		23			1,175
Value of in-force business		3,152		561			3,713
Other intangible assets		104		4,650			4,754
Tangible fixed assets		5,721		(14	)		5,707
Current tax recoverable		1,050		—			1,050
Deferred tax assets		2,556		(602	)		1,954
Other assets		7,601		(905	)		6,696
Total assets		698,753		(11,975	)		686,778

F-37

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

14 GAIN ON ACQUISITION continued


	Book value as at 16 January 2009 £m			Fair value adjustments £m			Fair value as at 16 January 2009 £m
Liabilities
Deposits from banks		87,731			109			87,840
Customer deposits		223,859			835			224,694
Items in course of transmission to banks		521			—			521
Trading and other financial liabilities at fair value through profit or loss		16,360			—			16,360
Derivative financial instruments		45,798			—			45,798
Notes in circulation		936			—			936
Debt securities in issue		191,566			(6,247	)		185,319
Liabilities arising from insurance contracts and participating investment contracts		36,405			282			36,687
Liabilities arising from non-participating investment contracts		28,168			13			28,181
Unallocated surplus within insurance businesses		526			—			526
Other liabilities		14,732			(312	)		14,420
Retirement benefit obligations		(474	)		832			358
Current tax liabilities		58			—			58
Deferred tax liabilities		245			(142	)		103
Other provisions		146			606			752
Subordinated liabilities		29,240			(9,192	)		20,048
Total liabilities		675,817			(13,216	)		662,601
Net assets acquired		22,936			1,241			24,177

Fair value of net assets acquired								24,177
Adjust for:
Preference shares ¹								(3,917	)
Minority interests								(1,300	)
Adjusted net assets of HBOS acquired								18,960
Consideration of acquisition costs:
Issue of 7,776 million ordinary shares of 25p in Lloyds Banking Group plc ²								(7,651	)
Fees and expenses related to the transaction								(136	)
Total consideration								(7,787	)
Gain on acquisition								11,173


¹	On 16 January 2009, the Group cancelled the following HBOS preference share issuances in exchange for preference shares issued by Lloyds Banking Group plc: 6.475 per cent non-cumulative preference shares of £1 each, 6.3673 per cent non-cumulative fixed to floating preference shares of £1 each and 6.0884 per cent non-cumulative preference shares of £1 each. The fair value of the Lloyds Banking Group preference shares issued is deducted from the net assets acquired for the purposes of calculating the gain arising on acquisition.

²	The calculation of consideration is based on the closing price of Lloyds TSB ordinary shares of 98.4p on 16 January 2009; 12,852 million HBOS shares were exchanged for Lloyds Banking Group shares at a ratio of 0.605 shares per HBOS share.

The post acquisition loss before tax of HBOS plc covering the period from 17 January 2009 to 31 December 2009 which is included in the Group statutory consolidated income statement for the year to 31 December 2009 is £5,613 million.

Had the acquisition date of HBOS plc been 1 January 2009, Lloyds Banking Group consolidated total income would have been £880 million lower at £44,417 million and Lloyds Banking Group consolidated profit before tax would have been £280 million lower at £762 million.

DISPOSAL OF BUSINESS

On 12 August 2009, the Group announced the sale of Insight Investment Management Limited, a subsidiary in which the Group held a 100 per cent interest. The sale completed on 8 November 2009 and resulted in no gain or loss on disposal. Customer related intangible assets of £170 million that arose on the acquisition of HBOS were included in the disposal (note 29).

F-38

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

15 TAXATION

(A) ANALYSIS OF TAX CREDIT (CHARGE) FOR THE YEAR


	2009		2008		2007
	£m		£m		£m
UK corporation tax:
Current tax on profit for the year	(227	)	(667	)	(763	)
Adjustments in respect of prior years	(310	)	(19	)	30
	(537	)	(686	)	(733	)
Double taxation relief	10		91		60
	(527	)	(595	)	(673	)
Foreign tax:
Current tax on profit for the year	(221	)	(144	)	(98	)
Adjustments in respect of prior years	40		4		3
	(181	)	(140	)	(95	)
Current tax charge	(708	)	(735	)	(768	)
Deferred tax (note 42):
Origination and reversal of temporary differences	2,429		625		118
Adjustments in respect of prior years	190		148		(29	)
	2,619		773		89
Tax credit (charge)	1,911		38		(679	)

The credit for tax on the profit for 2009 is based on a UK corporation tax rate of 28.0 per cent (2008: 28.5 per cent; 2007: 30 per cent). The above income tax credit is made up as follows:

	2009		2008		2007
	£m		£m		£m
Tax (charge) credit attributable to policyholders	(410	)	461		217
Shareholder tax credit (charge)	2,321		(423	)	(896	)
	1,911		38		(679	)

F-39

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

15 TAXATION continued


	Before tax amount £m			Total tax £m			After tax amount £m
Year ended 31 December 2009
Movements in available-for-sale financial assets:
Change in fair value		2,234			(298	)		1,936
Transferred to income statement in respect of disposals		(97	)		23			(74	)
Transferred to income statement in respect of impairment		621			(168	)		453
Other transfers to income statement		(93	)		26			(67	)
		2,665			(417	)		2,248
Movement in cash flow hedge:
Effective portion of changes in fair value taken to other comprehensive income		(530	)		148			(382	)
Net gains transferred to the income statement		121			(29	)		92
		(409	)		119			(290	)
Currency translation differences		(37	)		(182	)		(219	)
Other comprehensive income for the year		2,219			(480	)		1,739

	Before tax amount £m			Total tax £m			After tax amount £m
Year ended 31 December 2008
Movements in available-for-sale financial assets:
Change in fair value		(2,721	)		690			(2,031	)
Transferred to income statement in respect of disposals		(19	)		—			(19	)
Transferred to income statement in respect of impairment		130			(28	)		102
Other transfers to income statement		(91	)		25			(66	)
		(2,701	)		687			(2,014	)
Movement in cash flow hedge:
Effective portion of changes in fair value taken to other comprehensive income		(33	)		9			(24	)
Net gains transferred to the income statement		16			(4	)		12
		(17	)		5			(12	)
Currency translation differences		(1,304	)		942			(362	)
Other comprehensive income for the year		(4,022	)		1,634			(2,388	)

	Before tax amount £m			Total tax £m			After tax amount £m
Year ended 31 December 2007
Movements in available-for-sale financial assets:
Change in fair value		(483	)		47			(436	)
Transferred to income statement in respect of disposals		(5	)		—			(5	)
Transferred to income statement in respect of impairment		70			(21	)		49
Other transfers to income statement		(6	)		—			(6	)
		(424	)		26			(398	)
Movement in cash flow hedge:
Effective portion of changes in fair value taken to other comprehensive income		(20	)		6			(14	)
Net gains transferred to the income statement		(1	)		—			(1	)
		(21	)		6			(15	)
Currency translation differences		(87	)		103			16
Other comprehensive income for the year		(532	)		135			(397	)

F-40

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

15 TAXATION continued

(B) FACTORS AFFECTING THE TAX CREDIT (CHARGE) FOR THE YEAR

A reconciliation of the charge that would result from applying the standard UK corporation tax rate to profit before tax to the tax credit for the year is given below:


	2009 £m			2008 ¹ £m			2007 ¹ £m
Profit before tax		1,042			760			3,999
Tax charge thereon at UK corporation tax rate of 28 per cent (2008: 28.5 per cent;2007: 30 per cent)		(292	)		(217	)		(1,200	)
Factors affecting charge:
Goodwill		3,022			(28	)		—
Disallowed and non-taxable items		447			(116	)		(51	)
Overseas tax rate differences		(352	)		(39	)		1
Gains exempted or covered by capital losses		(14	)		27			268
Policyholder interests		(295	)		330			159
Tax losses where no deferred tax provided		(332	)		—			—
Adjustments in respect of previous years		(66	)		101			52
Effect of profit (loss) in joint ventures and associates		(211	)		—			—
UK corporation tax rate change		—			—			110
Other items		4			(20	)		(18	)
Tax credit (charge) on profit on ordinary activities		1,911			38			(679	)


¹	Restated for IFRS 2 (Revised)

16 EARNINGS PER SHARE


	2009 £m		2008 ¹ £m		2007 ¹ £m
Profit attributable to equity shareholders – basic and diluted		2,827		772		3,288
		2009		2008 ¹		2007 ¹
		million		million		million
Weighted average number of ordinary shares in issue – basic		37,674		11,581		11,369
Adjustment for share options and awards		255		79		93
Weighted average number of ordinary shares in issue – diluted		37,929		11,660		11,462
Basic earnings per share		7.5p		6.7p		28.9p
Diluted earnings per share		7.5p		6.6p		28.7p


¹	Restated, see below

Basic earnings per share are calculated by dividing the net profit attributable to equity shareholders by the weighted average number of ordinary shares in issue during the year, which has been calculated after deducting 10 million (2008: 11 million restated; 2007: 11 million restated) ordinary shares representing the Group’s holdings of own shares in respect of employee share schemes.

The basic and diluted weighted average number of ordinary shares in issue reflects the issue of 2,597 million ordinary shares on 13 January 2009, the issue of 7,776 million ordinary shares as purchase consideration for the acquisition of 100 per cent of the ordinary share capital of HBOS plc on 16 January 2009, the capitalisation issue of 408 million ordinary shares on 11 May 2009, the issue of 10,409 million ordinary shares on 16 June 2009 in respect of a placing and compensatory open offer, the issue of 36,505 million shares in respect of the rights issue on 27 November 2009 and the issue of 108 million ordinary shares on 11 December 2009. To the extent that such shares contain a bonus element, the average number of shares for 2009 has been adjusted to reflect that bonus element for the full year. Average shares for 2008 and 2007 have been adjusted accordingly (see below).

For the calculation of diluted earnings per share the weighted average number of ordinary shares in issue is adjusted to assume conversion of all dilutive potential ordinary shares. The Company has dilutive potential ordinary shares in respect of share options and awards granted to employees. The number of shares that could have been acquired at the average annual share price of the Company’s shares based on the monetary value of the subscription rights attached to outstanding share options and awards is determined. This is deducted from the number of shares issuable under such options and awards to leave a residual bonus amount of shares which are added to the weighted-average number of ordinary shares in issue, but no adjustment is made to the profit attributable to equity shareholders.

In December 2009, as part of the Group’s recapitalisation and exit from GAPS, the Group entered into an agreement with holders of certain existing liabilities to exchange these for ordinary shares or for cash on 18 February 2010. The weighted average number of anti-dilutive shares arising from this transaction that have been excluded from the calculation of diluted earnings per share was 294 million at 31 December 2009. As set out in note 57, on 18 February 2010, the above exchange completed and 3,141 million new ordinary shares in Lloyds Banking Group plc were issued.

The weighted-average number of anti-dilutive share options and awards excluded from the calculation of diluted earnings per share was 393 million at 31 December 2009 (2008: 59 million; 2007: £3 million).

F-41

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

16 EARNINGS PER SHARE continued

EARNINGS PER SHARE RESTATEMENT

Profit attributable to equity shareholders has been restated for the adoption of IFRS 2 (Revised) as explained in basis of preparation (see page F-9).

The weighted-average number of ordinary shares in issue have been restated to reflect the adjustment factor of 1.025 arising from the capitalisation issue on 11 May 2009, the adjustment factor of 1.310 arising from the placing and compensatory open offer on 16 June 2009, and the adjustment factor of 1.502 arising from the rights issue on 27 November 2009. The impact of these adjustments on the previously published comparatives is as follows:


	2008 £m			2007 £m
Profit attributable to equity shareholders as published		819			3,289
Restatement for IFRS 2 (Revised)		(47	)		(1	)
Restated		772			3,288
		Shares			Shares
		million			million
Weighted-average number of ordinary shares in issue (basic) as published		5,742			5,637
Restatement for capitalisation issue		144			141
Restatement for impact of placing and compensatory open offer		1,824			1,791
Restatement for rights issue		3,871			3,800
Restated		11,581			11,369
Weighted-average number of ordinary shares in issue (diluted) as published		5,781			5,683
Restatement for capitalisation issue		145			142
Restatement for impact of placing and compensatory open offer		1,837			1,806
Restatement for rights issue		3,897			3,831
Restated		11,660			11,462

17 TRADING AND OTHER FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS

These assets are comprised as follows:


	2009						2008
	Trading assets £m		Other financial assets at fair value through profit or loss £m		Total £m			Trading assets £m		Other financial assets at fair value through profit or loss £m		Total £m
Loans and advances to customers		13,579		166		13,745			283		325		608
Loans and advances to banks		4,702		635		5,337			—		—		—
Debt securities:
Government securities		2,936		17,025		19,961			38		7,326		7,364
Other public sector securities		6		700		706			—		18		18
Bank and building society certificates of deposit		2,034		—		2,034			—		433		433
Asset-backed securities:
Mortgage-backed securities		—		520		520			—		369		369
Other asset-backed securities		891		1,999		2,890			—		1,342		1,342
Corporate and other debt securities		3,097		17,571		20,668			536		11,120		11,656
		8,964		37,815		46,779			574		20,608		21,182
Equity shares:
Listed		—		55,685		55,685			—		16,569		16,569
Unlisted		—		28,465		28,465			—		6,705		6,705
		—		84,150		84,150			—		23,274		23,274
		27,245		122,766		150,011			857		44,207		45,064

F-42

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

17 TRADING AND OTHER FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS continued

Other financial assets at fair value through profit or loss represent the following assets designated into that category:


(i)	financial assets backing insurance contracts and investment contracts of £118,573 million (31 December 2008: £39,899 million) which are so designated because the related liabilities either have cash flows that are contractually based on the performance of the assets or are contracts whose measurement takes account of current market conditions and where significant measurement inconsistencies would otherwise arise;

(ii)	loans and advances to customers of £166 million (31 December 2008: £325 million) which are economically hedged by interest rate derivatives which are not in hedge accounting relationships and where significant measurement inconsistencies would otherwise arise if the related derivatives were treated as trading liabilities and the loans and advances were carried at amortised cost; and

(iii)	private equity investments of £1,880 million (31 December 2008: £947 million) that are managed, and evaluated, on a fair value basis in accordance with a documented risk management or investment strategy and reported to key management personnel on that basis.

The maximum exposure to credit risk at 31 December 2009 of the loans and advances to banks and customers designated at fair value through profit or loss was £166 million (2008: £325 million); the Group does not hold any credit derivatives or other instruments in mitigation of this risk. There was no significant movement in the fair value of these loans attributable to changes in credit risk which is determined by reference to the publicly available credit ratings of the instruments involved.

The carrying value of assets that are subject to stock lending arrangements was £1,752 million at 31 December 2009 (31 December 2008: £809 million) all of which the secured party is permitted by contract or custom to sell or repledge.

The Group’s Wholesale division had exposure to negative basis asset-backed securities of £1,174 million (31 December 2008: £584 million) of which £970 million were protected by monoline financial guarantors (note 54).

18 DERIVATIVE FINANCIAL INSTRUMENTS

The Group holds derivatives as part of the following strategies:


–	Customer driven, where derivatives are held as part of the provision of risk management products to Group customers;

–	To manage and hedge the Group’s interest rate and foreign exchange risk arising from normal banking business. The hedge accounting strategy adopted by the Group is to utilise a combination of fair value, cash flow and net investment hedge approaches as described in note 54; and

–	Derivatives held in policyholders funds as permitted by the investment strategies of those funds,

Derivatives are classified as trading except those designated as effective hedging instruments which meet the criteria under IAS 39. Derivatives are held at fair value on the Group’s balance sheet. A description of the methodology used to determine the fair value of derivative financial instruments and the effect of using reasonably possible alternative assumptions for those derivatives valued using unobservable inputs is set out in note 53.

The principal derivatives used by the Group are as follows:


–	Interest rate related contracts include interest rate swaps, forward rate agreements and options. An interest rate swap is an agreement between two parties to exchange fixed and floating interest payments, based upon interest rates defined in the contract, without the exchange of the underlying principal amounts. Forward rate agreements are contracts for the payment of the difference between a specified rate of interest and a reference rate, applied to a notional principal amount at a specific date in the future. An interest rate option gives the buyer, on payment of a premium, the right, but not the obligation, to fix the rate of interest on a future loan or deposit, for a specified period and commencing on a specified future date.

–	Exchange rate related contracts include forward foreign exchange contracts, currency swaps and options. A forward foreign exchange contract is an agreement to buy or sell a specified amount of foreign currency on a specified future date at an agreed rate. Currency swaps generally involve the exchange of interest payment obligations denominated in different currencies; the exchange of principal can be notional or actual. A currency option gives the buyer, on payment of a premium, the right, but not the obligation, to sell specified amounts of currency at agreed rates of exchange on or before a specified future date.

–	Credit derivatives, principally credit default swaps, are used by the Group as part of its trading activity and to manage its own exposure to credit risk. A credit default swap is a swap in which one counterparty receives a premium at pre-set intervals in consideration for guaranteeing to make a specific payment should a negative credit event take place. The Group also uses credit default swaps to securitise, in combination with external funding, £6,455 million (2008: £8,360 million) of corporate and commercial banking loans.

–	Equity derivatives are also used by the Group as part of its equity based retail product activity to eliminate the Group’s exposure to fluctuations in various international stock exchange indices. Index-linked equity options are purchased which give the Group the right, but not the obligation, to buy or sell a specified amount of equities, or basket of equities, in the form of published indices on or before a specified future date.

F-43

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

18 DERIVATIVE FINANCIAL INSTRUMENTS continued

The fair values and notional amounts of derivative instruments are set out the following table:

Contract/notional
amount
£m

Fair value
assets
£m

Fair value
liabilities
£m

31 December 2009

Trading and other

Exchange rate contracts:

Spot, forwards and futures

149,701

1,675

1,695

Currency swaps

130,954

6,853

1,787

Options purchased

11,130

678

—

Options written

11,072

—

431

302,857

9,206

3,913

Interest rate contracts:

Interest rate swaps

1,092,319

23,799

24,153

Forward rate agreements

840,539

441

400

Options purchased

68,267

1,700

—

Options written

57,772

—

1,656

Futures

12,938

2,071,835

25,942

26,216

Credit derivatives

19,673

1,711

444

Embedded equity conversion feature

—

1,797

—

Equity and other contracts

27,391

1,842

1,225

Total derivative assets/liabilities – trading and other

2,421,756

40,498

31,798

Hedging

Derivatives designated as fair value hedges:

Currency swaps

26,162

635

107

Interest rate swaps

80,085

3,989

985

Options written

628

—

144

106,875

4,624

1,236

Derivatives designated as cash flow hedges:

Interest rate swaps

222,548

4,749

7,285

Futures

5,137

Currency swaps

8,937

144

Options purchased

2,754

—

239,376

4,762

7,432

Derivatives designated as net investment hedges:

Cross currency swaps

2,507

Total derivative assets/liabilities – hedging

348,758

9,430

8,687

Total recognised derivative assets/liabilities

2,770,514

49,928

40,485

The principal amount of the contract does not represent the Group’s real exposure to credit risk which is limited to the current cost of replacing contracts with a positive value to the Group should the counterparty default. To reduce credit risk the Group uses a variety of credit enhancement techniques such as netting and collateralisation, where security is provided against the exposure. Further details are provided in note 54(3) on page F-103.

The embedded equity conversion feature of £1,797 million reflects the value at 31 December 2009 of the equity conversion feature contained in the Enhanced Capital Notes issued by the Group in December 2009 as part of the Group’s recapitalisation and exit from the Government Asset Protection Scheme (see note 44).

F-44

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

18 DERIVATIVE FINANCIAL INSTRUMENTS continued


	Contract/notional amount £m		Fair value assets £m		Fair value liabilities £m
31 December 2008
Trading and other
Exchange rate contracts:
Spot, forwards and futures		157,572		5,788		4,102
Currency swaps		29,463		4,367		1,463
Options purchased		9,185		714		—
Options written		10,143		—		743
		206,363		10,869		6,308
Interest rate contracts:
Interest rate swaps		368,176		11,797		12,639
Forward rate agreements		153,930		405		395
Options purchased		37,175		843		—
Options written		33,130		—		627
Futures		587		44		3
		592,998		13,089		13,664
Credit derivatives		32,495		4,257		2,670
Equity and other contracts		5,447		234		81
Total derivative assets/liabilities – trading and other		837,303		28,449		22,723
Hedging
Derivatives designated as fair value hedges:
Interest rate swaps (including swap options)		37,243		434		1,665
Derivatives designated as cash flow hedges:
Interest rate swaps		867		1		91
Derivatives designated as net investment hedges:
Cross currency swaps		6,318		—		2,413
Total derivative assets/liabilities – hedging		44,428		435		4,169
Total recognised derivative assets/liabilities		881,731		28,884		26,892

19 LOANS AND ADVANCES TO BANKS


	2009 £m			2008 £m
Lending to banks		3,705			3,056
Money market placements with banks		31,805			35,812
Total loans and advances to banks		35,510			38,868
Allowance for impairment losses (note 24)		(149	)		(135	)
		35,361			38,733

The Group holds collateral with a fair value of £4,171 million (31 December 2008: £10,739 million), which it is permitted to sell or repledge, of which £4,171 million (2008: £5,492 million) was repledge or sold to third parties for periods not exceeding three months from the transfer. The Group is obliged to return collateral with a fair value of £4,171 million (2008: £5,492 million).

F-45

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

20 LOANS AND ADVANCES TO CUSTOMERS


	2009 £m			2008 £m

Agriculture, forestry and fishing		5,130			3,969
Energy and water supply		3,031			2,598
Manufacturing		14,912			12,057
Construction		10,830			3,016
Transport, distribution and hotels		31,820			14,664
Postal and telecommunications		1,662			1,060
Property companies		83,820			23,318
Financial, business and other services		66,923			33,319
Personal:
Mortgages		362,667			114,643
Other		42,958			25,318
Lease financing		9,307			4,546
Hire purchase		8,710			5,295

		641,770			243,803
Allowance for impairment losses (note 24)		(14,801	)		(3,459	)

		626,969			240,344

The Group holds collateral with a fair value of £1,110 million (31 December 2008: £1,736 million), which it is permitted to sell or repledge, of which £1,102 million (31 December 2008: £366 million) was repledged or sold to third parties for periods not exceeding three months from the transfer. The Group is obliged to return collateral with a fair value of £1,102 million (2008: £366 million).

Loans and advances to customers include finance lease receivables, which may be analysed as follows:


	2009 £m			2008 £m

Gross investment in finance leases, receivable:
Not later than 1 year		1,374			541
Later than 1 year and not later than 5 years		3,577			1,775
Later than 5 years		7,911			5,570

		12,862			7,886
Unearned future finance income on finance leases		(3,428	)		(3,038	)
Rentals received in advance		(119	)		(128	)
Commitments for expenditure in respect of equipment to be leased		(8	)		(174	)

Net investment in finance leases		9,307			4,546

F-46

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

20 LOANS AND ADVANCES TO CUSTOMERS continued

The net investment in finance leases represents amounts recoverable as follows:


	2009 £m	2008 £m

Not later than 1 year	1,008	328
Later than 1 year and not later than 5 years	2,403	974
Later than 5 years	5,896	3,244

	9,307	4,546

Equipment leased to customers under finance leases primarily relates to structured financing transactions to fund the purchase of aircraft, ships and other large individual value items. During 2009 and 2008 no contingent rentals in respect of finance leases were recognised in the income statement. The allowance for uncollectable finance lease receivables included in the allowance for impairment losses is £123 million (2008: £15 million). The unguaranteed residual values included in finance lease receivables were as follows:


	2009 £m	2008 £m

Not later than 1 year	4	1
Later than 1 year and not later than 5 years	46	29
Later than 5 years	5	3

	55	33

21 SECURITISATIONS AND COVERED BONDS

Loans and advances to customers include balances that have been securitised but not derecognised, including residential mortgages and commercial banking loans, the carrying values of which are set out below together with any related liabilities. Residential mortgages are not derecognised because the Group remains exposed to the majority of the risk of any default in respect of them; commercial banking loans are not derecognised because the Group has not transferred the contractual rights to receive the cash flows from those loans nor has it assumed a contractual obligation to pay the cash flows from those loans to a third party.

Beneficial interests in certain residential mortgages have been transferred to special purpose entities which issue floating rate debt securities. Neither the Group nor any entities in the Group are obliged to support any losses that may be suffered by the note holders and do not intend to offer such support. The floating rate note holders only receive payments of interest and principal to the extent that the special purpose entities have received sufficient funds from the transferred mortgages and after certain expenses have been met. In the event of a deficiency, they have no recourse whatsoever to the Group.

F-47

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

21 SECURITISATIONS AND COVERED BONDS continued

The Group’s principal securitisation and covered bond programmes, together with the balances of the advances subject to securitisation and the carrying value of the notes in issue at 31 December, are listed below. The notes in issue are reported in note 35.

2009

2008

Securitisation

Type of loan

Gross assets
securitised
£m

Notes
in issue
£m

Gross assets
securitised
£m

Notes
in issue
£m

Arkle

UK residential mortgages

32,070

18,141

34,293

27,189

Ascot Black ¹

Commercial loans

1,220

—

1,434

—

Goodwood Gold ¹

Commercial loans

2,932

119

2,909

127

Doncaster Gold ¹

Commercial loans

831

950

Exeter Blue ¹

PFI/PPP and project finance loans

877

859

Kelso ¹

Corporate loans and revolving credit facilities

595

1,158

Morse ¹

Corporate loans and revolving credit facilities

—

1,050

—

Cooper’s Hill

UK residential mortgages

11,383

12,000

—

Highland

UK residential mortgages

5,937

6,050

—

Permanent

UK residential mortgages

38,134

30,512

—

Mound

UK residential mortgages

8,603

6,933

—

Handbridge

Personal loans

3,730

2,613

—

Candide

Dutch residential mortgages

4,800

4,663

—

Prominent

Commercial loans

898

787

—

Chepstow Blue

Commercial loans

3,959

4,050

—

Derby Blue

Commercial loans

3,231

3,250

—

Pendeford

UK residential mortgages

11,994

9,039

—

Balliol

UK residential mortgages

12,771

12,819

—

Brae

UK residential mortgages

7,838

9,588

—

Dakota

UK residential mortgages

3,832

3,826

—

Deva

UK residential mortgages

6,691

6,906

—

Penarth

Credit card receivables

5,155

2,699

—

Tioba

UK residential mortgages

2,094

2,249

—

Trinity

UK residential mortgages

11,033

11,466

—

Wolfhound

Irish residential mortgages

6,522

6,585

—

Bella Trust Series

Motor vehicle loans

443

470

—

Other

UK residential mortgages

169

—

187,636

155,046

42,653

27,415

Less held by the Group

(117,489

)

(17,365

)

Total securitisations

37,557

10,050

Covered Bonds

Residential Mortgage-Backed Covered Bonds

99,753

76,636

40,608

24,000

Social Housing Loan-Backed Covered Bonds

3,356

2,735

—

103,109

79,371

40,608

24,000

Less held by the Group

(52,060

)

(24,000

)

Total covered bonds

27,311

—

Total securitisations and covered bonds

64,868

10,050


¹	Securitisations utilising a combination of external funding and credit default swaps.

Cash deposits of £31,480 million (31 December 2008: £1,846 million) held by the Group are restricted in use to repayment of the debt securities issued by the securitisation vehicles and other legal obligations.

F-48

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

22 SPECIAL PURPOSE ENTITIES

In addition to the special purpose entities disclosed in note 21, which are used for securitisation and covered bond programmes, the Group sponsors three asset-backed conduits, Cancara, Grampian and Landale, which invest in debt securities and client receivables. All the external assets in these conduits are consolidated in the Group’s financial statements and are included in the credit market exposures set out in note 54. The total consolidated exposures in these conduits are set out in the table below:


	Cancara £m		Grampian £m		Landale £m		Total £m
At 31 December 2009
Loans and receivables		3,681		—		—		3,681
Debt securities:
Classified as loans and receivables		15		9,867		698		10,580
Classified as available-for-sale (note 25)		5,382		—		—		5,382
Total debt securities		5,397		9,867		698		15,962
Total assets		9,078		9,867		698		19,643
At 31 December 2008
Loans and receivables		5,905		—		—		5,905
Debt securities:
Classified as loans and receivables		437		—		—		437
Classified as available-for-sale (note 25)		6,273		—		—		6,273
Total debt securities		6,710		—		—		6,710
Total assets		12,615		—		—		12,615

OTHER SPECIAL PURPOSE ENTITIES

During 2009, the Group established Lloyds TSB Pension ABCS (No 1) LLP and Lloyds TSB Pension ABCS (No 2) LLP and transferred approximately £5 billion of assets, primarily comprising notes in certain of the Group’s securitisation programmes, in aggregate to these entities. The Group transferred interests in the LLPs with a fair value of approximately £1 billion in aggregate to the Lloyds TSB Group Pension Scheme No 1 and the Lloyds TSB Group Pension Scheme No 2 entitling these schemes to annual payments of approximately £215 million in aggregate until 31 December 2014 (see note 41).

23 DEBT SECURITIES CLASSIFIED AS LOANS AND RECEIVABLES

Debt securities accounted for as loans and receivables comprise:


	2009 £m			2008 £m
Asset-backed securities:
Mortgage-backed securities		13,322			478
Other asset-backed securities		17,137			540
Corporate and other debt securities		2,623			3,531
		33,082			4,549
Allowance for impairment losses (see note 24)		(430	)		(133	)
		32,652			4,416

F-49

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


24 ALLOWANCE FOR IMPAIRMENT LOSSES ON LOANS AND RECEIVABLES

	Loans and advances to customers £m			Loans and advances to banks £m			Debt securities £m			Total £m
Balance at 1 January 2008		2,408			—			—			2,408
Exchange and other adjustments		43			—			—			43
Advances written off		(1,586	)		—			(24	)		(1,610	)
Recoveries of advances written off in previous years		112			—			—			112
Unwinding of discount		(102	)		—			—			(102	)
Charge to the income statement		2,584			135			157			2,876
At 31 December 2008		3,459			135			133			3,727
Exchange and other adjustments		95			17			49			161
Advances written off		(4,200	)		—			—			(4,200	)
Recoveries of advances written off in previous years		110			—			—			110
Unwinding of discount		(446	)		—			—			(446	)
Charge to the income statement		15,783			(3	)		248			16,028
At 31 December 2009		14,801			149			430			15,380


25 AVAILABLE-FOR-SALE FINANCIAL ASSETS

	2009						2008
	Conduits £m		Other £m		Total £m		Conduits £m		Other £m		Total £m
Debt securities:
Government securities		—		8,669		8,669		—		868		868
Other public sector securities		—		31		31		—		12		12
Bank and building society certificates of deposit		—		1,014		1,014		—		9,602		9,602
Asset-backed securities:
Mortgage-backed securities		3,481		1,300		4,781		3,929		1,771		5,700
Other asset-backed securities		1,901		5,739		7,640		2,344		5,748		8,092
Corporate and other debt securities		—		19,904		19,904		—		2,183		2,183
		5,382		36,657		42,039		6,273		20,184		26,457
Equity shares:
Listed		—		102		102		—		3		3
Unlisted		—		1,929		1,929		—		38		38
		—		2,031		2,031		—		41		41
Treasury bills and other bills:
Treasury bills and similar securities		—		2,532		2,532		—		2,402		2,402
Other bills		—		—		—		—		26,807		26,807
		—		2,532		2,532		—		29,209		29,209
		5,382		41,220		46,602		6,273		49,434		55,707

Details of the Group’s asset-backed conduits shown in the table above are included in note 22.

Included within asset-backed securities are £12,421 million (31 December 2008: £13,792 million) managed by the Wholesale division. Further information on these exposures is provided in note 54.

The carrying value of assets that are subject to stock lending arrangements was £4,616 million at 31 December 2009 (31 December 2008: nil) all of which the secured party is permitted by contract or custom to sell or repledge.

All assets have been individually assessed for impairment. The criteria used to determine whether an impairment loss has been incurred are disclosed in note 2(H). Included in available-for-sale financial assets at 31 December 2009 are debt securities individually determined to be impaired whose gross amount before impairment allowances was £144 million (31 December 2008: £282 million) and in respect of which no collateral was held. In addition, included in available-for-sale financial assets at 31 December 2009 are equity securities individually determined to be impaired whose gross amount before impairment allowances was £621 million (31 December 2008: £31 million).

F-50

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

26 INVESTMENT PROPERTIES


	2009 £m			2008 £m
At 1 January		2,631			3,722
Exchange and other adjustments		(15	)		66
Adjustment on acquisition		3,002			—
Additions:
Acquisitions of new properties		151			85
Additional expenditure on existing properties		67			116
Total additions		218			201
Disposals		(865	)		(300	)
Changes in fair value (note 7)		(214	)		(1,058	)
At 31 December		4,757			2,631

The investment properties are valued at least annually at open-market value, by independent, professionally qualified valuers, who have recent experience in the location and categories of the investment properties being valued.

In addition, the following amounts have been recognised in the income statement:


	2009 £m		2008 £m
Rental income		358		209
Direct operating expenses arising from investment properties that generate rental income		64		29

Capital expenditure in respect of investment properties:
	2009 £m		2008 £m
Capital expenditure contracted for at the balance sheet date but not recognised in the financial statements		57		82

27 GOODWILL


	2009 £m			2008 £m
At 1 January		2,256			2,358
Exchange and other adjustments		—			(2	)
Impairment charged to the income statement		(240	)		(100	)
At 31 December		2,016			2,256
Cost ¹		2,362			2,362
Accumulated impairment losses		(346	)		(106	)
At 31 December		2,016			2,256


¹	For acquisitions made prior to 1 January 2004, the date of transition to IFRS, cost is included net of amounts amortised up to 31 December 2003.

The goodwill held in the Group’s balance sheet is tested at least annually for impairment. For the purposes of impairment testing the goodwill is allocated to the appropriate cash generating unit; of the total balance of £2,016 million (31 December 2008: £2,256 million), £1,836 million (or 91 per cent of the total) has been allocated to Scottish Widows in the Group’s Insurance division and £170 million (or 8 per cent of the total) to Asset Finance in the Group’s Wholesale division.

The recoverable amount of Scottish Widows has been based on a value in use calculation. The calculation uses projections of future cash flows based upon budgets and plans approved by management covering a five-year period, and a discount rate of 12 per cent (gross of tax). The budgets and plans are based upon past experience adjusted to take into account anticipated changes in sales volumes, product mix and margins having regard to expected market conditions and competitor activity. The discount rate is determined with reference to internal measures and available industry information. Cash flows beyond the five-year period have been extrapolated using a steady 3 per cent growth rate which does not exceed the long-term average growth rate for the life assurance market. Management believes that any reasonably possible change in the key assumptions would not cause the recoverable amount of Scottish Widows to fall below its balance sheet carrying value.

In 2009, the markets in which the Consumer Finance unit of Asset Finance operates have deteriorated further with both macroeconomic and market conditions worsening, leading to a fall off in demand and increasing arrears. This, together with continuing uncertainties over the likely short-term macroeconomic environment, has resulted in a reassessment of the carrying value of the consumer finance cash generating unit and the recognition of a goodwill impairment charge of £240 million at 31 December 2009 reflecting the write down of the entire balance of goodwill allocated to the Consumer Finance unit of Asset Finance leaving goodwill of £170 million in the Autolease unit of Asset Finance.

The recoverable amount of Asset Finance has also been based on a value in use calculation using cash flow projections based on financial budgets and plans approved by management covering a five-year period and a discount rate of 18.75 per cent (gross of tax). The cash flows beyond the five-year period are extrapolated using a growth rate of 0.5 per cent which does not exceed the long-term average growth rates for the markets in which Asset Finance participates.

F-51

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

28 VALUE OF IN-FORCE BUSINESS

The gross value of in-force business asset in the consolidated balance sheet is as follows:


	2009 £m		2008 £m
Acquired value of in-force non-participating investment contracts		1,545		—
Value of in-force insurance and participating investment contracts		5,140		1,893
		6,685		1,893

The movement in the acquired value of in-force non-participating investment contracts over the year is as follows:


	2009 £m			2008 £m
At 1 January		—			—
Adjustment on acquisition		1,620			—
Amortisation taken to income statement (note 11)		(75	)		—
At 31 December		1,545			—

The acquired value of in-force non-participating investment contracts includes £379 million in relation to OEIC business.

The movement in the value of in-force insurance and participating investment contracts over the year is as follows:


	2009 £m			2008 £m
At 1 January		1,893			2,218
Adjustment on acquisition		2,093			—
Exchange and other adjustments		(15	)		—
Movements in the year:
New business		563			368
Existing business:
Expected return		(456	)		(112	)
Experience variances		84			(46	)
Non-economic assumption changes		135			(92	)
Economic variance		843			(443	)
Movement in the value of in-force business taken to income statement (note 9)		1,169			(325	)
At 31 December		5,140			1,893

This breakdown shows the movement in the value of in-force business only, and does not represent the full contribution that each item in the breakdown contributes to profit before tax, which would also contain changes in the other assets and liabilities of the relevant businesses. Economic variance is the element of earnings which is generated from changes to economic experience in the period and to assumptions over time. The presentation of economic variance includes the impact of financial market conditions being different at the end of the reporting period from those included in assumptions used to calculate new and existing business returns.

The principal features of the methodology and process used for determining key assumptions used in the calculation of the value of in-force business are set out below:

ECONOMIC ASSUMPTIONS

Each cash flow is valued using the discount rate consistent with that applied to such a cash flow in the capital markets. In practice, to achieve the same result, where the cash flows are either independent of or move linearly with market movements, a method has been applied known as the ‘certainty equivalent’ approach whereby it is assumed that all assets earn a risk-free rate and all cash flows are discounted at a risk-free rate.

A market consistent approach has been adopted for the valuation of financial options and guarantees, using a stochastic option pricing technique calibrated to be consistent with the market price of relevant options at each valuation date. The risk-free rate used for the value of financial options and guarantees is defined as the spot yield derived from the relevant government bond yield curve in line with FSA realistic balance sheet assumptions.

The liabilities in respect of the Group’s UK annuity business are matched by a portfolio of fixed interest securities, including a large proportion of corporate bonds. In accordance with the approach adopted in December 2008, the value of the in-force business asset for UK annuity business has been calculated after taking into account an estimate of the market premium for illiquidity in respect of these corporate bond holdings. The illiquidity premium is estimated to be 75 basis points as at 31 December 2009 (31 December 2008: 154 basis points). The reduction in the illiquidity premium over 2009 has offset gains made on the assets backing the annuity liabilities, reducing the benefit within the results from the reduction in corporate bond spreads.

The risk-free rate assumed in valuing the non-annuity in-force business is the 15 year government bond yield for the appropriate territory. The risk-free rate assumed in valuing the in-force asset for the UK annuity business is presented as a single risk-free rate to allow a better comparison to the rate used for other business. That single risk-free rate has been derived to give the equivalent value to the UK annuity book, had that book been valued using the UK gilt yield curve increased to reflect the illiquidity premium described above.

F-52

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

28 VALUE OF IN-FORCE BUSINESS continued

The table below shows the range of resulting yields and other key assumptions at 31 December for UK business:


	2009 %		2008 %

Risk-free rate (value of in-force non-annuity business)		4.45		3.74
Risk-free rate (value of in-force annuity business)		5.05		5.22
Risk-free rate (financial options and guarantees)		0.87 to 4.76		1.11 to 4.24
Retail price inflation		3.64		2.75
Expense inflation		4.42		3.50

NON-MARKET RISK

An allowance for non-market risk is made through the choice of best estimate assumptions based upon experience, which generally will give the mean expected financial outcome for shareholders and hence no further allowance for non-market risk is required. However, in the case of operational risk and the with-profit funds these can be asymmetric in the range of potential outcomes for which an explicit allowance is made.

NON-ECONOMIC ASSUMPTIONS

Future mortality, morbidity, lapse and paid-up rate assumptions are reviewed each year and are based on an analysis of past experience and on management’s view of future experience. These assumptions are intended to represent a best estimate of future experience.

Further information about the effect of changes in key assumptions is given in note 37.

29 OTHER INTANGIBLE ASSETS


	Brands £m	Core deposit intangible £m	Purchased credit card relationships £m	Customer- related intangibles £m		Capitalised software enhancements £m	Total £m

Cost:
At 1 January 2008	—	—	—	57		240	297
Additions	—	—	—	6		80	86

At 31 December 2008	—	—	—	63		320	383
Adjustment on acquisition	596	2,770	300	984		104	4,754
Additions	—	—	—	—		63	63
Disposals of businesses (note 14)	—	—	—	(170	)	—	(170	)

At 31 December 2009	596	2,770	300	877		487	5,030

Accumulated amortisation:
At 1 January 2008	—	—	—	5		143	148
Charge for the year	—	—	—	7		31	38

At 31 December 2008	—	—	—	12		174	186
Charge for the year	21	393	58	237		60	769
Disposals	—	—	—	(12	)	—	(12	)

At 31 December 2009	21	393	58	237		234	943

Balance sheet amount at 31 December 2009	575	2,377	242	640		253	4,087

Balance sheet amount at 31 December 2008	—	—	—	51		146	197

The majority of the customer-related intangibles as well as the brands, core deposit intangibles and purchased credit card relationships have arisen from the acquisition of HBOS. Included within brands above are assets of £380 million (31 December 2008: £nil) that have been determined to have indefinite useful lives and are not amortised. These brands use the Bank of Scotland name which has been in existence for over 300 years. These brands are well established financial services brands and there are no indications that they should not continue indefinitely.

Capitalised software enhancements principally comprise identifiable and directly associated internal staff and other costs.

F-53

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

30 TANGIBLE FIXED ASSETS


	Premises £m			Equipment £m			Operating lease assets £m			Total tangible fixed assets £m

Cost:
At 1 January 2008		1,437			2,871			1,431			5,739
Exchange and other adjustments		2			18			70			90
Additions		96			341			556			993
Disposals		(19	)		(82	)		(493	)		(594	)

At 31 December 2008		1,516			3,148			1,564			6,228
Exchange and other adjustments		19			(38	)		281			262
Adjustment on acquisition		966			825			3,916			5,707
Additions		113			1,317			1,949			3,379
Disposals		(153	)		(130	)		(1,326	)		(1,609	)

At 31 December 2009		2,461			5,122			6,384			13,967

Accumulated depreciation and impairment:
At 1 January 2008		718			2,007			175			2,900
Exchange and other adjustments		1			10			21			32
Charge for the year		81			254			313			648
Disposals		(11	)		(63	)		(243	)		(317	)

At 31 December 2008		789			2,208			266			3,263
Exchange and other adjustments		(19	)		(12	)		113			82
Charge for the year		132			450			1,134			1,716
Disposals		(18	)		(49	)		(251	)		(318	)

At 31 December 2009		884			2,597			1,262			4,743

Balance sheet amount at 31 December 2009		1,577			2,525			5,122			9,224

Balance sheet amount at 31 December 2008		727			940			1,298			2,965

At 31 December the future minimum rentals receivable under non-cancellable operating leases were as follows:


	2009 £m	2008 £m

Receivable within 1 year	845	294
1 to 5 years	1,939	320
Over 5 years	88	9

	2,872	623

Equipment leased to customers under operating leases primarily relates to vehicle contract hire arrangements. During 2009 and 2008 no contingent rentals in respect of operating leases were recognised in the income statement.

In addition, total future minimum sub-lease income of £79 million at 31 December 2009 (£102 million at 31 December 2008) is expected to be received under non-cancellable sub-leases of the Group’s premises.

F-54

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

31 OTHER ASSETS


	2009 £m		2008 £m

Assets arising from reinsurance contracts held (note 36)		1,875		385
Deferred acquisition and origination costs		533		196
Settlement balances		1,587		751
Other assets and prepayments		8,230		4,469

		12,225		5,801

Deferred acquisition and origination costs:


	2009 £m			2008 £m

At 1 January		196			212
Adjustment on acquisition		422			—
Costs deferred, net of amounts amortised to the income statement		(84	)		(16	)
Exchange and other adjustments		(1	)		—

At 31 December		533			196

32 DEPOSITS FROM BANKS


	2009 £m		2008 £m

Liabilities in respect of securities sold under repurchase agreements		27,558		24,888
Other deposits from banks		54,894		41,626

Deposits from banks		82,452		66,514

Included in deposits from banks were deposits of £17,253 million (31 December 2008: £2,574 million) held as collateral. The fair value of those deposits approximates the carrying amount.

33 CUSTOMER DEPOSITS


	2009 £m		2008 £m

Non-interest bearing current accounts		9,264		4,176
Interest bearing current accounts		93,887		47,109
Savings and investment accounts		207,474		76,144
Liabilities in respect of securities sold under repurchase agreements		35,554		92
Other customer deposits		60,562		43,417

Customer deposits		406,741		170,938

Included in customer deposits were deposits of £656 million (31 December 2008: £1,002 million) held as collateral. The fair value of those deposits approximates the carrying amount.

F-55

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

34 TRADING AND OTHER FINANCIAL LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS


	2009 £m		2008 £m
Liabilities held at fair value through profit or loss (debt securities)		6,160		6,748
Trading liabilities:
Liabilities in respect of securities sold under repurchase agreements		21,389		—
Short positions in securities		202		6
Other		520		—
		22,111		6
Trading and other financial liabilities at fair value through profit or loss		28,271		6,754

The amount contractually payable on maturity of the debt securities held at fair value through profit or loss at 31 December 2009 was £5,866 million, which was £294 million lower than the balance sheet carrying value (31 December 2008: £6,517 million, which was £231 million lower than the balance sheet carrying value). At 31 December 2009 there was a cumulative £55 million decrease in the fair value of these liabilities attributable to changes in credit spread risk; this is determined by reference to the quoted credit spreads of Lloyds TSB Bank plc, the issuing entity within the Group. Of the £55 million, £11 million arose in 2009 and £36 million arose in 2008.

Liabilities designated at fair value through profit or loss represent debt securities in issue which either contain substantive embedded derivatives which would otherwise need to be recognised and measured at fair value separately from the related debt securities, or which are accounted for at fair value to significantly reduce an accounting mismatch.

35 DEBT SECURITIES IN ISSUE


	2009 £m		2008 £m
Medium-term notes issued		82,876		11,823
Covered bonds (note 21)		27,311		—
Certificates of deposit issued		50,858		33,207
Securitisation notes (note 21)		37,557		10,050
Commercial paper		34,900		20,630
Total debt securities in issue		233,502		75,710

36 LIABILITIES ARISING FROM INSURANCE CONTRACTS AND PARTICIPATING INVESTMENT CONTRACTS

Insurance contract and participating investment contract liabilities are comprised as follows:


	2009							2008
	Gross £m		Reinsurance ¹ £m			Net £m		Gross £m		Reinsurance ¹ £m			Net £m
Life insurance (see (1) below):
Insurance contracts		56,800		(1,831	)		54,969		21,518		(380	)		21,138
Participating investment contracts		18,089		—			18,089		11,619		—			11,619
		74,889		(1,831	)		73,058		33,137		(380	)		32,757
Non-life insurance contracts (see (2) below):
Unearned premiums		788		(31	)		757		472		—			472
Claims outstanding		502		(13	)		489		183		(5	)		178
		1,290		(44	)		1,246		655		(5	)		650
		76,179		(1,875	)		74,304		33,792		(385	)		33,407


¹ Reinsurance balances are reported within other assets (note 31).

At 31 December 2009 £44,441 million (31 December 2008: £29,967 million) of liabilities arising from insurance contracts and participating investment contracts had a contractual residual maturity of greater than one year.

F-56

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

36 LIABILITIES ARISING FROM INSURANCE CONTRACTS AND PARTICIPATING INVESTMENT CONTRACTS continued

(1) LIFE INSURANCE

The movement in life insurance contract and participating investment contract liabilities over the year can be analysed as follows:


	Insurance contracts			Participating investment contracts			Gross £m			Reinsurance £m			Net £m
At 1 January 2008:		22,526			14,874			37,400			(340	)		37,060
New business		2,915			208			3,123			(32	)		3,091
Changes in existing business		(4,092	)		(3,363	)		(7,455	)		(8	)		(7,463	)
Change in liabilities charged to the income statement (note 10)		(1,177	)		(3,155	)		(4,332	)		(40	)		(4,372	)
Exchange and other adjustments		169			(100	)		69			—			69
At 31 December 2008:		21,518			11,619			33,137			(380	)		32,757
New business		4,455			122			4,577			(28	)		4,549
Changes in existing business		971			374			1,345			(149	)		1,196
Change in liabilities charged to the income statement (note 10)		5,426			496			5,922			(177	)		5,745
Adjustment on acquisition		29,996			5,996			35,992			(1,367	)		34,625
Exchange and other adjustments		(140	)		(22	)		(162	)		93			(69	)
At 31 December 2009		56,800			18,089			74,889			(1,831	)		73,058

Liabilities for life insurance contracts and participating investment contracts can be split into with-profit fund liabilities, accounted for using the FSA’s realistic capital regime (realistic liabilities) and non-profit fund liabilities, accounted for using a prospective actuarial discounted cash flow methodology, as follows:

2009

2008

With-profit
fund
£m

Non-profit
fund
£m

Total
£m

With-profit
fund
£m

Non-profit
fund
£m

Total
£m

Insurance contracts

12,066

44,734

56,800

7,457

14,061

21,518

Participating investment contracts

11,506

6,583

18,089

5,836

5,783

11,619

23,572

51,317

74,889

13,293

19,844

33,137

WITH-PROFIT FUND REALISTIC LIABILITIES


(i)	Business description

The Group has with-profit funds within Scottish Widows plc and Clerical Medical Investment Group Limited containing both insurance contracts and participating investment contracts.

The primary purpose of the conventional and unitised business written in the with-profit funds is to provide a long-term smoothed investment vehicle to the policyholder, protecting them against short-term market fluctuations. With-profit policyholders are entitled to at least 90 per cent of the distributed profits, the shareholders receiving the balance. The policyholder is also usually insured against death and the policy may carry a guaranteed annuity option at maturity.


(ii)	Method of calculation of liabilities

With-profit liabilities are stated at their realistic value, the main components of which are:


–	With-profit benefit reserve, the total asset shares for with-profit policies;

–	Cost of options and guarantees;

–	Deductions levied against asset shares; and

–	Impact of the smoothing policy.

The realistic assessment is carried out using a stochastic simulation model which values liabilities on a market consistent basis. The calculation of realistic liabilities uses best estimate assumptions for mortality, persistency rates and expenses. These are calculated in a similar manner to those used for the value of in-force business as discussed in note 28.


(iii)	Assumptions

Key assumptions used in the calculation of with-profit liabilities, and the processes for determining these, are:

INVESTMENT RETURNS AND DISCOUNT RATES

The realistic capital regime dictates that with-profit fund liabilities are valued on a market-consistent basis. This is achieved by the use of a valuation model which values liabilities on a basis calibrated to tradable market option contracts and other observable market data. The with-profit fund financial options and guarantees are valued using a stochastic simulation model where all assets are assumed to earn, on average, the risk-free yield and all cash flows are discounted using the risk-free yield. The risk-free yield is defined as the spot yield derived from the relevant government bond yield curve.

F-57

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

36 LIABILITIES ARISING FROM INSURANCE CONTRACTS AND PARTICIPATING INVESTMENT CONTRACTS continued

GUARANTEED ANNUITY OPTIONS

Certain pension contracts contain guaranteed annuity options that allow the policyholder to take an annuity benefit on retirement at annuity rates that were guaranteed at the outset of the contract. For contracts that contain such options, key assumptions in determining the cost of options are economic conditions in which the option has value, mortality rates and take up rates of other options. The financial impact is dependent on the value of corresponding investments, interest rates and longevity at the time of the claim.

INVESTMENT VOLATILITY

The calibration of the stochastic simulation model uses implied volatilities of derivatives where possible, or historical volatility where it is not possible to observe meaningful prices.

MORTALITY

The mortality assumptions, including allowances for improvements in longevity for annuitants, are set with regard to the Group’s actual experience where this is significant, and relevant industry data otherwise.

LAPSE RATES (PERSISTENCY)

Lapse rates refer to the rate of policy termination or the rate at which policyholders stop paying regular premiums due under the contract.

Historical persistency experience is analysed using statistical techniques. As experience can vary considerably between different product types and for contracts that have been in force for different periods, the data is broken down into broadly homogenous groups for the purposes of this analysis.

The most recent experience is considered along with the results of previous analyses and management’s views on future experience, taking into consideration potential changes in future experience that may result from guarantees and options becoming more valuable under adverse market conditions, in order to determine a ‘best estimate’ view of what persistency will be. In determining this best estimate view a number of factors are considered, including the credibility of the results (which will be affected by the volume of data available), any exceptional events that have occurred during the period under consideration, any known or expected trends in underlying data and relevant published market data.

NON-PROFIT FUND LIABILITIES


(i)	Business description

The Group principally writes the following types of life insurance contracts within its non-profit funds. Shareholder profits on these types of business arise from management fees and other policy charges.

Unit-linked business – This includes unit-linked pensions and unit-linked bonds, the primary purpose of which is to provide an investment vehicle where the policyholder is also insured against death.

Life insurance – The policyholder is insured against death or permanent disability, usually for predetermined amounts. Such business includes whole of life and term assurance and long-term creditor policies.

Annuities – The policyholder is entitled to payments for the duration of their life and is therefore insured against surviving longer than expected.

German insurance and pensions business is written through the subsidiary Heidelberger Leben and comprises policies similar to the UK definitions above, except that there is participation by the policyholder in the investment, insurance and expense profits of Heidelberger Leben. A minimum level of policyholder participation is prescribed by German law. The following types of life insurance contracts are written under which there is policyholder participation in Heidelberger Leben profits:


–	Unit linked endowment or pensions business;

–	Traditional endowment or pensions business;

–	Life insurance business in which the policyholder is protected against temporary disability; and

–	Life insurance business in which the policyholder is protected against death.

(ii)	Method of calculation of liabilities

The non-profit fund liabilities are determined on the basis of recognised actuarial methods and consistent with the approach required by regulatory rules. The methods used involve estimating future policy cash flows over the duration of the in-force book of policies, and discounting the cash flows back to the valuation date allowing for probabilities of occurrence.


(iii)	Assumptions

Generally, assumptions used to value non-profit fund liabilities are prudent in nature and therefore contain a margin for adverse deviation. This margin for adverse deviation is based on management’s judgement and reflects management’s views on the inherent level of uncertainty. The key assumptions used in the measurement of non-profit fund liabilities are:

INTEREST RATES

The rates used are derived in accordance with the guidelines set by local regulatory bodies. These limit the rates of interest that can be used by reference to a number of factors including the redemption yields on fixed interest assets at the valuation date.

Margins for risk are allowed for in the assumed interest rates. These are derived from the limits in the guidelines set by local regulatory bodies, including reductions made to the available yields to allow for default risk based upon the credit rating of the securities allocated to the insurance liability.

MORTALITY AND MORBIDITY

The mortality and morbidity assumptions, including allowances for improvements in longevity for annuitants, are set with regard to the Group’s actual experience where this provides a reliable basis, and relevant industry data otherwise, and include a margin for adverse deviation. For German business appropriate industry tables have been considered.

F-58

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

36 LIABILITIES ARISING FROM INSURANCE CONTRACTS AND PARTICIPATING INVESTMENT CONTRACTS continued

LAPSE RATES (PERSISTENCY)

Lapse rates are allowed for on some non-profit fund contracts. The process for setting these rates is as described for with-profit liabilities, however a prudent scenario is assumed by the inclusion of a margin for adverse deviation within the non-profit fund liabilities.

MAINTENANCE EXPENSES

Allowance is made for future policy costs explicitly. Expenses are determined by reference to an internal analysis of current and expected future costs plus a margin for adverse deviation. Explicit allowance is made for future expense inflation. For German business appropriate cost assumptions have been set in accordance with the rules of the local regulatory body.

KEY CHANGES IN ASSUMPTIONS

A detailed review of the Group’s assumptions in 2009 resulted in the following key impacts on profit before tax:


–	Change in persistency assumptions (£79 million decrease)

–	Change in the assumption in respect of future mortality rates (£44 million increase)

These amounts include the impacts of movements in liabilities and value of the in-force business in respect of insurance contracts and participating investment contracts.

(2) NON-LIFE INSURANCE

Gross non-life insurance contract liabilities are analysed by line of business as follows:


	2009 £m		2008 £m

Credit protection		533		293
Home		754		359
Health		3		3
		1,290		655

For non-life insurance contracts, the methodology and assumptions used in relation to determining the bases of the earned premium and claims provisioning levels are derived for each individual underwritten product. Assumptions are intended to be neutral estimates of the most likely or expected outcome. There has been no significant change in the assumptions and methodologies used for setting reserves.

The reserving methodology and associated assumptions are set out below:

The unearned premium reserve is determined on a basis that reflects the length of time for which contracts have been in force and the projected incidence of risk over the term of each contract.

Claims outstanding comprise those claims that have been notified and those that have been incurred but not reported. Claims incurred but not reported are determined based on the historical emergence of claims and their average cost. The notified claims element represents the best estimate of the cost of claims reported using projections and estimates based on historical experience.

The movements in non-life insurance contract liabilities and reinsurance assets over the year have been as follows:


	Gross £m			Reinsurance £m			Net £m
Provisions for unearned premiums
At 1 January 2008		456			—			456
Increase in the year		651			(23	)		628
Release in the year		(635	)		23			(612	)
Change in provision for unearned premiums charged to income statement (note 8)		16			—			16
At 31 December 2008		472			—			472
Adjustment on acquisition		487			(4	)		483
Increase in the year		1,267			(101	)		1,166
Release in the year		(1,438	)		75			(1,363	)
Change in provision for unearned premiums charged to income statement (note 8)		(171	)		(26	)		(197	)
Exchange translation		—			(1	)		(1	)
At 31 December 2009		788			(31	)		757

F-59

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

36 LIABILITIES ARISING FROM INSURANCE CONTRACTS AND PARTICIPATING INVESTMENT CONTRACTS continued

These provisions represent the liability for short-term insurance contracts for which the Group’s obligations are not expired at the year end.


	Gross £m			Reinsurance £m			Net £m
Claims and loss adjustment expenses
Notified claims		188			(10	)		178
Incurred but not reported		19			—			19
At 1 January 2008		207			(10	)		197
Cash paid for claims settled in the year		(245	)		7			(238	)
Increase (decrease) in liabilities:
Arising from current year claims		221			—			221
Arising from prior year claims		—			(2	)		(2	)
Change in liabilities charged to income statement (note 10)		(24	)		5			(19	)
At 31 December 2008		183			(5	)		178
Adjustment on acquisition		208			(5	)		203
Cash paid for claims settled in the year		(513	)		14			(499	)
Increase (decrease) in liabilities:
Arising from current year claims		623			(15	)		608
Arising from prior year claims		1			(2	)		(1	)
Change in liabilities charged to income statement (note 10)		111			(3	)		108
At 31 December 2009		502			(13	)		489
Notified claims		289			(9	)		280
Incurred but not reported		213			(4	)		209
At 31 December 2009		502			(13	)		489
Notified claims		160			(5	)		155
Incurred but not reported		23			—			23
At 31 December 2008		183			(5	)		178

NON-LIFE INSURANCE CLAIMS DEVELOPMENT TABLE

The development of insurance liabilities provides a measure of the Group’s ability to estimate the ultimate value of claims. The top half of the table below illustrates how the Group’s estimate of total claims outstanding for each accident year has changed at successive year ends. The bottom half of the table reconciles the cumulative claims to the amount appearing in the balance sheet. The accident year basis is considered the most appropriate for the business written by the Group.

NON-LIFE INSURANCE ALL RISKS – GROSS


	2005 £m			2006 £m			2007 £m			2008 £m			2009 £m			Total £m
Accident year
Estimate of ultimate claims costs:
At end of accident year		211			208			317			205			639			1,580
One year later		207			206			311			199
Two years later		204			204			299
Three years later		202			204
Four years later		201
Current estimate in respect of above claims		201			204			299			199			639			1,542
Current estimate of claims relating to general
insurance business acquired during the year		283			321			391			270						1,265
Current estimate of cumulative claims		484			525			690			469			639			2,807
Cumulative payments to date		(478	)		(517	)		(664	)		(412	)		(270	)		(2,341	)
Liability recognised in the balance sheet		6			8			26			57			369			466
Liability in respect of earlier years ¹																	26
Total liability included in the balance sheet																	492


¹ This balance includes £19 million of claims relating to general insurance business acquired during the year.

The liability of £492 million shown in the above table excludes £10 million of unallocated claims handling expenses.

F-60

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

37 LIFE INSURANCE SENSITIVITY ANALYSIS

The following table demonstrates the effect of changes in key assumptions on profit before tax and equity disclosed in these financial statements assuming that the other assumptions remain unchanged. In practice this is unlikely to occur, and changes in some assumptions may be correlated. These amounts include movements in assets, liabilities and the value of the in-force business in respect of insurance contracts and participating investment contracts. The impact is shown in one direction but can be assumed to be reasonably symmetrical.


	Change in variable	Increase (reduction) in profit before tax £m		Increase (reduction) in equity £m

Non-annuitant mortality ¹	5% reduction	80		58
Annuitant mortality ²	5% reduction	(120	)	(86	)
Lapse rates ³	10% reduction	168		121
Future maintenance and investment expenses ⁴	10% reduction	207		149
Risk-free rate ⁵	0.25% reduction	56		40
Guaranteed annuity option take up ⁶	5% addition	(7	)	(5)
Equity investment volatility ⁷	1% addition	(13	)	(9)
Widening of credit default spreads on corporate bonds ⁸	0.25% addition	(144	)	(104	)
Increase in illiquidity premia ⁹	0.10% addition	78		56

Assumptions have been flexed on the basis used to calculate the value of in-force business and the realistic and statutory reserving bases.


¹	This sensitivity shows the impact of reducing mortality and morbidity rates on non-annuity business to 95 per cent of the expected rate.

²	This sensitivity shows the impact on the annuity and deferred annuity business of reducing mortality rates to 95 per cent of the expected rate.

³	This sensitivity shows the impact of reducing lapse and surrender rates to 90 per cent of the expected rate.

⁴	This sensitivity shows the impact of reducing maintenance expenses and investment expenses to 90 per cent of the expected rate.

⁵	This sensitivity shows the impact on the value of in-force business, financial options and guarantee costs, statutory reserves and asset values of reducing the risk-free rate by 25 basis points.

⁶	This sensitivity shows the impact of a flat 5 per cent addition to the expected rate.

⁷	This sensitivity shows the impact of a flat 1 per cent addition to the expected rate.

⁸	This sensitivity shows the impact of a 25 basis point increase in credit default spreads on corporate bonds and the corresponding reduction in market values. Government bond yields, the risk-free rate and illiquidity premia are all assumed to be unchanged.

⁹	This sensitivity shows the impact of a 10 basis point increase in the allowance for illiquidity premia. It assumes the overall corporate bond spreads are unchanged and hence market values are unchanged. Government bond yields and the non-annuity risk-free rate are both assumed to be unchanged. The increased illiquidity premium increases the annuity risk-free rate.

38 LIABILITIES ARISING FROM NON-PARTICIPATING INVESTMENT CONTRACTS

The movement in liabilities arising from non-participating investment contracts may be analysed as follows:


	Gross		Reinsurance	Net
	£m		£m	£m

At 1 January 2008	18,197		—	18,197
New business	660		—	660
Changes in existing business	(4,614	)	—	(4,614	)

At 31 December 2008	14,243		—	14,243
Adjustment on acquisition	28,181		—	28,181
New business	3,498		—	3,498
Changes in existing business	430		—	430
Exchange translation	(4	)	—	(4	)

At 31 December 2009	46,348		—	46,348

39 UNALLOCATED SURPLUS WITHIN INSURANCE BUSINESSES

The movement in the unallocated surplus within long-term insurance business over the year can be analysed as follows:


	2009		2008
	£m		£m

At 1 January	270		554
Adjustment on acquisition	526		—
Change in unallocated surplus recognised in the income statement (note 10)	318		(284	)
Exchange and other adjustments	(32	)	—

At 31 December	1,082		270

F-61

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

40 OTHER LIABILITIES


	2009	2008
	£m	£m

Settlement balances	2,070	891
Unitholders’ interest in Open Ended Investment Companies	12,415	4,336
Other creditors and accruals	14,835	6,229

Other liabilities	29,320	11,456

41 RETIREMENT BENEFIT OBLIGATIONS


	2009	2008	2007
	£m	£m	£m

Charge to the income statement
Defined benefit pension schemes	529	157	158
Other post-retirement benefit schemes	7	7	17

Total defined benefit schemes	536	164	175
Defined contribution pension schemes	208	71	63

	744	235	238


	2009	2008
	£m	£m

Amounts recognised in the balance sheet
Defined benefit pension schemes	619	1,657
Other post-retirement benefit schemes	161	114

	780	1,771

PENSION SCHEMES

DEFINED BENEFIT SCHEMES

The Group has established a number of defined benefit pension schemes in the UK and overseas, the three most significant being the defined benefit sections of the Lloyds TSB Group Pension Schemes No’s 1 and 2 and the HBOS Final Salary Pension Scheme (HFSPS). These schemes provide retirement benefits calculated as a percentage of final salary depending upon the length of service; the minimum retirement age under the rules of the schemes at 31 December 2009 was 50.

The latest full valuations of the two Lloyds TSB schemes were carried out as at 30 June 2008; the latest full valuation of the HFSPS was carried out as at 31 December 2007. The provisional results have been updated to 31 December 2009 by qualified independent actuaries. The last full valuations of other Group schemes were carried out on a number of different dates; these have been updated to 31 December 2009 by qualified independent actuaries or, in the case of the Scottish Widows Retirement Benefits Scheme, by a qualified actuary employed by Scottish Widows.

F-62

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

41 RETIREMENT BENEFIT OBLIGATIONS continued

The Group’s obligations in respect of its defined benefit schemes are funded. During 2009, the Group’s contributions to its defined benefit schemes of £1,859 million included one-off contributions to the Lloyds TSB Group Pension Scheme No 1 and Lloyds TSB Group Pension Scheme No 2 of approximately £1 billion in aggregate. These contributions took the form of interests in limited liability partnerships for each of the two schemes which contain assets of approximately £5 billion in aggregate entitling the schemes to annual payments of approximately £215 million in aggregate until 31 December 2014. Thereafter, assuming that all distributions have been made, the value of the partnership interests will equate to a nominal amount. The limited liability partnerships are fully consolidated in the Group’s balance sheet (see note 22).

The Group currently expects to pay contributions of at least £500 million to its defined benefit schemes in 2010.


	2009		2008
	£m		£m

Amount included in the balance sheet
Present value of funded obligations	27,073		15,617
Fair value of scheme assets	(23,518	)	(13,693	)

	3,555		1,924
Unrecognised actuarial losses	(2,936	)	(267	)

Liability in the balance sheet	619		1,657


	2009		2008
	£m		£m

Movements in the defined benefit obligation
At 1 January	15,617		16,795
Adjustment on acquisition	7,046		—
Current service cost	395		258
Employee contributions	2		—
Interest cost	1,383		957
Actuarial losses (gains)	3,568		(1,928	)
Benefits paid	(932	)	(597	)
Past service cost	67		21
Curtailments	—		6
Settlements	(8	)	—
Exchange and other adjustments	(65	)	105

At 31 December	27,073		15,617


	2009		2008
	£m		£m

Changes in the fair value of scheme assets
At 1 January	13,693		16,112
Adjustment on acquisition	6,743		—
Expected return	1,320		1,085
Employer contributions	1,859		541
Employee contributions	2		—
Actuarial gains (losses)	886		(3,520	)
Benefits paid	(932	)	(597	)
Settlements	(12	)	—
Exchange and other adjustments	(41	)	72

At 31 December	23,518		13,693

Actual return on scheme assets	2,206		(2,435	)

F-63

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

41 RETIREMENT BENEFIT OBLIGATIONS continued

ASSUMPTIONS

The principal actuarial and financial assumptions used in valuations of the defined benefit pension schemes were as follows:


	2009 %		2008 %

Discount rate		5.70		6.30
Rate of inflation		3.40		3.00
Rate of salary increases		3.75		3.75
Rate of increase for pensions in payment		3.20		2.80

		Years		Years

Life expectancy for member aged 60, on the valuation date:
Men		27.1		26.4
Women		28.2		27.2
Life expectancy for member aged 60, 15 years after the valuation date:
Men		28.7		27.3
Women		29.8		28.1

The mortality assumptions used in the scheme valuations are based on standard tables published by the Institute and Faculty of Actuaries which were adjusted in line with the actual experience of the relevant schemes. The table shows that a member retiring at age 60 as at 31 December 2009 is assumed to live for, on average, 27.1 years for a male and 28.2 years for a female. In practice there will be much variation between individual members but these assumptions are expected to be appropriate across all members. It is assumed that younger members will live longer in retirement than those retiring now. This reflects the expectation that mortality rates will continue to fall over time as medical science and standards of living improve. To illustrate the degree of improvement assumed the table also shows the life expectancy for members aged 45 now, when they retire in 15 years time at age 60.

An analysis of the impact of a reasonable change in these assumptions is provided in note 3.

The expected return on scheme assets has been calculated using the following assumptions:


	2009 %		2008 %

Equities		8.4		8.2
Fixed interest gilts		3.7		4.5
Index linked gilts		4.0		4.4
Non-Government bonds		6.7		6.0
Property		6.4		6.7
Money market instruments and cash		3.8		4.8

The expected return on scheme assets in 2010 will be calculated using the following assumptions:


	2010 %

Equities and alternative assets		8.3
Fixed interest gilts		4.5
Index linked gilts		4.1
Non-Government bonds		6.0
Property		7.5
Money market instruments and cash		4.3

F-64

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

41 RETIREMENT BENEFIT OBLIGATIONS continued

Composition of scheme assets:


	2009 £m	2008 £m

Equities	10,934	7,040
Fixed interest gilts	2,038	1,452
Index linked gilts	2,917	1,326
Non-Government bonds	2,148	1,721
Property	1,577	1,485
Money market instruments, cash and other assets and liabilities	3,904	669

At 31 December	23,518	13,693

The assets of all the funded plans are held independently of the Group’s assets in separate trustee administered funds.

The expected return on plan assets was determined by considering the expected returns available on the assets underlying the current investment policy. Expected yields on fixed interest investments are based on gross redemption yields at the balance sheet date at a term and credit rating broadly appropriate for the bonds held. Expected returns on equity and property investments are long-term rates based on the views of the plan’s independent investment consultants. The expected return on equities allows for the different expected returns from the private equity, infrastructure and hedge fund investments held by some of the funded plans. Some of the funded plans also invest in certain money market instruments and the expected return on these investments has been assumed to be the same as cash.

Experience adjustments history:


	2009 £m		2008 £m		2007 £m		2006 £m		2005 £m

Present value of defined benefit obligation	27,073		15,617		16,795		17,378		17,320
Fair value of scheme assets	(23,518	)	(13,693	)	(16,112	)	(15,279	)	(14,026	)

	3,555		1,924		683		2,099		3,294

Experience gains (losses) on scheme liabilities	31		(39	)	(185	)	(50	)	(69	)

Experience gains (losses) gains on scheme assets	886		(3,520	)	139		314		1,538

The expense recognised in the income statement for the year ended 31 December comprises:


	2009 £m		2008 £m		2007 £m

Current service cost	395		258		302
Interest cost	1,383		957		866
Expected return on scheme assets	(1,320	)	(1,085	)	(1,035	)
Curtailments	—		6		—
Settlements	4		—		—
Past service cost	67		21		25

Total defined benefit pension expense	529		157		158

DEFINED CONTRIBUTION SCHEMES

The Group operates a number of defined contribution pension schemes in the UK and overseas, principally the defined contribution sections of the Lloyds TSB Group Pension Schemes No’s 1 and 2.

During the year ended 31 December 2009 the charge to the income statement in respect of defined contribution schemes was £208 million (2008: £71 million; 2007: £63 million), representing the contributions payable by the employer in accordance with each scheme’s rules.

F-65

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

41 RETIREMENT BENEFIT OBLIGATIONS continued

OTHER POST-RETIREMENT BENEFIT SCHEMES

The Group operates a number of schemes which provide post-retirement healthcare benefits and concessionary mortgages to certain employees, retired employees and their dependants. The principal scheme relates to former Lloyds Bank staff and under this scheme the Group has undertaken to meet the cost of post-retirement healthcare for all eligible former employees (and their dependants) who retired prior to 1 January 1996. The Group has entered into an insurance contract to provide these benefits and a provision has been made for the estimated cost of future insurance premiums payable.

For the principal post-retirement healthcare scheme, the latest actuarial valuation of the liability was carried out at 30 June 2008; this valuation has been updated to 31 December 2009 by qualified independent actuaries. The principal assumptions used were as set out above, except that the rate of increase in healthcare premiums has been assumed at 7.33 per cent (2008: 7.50 per cent).

Amount included in the balance sheet:


	2009 £m			2008 £m

Present value of unfunded obligations		170			118
Unrecognised actuarial losses		(9	)		(4	)

Liability in the balance sheet		161			114


Movements in the other post-retirement benefits obligation:

		2009 £m			2008 £m

At 1 January		118			123
Exchange and other adjustments		(7	)		2
Adjustment on acquisition		55			—
Actuarial loss (gain)		5			(8	)
Insurance premiums paid		(8	)		(6	)
Charge for the year		7			7

At 31 December		170			118

42 DEFERRED TAX

The movement in the net deferred tax balance is as follows:


	2009 £m			2008 £m
Asset (liability) at 1 January		833			(948	)
Exchange and other adjustments		107			(4	)
Adjustment on acquisition		1,851			—
Disposals		16			98
Income statement credit (note 15)		2,619			773
Amount credited (charged) to equity:
Available-for-sale financial assets (note 47)		(395	)		566
Net investment hedges (note 47)		(358	)		358
Cash flow hedges (note 47)		119			5
Share based compensation		5			(15	)
		(629	)		914
Asset at 31 December		4,797			833

F-66

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

42 DEFERRED TAX continued

The statutory position reflects the deferred tax assets and liabilities as disclosed in the consolidated balance sheet and takes account of the inability to offset assets and liabilities where there is no legally enforceable right of offset. The tax disclosure of deferred tax assets and liabilities ties to the amounts outlined in the table below which splits the deferred tax assets and liabilities by type.


Statutory position	2009 £m		2008 £m	Tax disclosure	2009 £m		2008 £m

Deferred tax assets	5,006		833	Deferred tax assets	8,579		2,308
Deferred tax liabilities	(209	)	—	Deferred tax liabilities	(3,782	)	(1,475	)

	4,797		833		4,797		833

The deferred tax credit in the income statement comprises the following temporary differences:


	2009 £m		2008 £m		2007 £m

Accelerated capital allowances	1,039		318		32
Pensions and other post-retirement benefits	(199	)	(104	)	(134	)
Long-term assurance business	(188	)	458		175
Allowances for impairment losses	(128	)	2		(42	)
Trading losses	4,000		97		83
Tax on fair value of acquired assets	(2,022	)	—		—
Other temporary differences	117		2		(25	)

	2,619		773		89

Deferred tax assets and liabilities are comprised as follows:


	2009 £m		2008 £m

Deferred tax assets:
Pensions and other post-retirement benefits	424		496
Allowances for impairment losses	474		103
Other provisions	232		51
Derivatives	155		114
Available-for-sale asset revaluation	936		567
Tax losses carried forward	5,925		856
Other temporary differences	433		121

	8,579		2,308


	2009 £m		2008 £m

Deferred tax liabilities:
Accelerated capital allowances	(92	)	(561	)
Long-term assurance business	(1,530	)	(655	)
Tax on fair value of acquired assets	(1,913	)	—
Effective interest rates	(88	)	(2	)
Other temporary differences	(159	)	(257	)

	(3,782	)	(1,475	)

F-67

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

42 DEFERRED TAX continued

DEFERRED TAX ASSETS

Deferred tax assets are recognised for tax losses carried forward to the extent that the realisation of the related tax benefit through future taxable profits is probable. Group companies have recognised deferred tax assets of £5,925 million (2008: £856 million) in relation to tax losses carried forward. After reviews of medium-term profit forecasts, the Group considers that there will be sufficient profits in the future against which these losses will be offset.

Deferred tax assets of £487 million (31 December 2008: £252 million) have not been recognised in respect of capital losses carried forward as there are no predicted future capital profits. Capital losses can be carried forward indefinitely.

Deferred tax assets of £349 million (31 December 2008: nil) have not been recognised in respect of trading losses carried forward, mainly in certain overseas companies as there are limited predicted future trading profits. Trading losses can be carried forward indefinitely.

In addition, deferred tax assets have not been recognised in respect of unrelieved foreign tax carried forward as at 31 December 2009 of £53 million (31 December 2008: £60 million), as there are no predicted future taxable profits against which the unrelieved foreign tax credits can be utilised. These tax credits can be carried forward indefinitely.

DEFERRED TAX LIABILITIES

Future transfers from Scottish Widows plc’s long-term business funds to its Shareholder Fund will be subject to a shareholder tax charge. Under IAS 12, no provision is required to be made to the extent that the timing of such transfers is under Scottish Widows plc’s control. Accordingly, deferred tax liabilities of £90 million (2008: £90 million) have not been recognised.

Scottish Widows plc has a taxable difference of £152 million (2008: £152 million) in respect of its holding of a life insurance subsidiary. No deferred tax liability is required to be recognised in respect of this taxable temporary difference under IAS 12 as Scottish Widows plc does not intend to dispose of this subsidiary company.

43 OTHER PROVISIONS


	Provisions for contingent liabilities and commitments £m		Customer remediation provisions £m		Restructuring provisions £m		Vacant leasehold property £m	Other £m		Total £m

At 1 January 2009	30		34		14		28	124		230
Exchange and other adjustments	(1	)	1		—		—	7		7
Transfers	—		157		—		—	—		157
Adjustment on acquisition	—		503		2		40	207		752
Provisions applied	—		(105	)	(1	)	—	(128	)	(234	)
Charge (release) for the year	43		(130	)	101		40	17		71

At 31 December 2009	72		460		116		108	227		983

F-68

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

43 OTHER PROVISIONS continued

PROVISIONS FOR CONTINGENT LIABILITIES AND COMMITMENTS

Provisions are held in cases where the Group is irrevocably committed to advance additional funds, but where there is doubt as to the customer’s ability to meet its repayment obligations.

CUSTOMER REMEDIATION PROVISIONS

The Group establishes provisions for the estimated cost of making redress payments to customers in respect of past product sales, in those cases where the original sales processes have been found to be deficient. During 2009 management has reviewed the adequacy of the provisions held having regard to current complaint volumes and the level of payments being made and £130 million has been released to the income statement. At 31 December 2009 the remaining provisions held relate to past sales of a number of products, including mortgage endowment policies, sold through the branch networks.

RESTRUCTURING

Provisions are made for staff and other costs related to Group restructuring initiatives at the point at which the Group becomes irrevocably committed to the expenditure.

VACANT LEASEHOLD PROPERTY

Vacant leasehold property provisions are made by reference to a prudent estimate of expected sub-let income, compared to the head rent, and the possibility of disposing of the Group’s interest in the lease, taking into account conditions in the property market. These provisions are reassessed on a biennial basis and will normally run off over the period of under-recovery of the leases concerned, currently averaging five years; where a property is disposed of earlier than anticipated, any remaining balance in the provision relating to that property is released.

OTHER

Other provisions include the provisions which the Group carries in respect of its obligations relating to UIC Insurance Company Limited (UIC), which is in provisional liquidation. The Group has indemnified a third party against losses in the event that UIC does not honour its obligations under a reinsurance contract, which is subject to asbestosis and pollution claims in the US. The ultimate cost of settling the Group’s exposure in respect of the insurance business of UIC and the timing remains uncertain. The provision held represents management’s current best estimate of the cost after having regard to the financial condition of UIC and actuarial estimates of future claims.

F-69

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

44 SUBORDINATED LIABILITIES


	2009 £m	2008 £m

Preference shares	1,983	1,408
Preferred securities	2,917	4,088
Undated subordinated liabilities	4,826	5,638
Enhanced capital notes	9,047	—
Dated subordinated liabilities	15,954	6,122

	34,727	17,256

As part of the Group’s recapitalisation and agreement not to enter GAPS which included a £13.1 billion rights issue (net of costs) (note 45), on 1 December, 10 December and 15 December 2009, the Group issued a total of £8,554 million of enhanced capital notes in exchange for certain existing preference shares, preferred securities and undated subordinated liabilities.

The ECNs contain an equity conversion feature (based on a fixed definition as defined by the Financial Services Authority in May 2009) that requires them to convert into ordinary shares if the consolidated core tier 1 ratio of the Group falls below 5 per cent. The conversion feature meets the definition of an embedded derivative and has been recorded separately as a derivative asset (note 18). The ECNs are guaranteed by either the Company or Lloyds TSB Bank plc. These guarantees are subordinated to the claims of senior creditors, rank equally with the claims of the holders of dated subordinated liabilities and are senior to the claims of holders of undated subordinated liabilities, preferred securities and shareholders of the respective guarantor.

The securities in this note will, in the event of the winding-up of the issuer, be subordinated to the claims of depositors and all other creditors of the issuer, other than creditors whose claims rank equally with, or are junior to, the claims of the holders of the subordinated liabilities. The subordination of specific subordinated liabilities is determined in respect of the issuer and any guarantors of that liability. The claims of holders of preferred shares and securities are generally junior to those of the holders of undated subordinated liabilities, which in turn are junior to the claims of holders of the dated subordinated liabilities. The subordination of the enhanced capital notes ranks equally with that of the dated subordinated liabilities. The Group has not had any defaults of principal, interest or other breaches with respect to its subordinated liabilities during the year (2008: none). No repayment or purchase by the issuer of the subordinated liabilities may be made prior to their stated maturity without the consent of the Financial Services Authority.


	Note	2009 £m	2008 £m

Preference shares
6% Non-cumulative Redeemable Preference Shares	a	—	—
6.369% Fixed/Floating Rate Non-Cumulative Callable Preference Shares callable 2015
(£600 million)	c, e	—	584
6.267% Fixed/Floating Rate Non-Cumulative Callable Preference Shares callable 2016
(US$1,000 million)	c, e	327	824
9¼% Non-cumulative Irredeemable £1 preference shares (£300 million)	b, c, e	197	—
9¾% Non-cumulative Irredeemable £1 preference shares (£100 million)	b, c, e	72	—
6.413% Fixed-to-Floating Rate US$1 series A preference shares (US$750 million)	b, c, e	115	—
5.92% Fixed-to-Floating Rate US$1 series B preference shares (US$750 million)	b, c, e	90	—
6.657% Fixed-to-Floating rate US$1 preference shares (US$750 million)	b, c, e	28	—
7.875% Non-cumulative callable preference shares (US$1,250 million)	c, d, e	680	—
7.875% Non-cumulative callable preference shares (€500 million)	c, d, e	417	—
6.475% fixed rate non-cumulative callable preference shares (£186 million)	b, c, e	45	—
6.0884% fixed-to-floating rate non-cumulative callable preference shares (£745 million)	b, c, e	10	—
6.3673% fixed-to-floating non-cumulative callable preference shares (£335 million)	b, c, e	2	—

		1,983	1,408

As described in note 51, in January 2009 the Company issued £1,000 million 12 per cent fixed-to-floating non-cumulative callable preference shares to HM Treasury as part of the recapitalisation of the Lloyds Banking Group and a further £3,000 million 12 per cent fixed-to-floating non-cumulative callable preference shares in respect of the recapitalisation of the HBOS Group. These shares were redeemed out of the proceeds from the placing and compensatory open offer in June 2009 (see note 45) and are excluded from the table above.


a	Since 2004, the Company has had in issue 400 6 per cent non-cumulative preference shares of 25p each. The shares, which are redeemable at the option of the Company at any time, carry the rights to a fixed rate non-cumulative preferential dividend of 6 per cent per annum; no dividend shall be payable in the event that the directors determine that prudent capital ratios would not be maintained if the dividend were paid. Upon winding up, the shares rank equally with any other preference shares issued by the Company. The holder of the 400 25p 6 per cent preference shares has waived its right to payment for the period from 1 March 2010 to 1 March 2012.

b	On 16 January 2009 so as to improve the position of HBOS preference shareholders and simplify the Group’s capital structure following the acquisition of HBOS the Group replaced certain HBOS preference share issuances in exchange for preference shares with similar terms and conditions issued by the Company.

c	As part of the Group’s recapitalisation and exit from GAPS, following an exchange offer, on 1 December, 10 December and 15 December 2009, certain holders of certain series elected to exchange some or all of the preference shares they held for enhanced capital notes issued by LBG Capital No. 1 plc and LBG Capital No. 2 plc or equity issued by Lloyds Banking Group plc.

d	On 19 January 2009 the Company issued US$1,250,000,000 7.875 per cent non-cumulative callable preference shares and €500,000,000 7.875 per cent non-cumulative callable preference shares by exercising its option to convert preferred securities into preference shares. Both issues are callable on 29 November 2013.

e	As described in note 9, in November 2009, as part of the state aid restructuring plan, the Group agreed to suspend the payment of coupons on these instruments for the two year period from 31 January 2010 to 31 January 2012 .

F-70

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

44 SUBORDINATED LIABILITIES continued


	Note	2009 £m	2008 £m

Preferred securities
6.90% Perpetual Capital Securities (US$1,000 million)	c	645	756
7.375% Euro Step-up Non-Voting Non-Cumulative Preferred Securities callable 2012 (€430 million)	c, d	306	459
7.875% Perpetual Capital Securities (€500 million)	a	—	472
7.875% Perpetual Capital Securities (US$1,250 million)	a	—	921
6.35% Step-up Perpetual Capital Securities callable 2013 (€500 million)	c	456	512
7.834% Sterling Step-up Non-Voting Non-Cumulative Preferred Securities callable 2015 (£250 million)	c, d	43	248
4.385% Step-up Perpetual Capital Securities callable 2017 (€750 million)	c, d	82	720
6.071% Non-cumulative Perpetual Preferred Securities of US$1,000 each (US$750 million)	b, c	240	—
6.85% Non-cumulative Perpetual Preferred Securities of US$1,000 each (US$1,000 million)	b, c	—	—
6.461% Guaranteed Non-voting Non-cumulative Perpetual Preferred Securities Series A of £1,000 each (£600 million)	b, c	398	—
8.117% Non-cumulative Perpetual Preferred Securities Series 1 of £1,000 each (Class A) (£250 million)	b, c	234	—
7.754% Non-cumulative Perpetual Preferred Securities Series 2 of £1,000 each (Class B) (£150 million)	b, c	93	—
7.881% Guaranteed Non-voting Non-cumulative Preferred Securities (£245 million)	b, c	151	—
7.627% Fixed to Floating Rate Guaranteed Non-voting Non-cumulative Preferred Securities (€415 million)	b, c	259	—
4.939% Non-voting Non-cumulative Perpetual Preferred Securities (€750 million)	b, c, d	10	—

		2,917	4,088


a	On 16 January 2009 Lloyds TSB Bank plc exercised the option to convert these securities into preference shares.

b	Arising on acquisition of HBOS.

c	As part of the Group’s recapitalisation and exit from GAPS, following an exchange offer, on 1 December 2009, 10 December and 15 December 2009 certain holders of certain series elected to exchange some or all of the notes they held for enhanced capital notes issued by LBG Capital No. 1 plc and LBG Capital No. 2 plc.

d	As described in note 9, in November 2009, as part of the state aid restructuring plan, the Group agreed to suspend the payment of coupons on these instruments for the two year period from 31 January 2010 to 31 January 2012.

F-71

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

44 SUBORDINATED LIABILITIES continued


	Note	2009 £m	2008 £m

Undated subordinated liabilities
Primary Capital Undated Floating Rate Notes:	b
Series 1 (US$750 million)	e	408	515
Series 2 (US$500 million)	e	262	343
Series 3 (US$600 million)	e	326	412
11¾% Perpetual Subordinated Bonds (£100 million)	e	102	100
5 ⁵ / ₈ % Undated Subordinated Step-up Notes callable 2009 (€1,250 million)	b, e	—	1,212
Undated Step-up Floating Rate Notes callable 2009 (€150 million)	b	—	144
6 ⁵ / ₈ % Undated Subordinated Step-up Notes callable 2010 (£410 million)	b, c, e	5	409
5.125% Step-up Perpetual Subordinated Notes callable 2015 (£560 million) (Scottish Widows plc)	a	547	536
5.57% Undated Subordinated Step-up Coupon Notes callable 2015 (¥20,000 million)	e	—	189
5.125% Undated Subordinated Step-up Notes callable 2016 (£500 million)	b, c, e	—	455
6½% Undated Subordinated Step-up Notes callable 2019 (£270 million)	b, c, e	—	241
8% Undated Subordinated Step-up Notes callable 2023 (£200 million)	b, c, e	—	186
6½% Undated Subordinated Step-up Notes callable 2029 (£450 million)	c, e	—	444
6% Undated Subordinated Step-up Guaranteed Bonds callable 2032 (£500 million)	c, e	10	452
13% Step-up Perpetual Capital Securities callable 2019 (£784 million)	e	9	—
13% Euro Step-up Perpetual Capital Securities callable 2019 (€532 million)	e	47	—
12% Fixed to Floating Rate Perpetual Tier 1 Capital Securities callable 2024 (US$2,000 million)		1,235	—
13% Sterling Step-up Perpetual Capital Securities callable 2029 (£700 million)	e	666	—
5.625% Cumulative Callable Fixed to Floating Rate Undated Subordinated Notes (£500 million)	b, c, d, e	1	—
4.875% Undated Subordinated Fixed to Floating Rate Instruments (€750 million)	b, c, d, e	60	—
Floating Rate Undated Subordinated Notes (€500 million)	b, c, d, e	41	—
5.375% Undated Fixed to Floating Rate Subordinated Notes (US$1,000 million)	d, e	3	—
5.125% Undated Subordinated Fixed to Floating Notes (€750 million)	b, c, d, e	39	—
5.75% Undated Subordinated Step-up Notes (£600 million)	b, c, d, e	2	—
6.05% Fixed to Floating Rate Undated Subordinated Notes (€500 million)	b, c, d, e	50	—
Perpetual Regulatory Tier One Securities (£300 million)	d	204	—
7.5% Undated Subordinated Step-up Notes (£300 million)	b, c, d, e	4	—
3.50% Undated Subordinated Yen Step-up Notes (JPY 42.5 billion)	d	267	—
8.625% Perpetual Subordinated Notes (£200 million)	b, c, d, e	18	—
7.375% Undated Subordinated Guaranteed Bonds (£200 million) (Clerical Medical Finance plc)	d, f	35	—
Floating Rate Undated Subordinated Step-up Notes (€300 million)	b, c, d, e	58	—
Floating Rate Primary Capital Notes (US$250 million)	d, e	146	—
10.25% Subordinated Undated Instruments (£100 million)	b, c, d, e	1	—
12% Perpetual Subordinated Bonds (£100 million)	d, e	22	—
8.75% Perpetual Subordinated Bonds (£100 million)	d, e	6	—
13.625% Perpetual Subordinated Bonds (£75 million)	d, e	33	—
9.375% Perpetual Subordinated Bonds (£50 million)	d, e	26	—
5.75% Undated Subordinated Step-up Notes (£500 million)	b, c, d, e	3	—
4.25% Perpetual Fixed/Floating Rate Reset Subordinated Guaranteed Notes (€750 million)
(Clerical Medical Finance plc)	d, f	190	—

		4,826	5,638


a	Scottish Widows plc may elect to defer interest on these securities although in that event Scottish Widows plc cannot declare or pay a dividend on any ordinary share capital until any deferred payments have been made.

b	Following an exchange offer, on 7 January 2009 certain holders elected to exchange all or some of the notes they held for innovative Tier 1 securities issued by Lloyds TSB Bank plc.

c	Following an exchange offer, on 25 March 2009 certain holders elected to exchange all or some of the notes they held for senior unsecured notes issued by Lloyds TSB Bank plc.

d	Arising on acquisition of HBOS.

e	As part of the Group’s recapitalisation and exit from GAPS, following an exchange offer, on 1 December, 10 December and 15 December certain holders of certain series elected to exchange some or all of the notes they held for enhanced capital notes issued by LBG Capital No. 1 plc and LBG Capital No. 2 plc.

f	Following an exchange offer, on 30 June 2009, certain holders elected to exchange all or some of the notes for senior unsecured notes by Lloyds TSB Bank plc.

F-72

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

44 SUBORDINATED LIABILITIES continued


	Note	2009 £m	2008 £m

Enhanced capital notes
7.5884% Enhanced Capital Notes due 2020 (Series 1) (£732 million)		690	—
7.8673% Enhanced Capital Notes due 2019 (Series 2) (£331 million)		316	—
7.975% Enhanced Capital Notes due 2024 (Series 3) (£102 million)		96	—
7.869% Enhanced Capital Notes due 2020 (Series 8) (£596 million)		572	—
8.875% Enhanced Capital Notes due 2020 (Series 12) (€125 million)		117	—
9.334% Enhanced Capital Notes due 2020 (Series 14) (£208 million)		218	—
6.439% Enhanced Capital Notes due 2020 (Series 15) (€710 million)		557	—
6.385% Enhanced Capital Notes due 2020 (Series 18) (€662 million)		517	—
11.04% Enhanced Capital Notes due 2020 (Series 19) (£736 million)		871	—
15% Enhanced Capital Notes due 2019 (Series 21) (£775 million)		1,125	—
15% Enhanced Capital Notes due 2019 (Series 22) (€487 million)		646	—
15% Enhanced Capital Notes due 2029 (Series 23) (£68 million)		108	—
9.125% Enhanced Capital Notes due 2020 (Series 27) (£148 million)		153	—
11.125% Enhanced Capital Notes due 2020 (Series 31) (£39 million)		45	—
7.375% Enhanced Capital Notes due 2020 (Series 32) (€95 million)		80	—
Floating Rate Enhanced Capital Notes due 2020 (Series 33) (€53 million)	a	42	—
12.75% Enhanced Capital Notes due 2020 (Series 34) (£57 million)		74	—
8.07% Enhanced Capital Notes due 2020 (Series 35) (¥20,000 million)		156	—
7.625% Enhanced Capital Notes due 2020 (Series 36) (€226 million)		193	—
6.75% Enhanced Capital Notes due 2020 (Series 37) (¥17,000 million)		121	—
7.625% Enhanced Capital Notes due 2019 (Series 39) (£151 million)		142	—
9% Enhanced Capital Notes due 2019 (Series 40) (£97 million)		100	—
8.125% Enhanced Capital Notes due 2019 (Series 41) (£4 million)		4	—
14.5% Enhanced Capital Notes due 2022 (Series 42) (£79 million)		115	—
9.875% Enhanced Capital Notes due 2023 (Series 44) (£57 million)		62	—
11.25% Enhanced Capital Notes due 2023 (Series 45) (£95 million)		115	—
10.5% Enhanced Capital Notes due 2023 (Series 46) (£69 million)		78	—
11.875% Enhanced Capital Notes due 2024 (Series 47) (£35 million)		45	—
9% Enhanced Capital Notes due 2029 (Series 49) (£107 million)		108	—
8.5% Enhanced Capital Notes due 2032 (Series 50) (£104 million)		100	—
16.125% Enhanced Capital Notes due 2024 (Series 52) (£61 million)		100	—
7.875% Enhanced Capital Notes due 2020 (US$986 million)		599	—
8% Fixed to Floating Rate Undated Enhanced Capital Notes callable 2022 (US$1,259 million)	b	639	—
8.5% Undated Enhanced Capital Notes callable 2021 (Series 2) (US$277 million)	b	143	—

		9,047	—


a	Interest is payable quarterly in arrears at a rate of 3 month EURIBOR +3.1 per cent per annum.

b	Issued in upper tier 2 format.

Enhanced capital notes are a new liability class developed for the purposes of the liability management exercise conducted by Lloyds Banking Group in the final quarter of 2009. With the exception of the two series identified in note b, the ECNs were issued in lower tier 2 format and are convertible into ordinary shares on the breach of a defined trigger. The trigger on the ECNs offered in the exchange will be if the published core tier 1 ratio of the Group falls below 5 per cent (as defined by the Financial Services Authority in May 2009).

F-73

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

44 SUBORDINATED LIABILITIES continued


	Note	2009 £m	2008 £m

Dated subordinated liabilities
9 ¹ / ₂ % Subordinated Bonds 2009 (£100 million)		—	100
6 ¹ / ₄ % Subordinated Notes 2010 (€400 million)		375	404
12% Guaranteed Subordinated Bonds 2011 (£100 million)	a	108	100
7.70% Notes 2010 (US$500 million)	b	327	—
9 ¹ / ₈ % Subordinated Bonds 2011 (£150 million)		152	149
4 ³ / ₄ % Subordinated Notes 2011 (€850 million)		771	836
6.50% Notes 2011 (US$150 million)	b	102	—
5.50% Subordinated Fixed Rate Notes 2012 (€750 million)	b	654	—
6.25% Instruments 2012 (€12.8 million)	b	10	—
6.125% Notes 2013 (€325 million)	b	296	—
4.25% Subordinated Guaranteed Notes 2013 (US$1,000 million)	b	594	—
5 ⁷ / ₈ % Subordinated Guaranteed Bonds 2014 (€750 million)		768	821
5 ⁷ / ₈ % Subordinated Notes 2014 (£150 million)		154	149
11% Subordinated Bonds 2014 (£250 million)	b	304	—
6 ⁵ / ₈ % Subordinated Notes 2015 (£350 million)		335	320
4.875% Subordinated Notes 2015 (€1,000 million)	b	875	—
Subordinated Step-up Floating Rate Notes 2016 callable 2011 (£300 million)		296	300
Subordinated Step-up Floating Rate Notes 2016 callable 2011 (€500 million)		445	480
Callable Floating Rate Subordinated Notes 2016 (€500 million)	b	374	—
Subordinated Notes 2016 (€500 million)	b	389	—
Notes 2016 (US$750 million)	b	367	—
Subordinated Lower Tier II Notes 2017 (€1,000 million)	b	704	—
Subordinated Callable Notes 2017 (US$1,000 million)	b	464	—
Subordinated Callable Floating Rate Instruments 2017 (Aus$400 million)	b	209	—
6.75% Subordinated Callable Fixed/Floating Rate Instruments 2017 (Aus$200 million)	b	101	—
5.109% Callable Fixed to Floating Rate Notes 2017 (Can$500 million)	b	263	—
Lower Tier II Subordinated Notes 2017 (£500 million)	b	474	—
5.625% Subordinated Fixed to Floating Rate Notes due 2018 callable 2013 (€1,000 million)		979	992
10.5% Subordinated Bonds 2018 (£150 million)	b	165	—
6.75% Subordinated Fixed Rate Notes 2018 (US$2,000 million)	b	917	—
6.375% Instruments 2019 (£250 million)	b	227	—
4.375% Callable Fixed to Floating Rate Subordinated Notes 2019 (€750 million)	b	602	—
6.9625% Subordinated Fixed to Floating Rate Notes due 2020 callable 2015 (£750 million)		755	754
Subordinated Floating Rate Notes 2020 (€100 million)		89	96
9.375% Subordinated Bonds 2021 (£500 million)	b	268	—
5.374% Subordinated Fixed Rate Notes 2021 (€160 million)	b	132	—
6.45% Fixed/Floating Subordinated Guaranteed Bonds 2023 (€400 million)
(Clerical Medical Finance plc)	b, c	171	—
6.5% Subordinated Fixed Rate Notes 2023 (€175 million)	b	128	—
5.75% Subordinated Step-up Notes 2025 callable 2020 (£350 million)		322	309
9 5/8% Subordinated Bonds 2023 (£300 million)		333	312
4.50% Fixed Rate Step-up Subordinated Notes due 2030 (€750 million)	b	478	—
6.00% Subordinated Notes 2033 (US$750 million)	b	477	—

		15,954	6,122


a	Issued by a group undertaking under the Company’s subordinated guarantee.

b	Arising on acquisition of HBOS.

c	Following an exchange offer on 30 June 2009, certain holders elected to exchange all or some of the notes for senior unsecured notes issued by Lloyds TSB Bank plc.

F-74

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

45 SHARE CAPITAL

(1) AUTHORISED SHARE CAPITAL

As permitted by the Companies Act 2006, the Company removed references to authorised share capital from its articles of association at the annual general meeting on 5 June 2009. This change took effect from 1 October 2009.

(2) ISSUED AND FULLY PAID SHARE CAPITAL


	2009 Number of shares		2008 Number of shares		2007 Number of shares		2009 £m			2008 £m		2007 £m

Ordinary shares of 10p (formerly 25p) each
At 1 January		5,972,855,669		5,647,703,945		5,637,964,437		1,493			1,412		1,409
Private placement		—		284,400,000		—		—			71		—
Placing and open offer		2,596,653,203		—		—		649			—		—
Issued on acquisition of HBOS		7,775,694,993		—		—		1,944			—		—
Capitalisation issue		407,943,501		—		—		102			—		—
Placing and compensatory open offer		10,408,535,000		—		—		2,602			—		—
Subdivision		—		—		—		(4,074	)		—		—
Rights issue		36,505,088,579		—		—		3,651			—		—
Issued to the Lloyds TSB Foundations		107,740,591		—		—		11			—		—
Issued under employee share schemes		—		40,751,724		9,739,508		—			10		3

At 31 December		63,774,511,536		5,972,855,669		5,647,703,945		6,378			1,493		1,412

Limited voting ordinary shares of 10p (formerly 25p) each
At 1 January		78,947,368		78,947,368		78,947,368		20			20		20
Capitalisation issue		1,973,683		—		—		—			—		—
Subdivision		—		—		—		(12	)		—		—

At 31 December		80,921,051		78,947,368		78,947,368		8			20		20

Deferred shares of 15p each
At 1 January		—		—		—		—			—		—
Subdivision of ordinary shares		27,161,682,366		—		—		4,074			—		—
Subdivision of limited voting ordinary shares		80,921,051		—		—		12			—		—

At 31 December		27,242,603,417		—		—		4,086			—		—

Total issued share capital								10,472			1,513		1,432

Details of preference shares that are classified as debt for accounting purposes are given in note 44.

SHARE SUBDIVISION

At the general meeting held on 26 November 2009 the Company’s shareholders approved the subdivision of the ordinary shares with each ordinary share of 25 pence subdivided into one ordinary share of 10 pence and a deferred share of 15 pence. In addition, the shareholders approved the subdivision of the limited voting ordinary shares with each share of 25 pence subdivided into one limited voting ordinary share of 10 pence and a deferred share of 15 pence.

F-75

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

45 SHARE CAPITAL continued

SHARE ISSUANCES DURING 2009

ORDINARY SHARES

On 13 January 2009 the Company issued 2,597 million shares under a placing and open offer, subscribed for by HM Treasury as part of the recapitalisation of the banking industry by the UK Government, which raised £4,430 million (net of £70 million issue costs). This issue resulted in an increase of £649 million in share capital and an increase of £3,781 million in the merger reserve.

On 16 January 2009 the Company issued 7,776 million shares in consideration for the acquisition of HBOS, whereby 12,852 million HBOS shares were exchanged for Lloyds Banking Group shares at a ratio of 0.605 shares per HBOS share. This issue resulted in an increase of £1,944 million in share capital and an increase of £5,707 million in the merger reserve.

In lieu of a dividend the Group announced a capitalisation issue of 1 for 40 ordinary shares held and on 11 May 2009 408 million ordinary shares of 25 pence were issued. This resulted in an increase in share capital of £102 million with a corresponding decrease in the share premium account.

In June 2009 the Company issued 10,409 million shares under a placing and compensatory open offer which raised £3,905 million (net of £95 million issue costs), the proceeds of which were used to redeem the £4,000 million of 12 per cent fixed-to-floating rate non-cumulative callable preference shares of 25 pence each issued to HM Treasury earlier in the year as described in note 44. This issue resulted in an increase of £2,602 million in share capital and an increase of £1,303 million in the share premium account.

In December 2009, the Company issued 36,505 million shares in a rights issue at an issue price of 37 pence per new share as part of its recapitalisation and exit from the Government Asset Protection Scheme. This raised £13,112 million (net of £395 million of issue costs). This issue resulted in an increase of £3,651 million in share capital and an increase of £9,461 million in the share premium account.

DEFERRED SHARES

The share subdivision noted above created 27,243 million deferred shares of 15 pence each. These shares carry no voting or dividend rights and on a return of capital on a winding up of the Company will have the right to receive the paid up amount only after ordinary shareholders have received in aggregate any amounts paid up plus £10 million per ordinary share.

(3) SHARE CAPITAL AND CONTROL

There are no restrictions on the transfer of shares in the Company other than as set out in the articles of association and:


–	certain restrictions which may from time to time be imposed by law and regulations (for example, insider trading laws);

–	pursuant to the UK Listing Authority’s listing rules where directors and certain employees of the Company require the approval of the Company to deal in the Company’s shares; and

–	pursuant to the rules of some of the Company’s employee share plans where certain restrictions may apply while the shares are subject to the plans.

Where, under an employee share plan operated by the Company, participants are the beneficial owners of shares but not the registered owners, the voting rights are normally exercised by the registered owner at the direction of the participant. Outstanding awards and options would normally vest and become exercisable on a change of control, subject to the satisfaction of any performance conditions at that time.

In addition, the Company is not aware of any agreements between shareholders that may result in restrictions on the transfer of securities and/or voting rights.

Information regarding significant direct or indirect holdings of shares in the Company can be found on page 129.

The directors have authority to allot and issue ordinary and preference shares and to make market purchases of preference shares as granted at the general meeting on 26 November 2009. The authority to issue shares will expire at the annual general meeting, and the authority to make market purchases of preference shares expires on 25 November 2010. The directors also have authority to make market purchases of ordinary shares as granted at the general meeting on 5 June 2009. This authority expires either a year after the date of approval or at the annual general meeting. Shareholders will be asked, at the annual general meeting, to give similar authorities.

Subject to any rights or restrictions attached to any shares, on a show of hands at a general meeting of the Company every holder of shares present in person or by proxy and entitled to vote has one vote and on a poll every member present and entitled to vote has one vote for every share held.

Further details regarding voting at the annual general meeting can be found in the notes to the notice of the annual general meeting.

ORDINARY SHARES

The holders of ordinary shares (excluding the limited voting ordinary shares), who held 98.7 per cent of the total ordinary share capital as at 31 December 2009, are entitled to receive the Company’s report and accounts, attend, speak and vote at general meetings and appoint proxies to exercise voting rights. Holders of ordinary shares (excluding the limited voting ordinary shares) may also receive a dividend (subject to the provisions of the Company’s articles of association and the restrictions noted below) and on a winding up may share in the assets of the Company.

F-76

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

45 SHARE CAPITAL continued

Under the terms of the state aid remedies referred to in note 9, the Company is prevented from making discretionary coupon and dividend payments on certain capital instruments from 31 January 2010 until 31 January 2012. Consequently, the terms of these instruments prevent the Company from making dividend payments on ordinary shares.

LIMITED VOTING ORDINARY SHARES

The limited voting ordinary shares are held by the Lloyds TSB Foundations (the Foundations). The holders of the limited voting ordinary shares, who held 1.3 per cent of the total ordinary shares as at 31 December 2009, are entitled to receive copies of every circular or other document sent out by the Company to the holders of other ordinary shares. These shares carry no rights to dividends but rank pari passu with the ordinary shares in respect of other distributions and in the event of winding up. These shares do not have any right to vote at general meetings other than on resolutions concerning acquisitions or disposals of such importance that they require shareholder consent, or for the winding up of the Company, or for a variation in the class rights of the limited voting ordinary shares. In the event of an offer for more than 50 per cent of the issued ordinary share capital of the Company, each limited voting ordinary share will convert into an ordinary share and shall rank equally with the ordinary shares in all respects from the date of conversion.

PREFERENCE SHARES

The Company has in issue various classes of preference shares which are all classified as liabilities under IFRS and details of which are shown in note 44.

46 SHARE PREMIUM ACCOUNT


	2009 £m			2008 £m		2007 £m

At 1 January		2,096			1,298		1,266
Premium arising on private placement of ordinary shares		—			689		—
Capitalisation issue		(102	)		—		—
Premium arising on Placing and Compensatory Open Offer of ordinary shares		1,303			—		—
Transfer to merger reserve ¹		(1,000	)		—		—
Rights issue		9,461			—		—
Issued to Lloyds TSB Foundations		30			—		—
Redemption of preference shares ²		2,684			—		—
Premium arising on issue of shares under share option schemes		—			109		32

At 31 December		14,472			2,096		1,298


¹	Distributable reserves of £1,000 million arose on the issue of preference shares in January 2009 which were classified as debt. In June 2009, these preference shares were redeemed out of the proceeds of the placing and compensatory open offer of ordinary shares and the distributable element of this issue was transferred from the share premium account to the merger reserve.

²	In December 2009, the Group redeemed eight issues of preference shares in exchange for the issuance of enhanced capital notes. This resulted in a transfer of £26 million from the merger reserve to the cap

F-77

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

47 OTHER RESERVES


	2009 £m			2008 £m			2007 £m

Other reserves comprise:
Merger reserve		8,121			343			343
Capital redemption reserve		26			—			—
Revaluation reserve in respect of available-for-sale financial assets		(914	)		(2,982	)		(399	)
Cash flow hedging reserve		(305	)		(15	)		(3	)
Foreign currency translation reserve		158			178			(1	)

At 31 December		7,086			(2,476	)		(60	)

The merger reserve primarily comprises the premium on shares issued on 13 January 2009 under the placing and open offer and shares issued on 16 January 2009 on the acquisition of HBOS plc.

The capital redemption reserve represents transfers from the merger reserve in accordance with companies’ legislation.

The revaluation reserve in respect of available-for-sale financial assets represents the cumulative after tax unrealised change in the fair value of financial assets classified as available-for-sale since initial recognition, or in the case of available-for-sale financial assets obtained on acquisitions of businesses, since the date of acquisition.

The cash flow hedging reserve represents the cumulative after-tax gains and losses on effective cash flow hedging instruments that will be reclassified to the income statement in the periods in which the hedged item affects profit or loss.

The foreign currency translation reserve represents the cumulative after-tax gains and losses on the translation of foreign operations and exchange differences arising on financial instruments designated as hedges of the Group’s net investment in foreign operations.

Movements in other reserves were as follows:


	2009 £m			2008 £m		2007 £m

Merger reserve
At 1 January		343			343		343
Placing and open offer		3,781			—		—
Shares issued on acquisition of HBOS		5,707			—		—
Issue of preference shares ¹		1,000			—		—
Redemption of preference shares ²		(2,710	)		—		—

At 31 December		8,121			343		343


	2009 £m			2008 £m		2007 £m

Capital redemption reserve
At 1 January		—			—		—
Redemption of preference shares ²		26			—		—

At 31 December		26			—		—


¹	Distributable reserves of £1,000 million arose on the issue of preference shares in January 2009 which were classified as debt. In June 2009, these preference shares were redeemed out of the proceeds of the placing and compensatory open offer of ordinary shares and the distributable element of this issue was transferred to the merger reserve.

²	In December 2009, the Group redeemed eight issues of preference shares in exchange for the issuance of enhanced capital notes. This resulted in a transfer of £26 million from the merger reserve to the capital redemption reserve and a transfer of £2,684 million from the merger reserve to the share premium account. Details of the preference shares redeemed are set out in note 44.

F-78

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

47 OTHER RESERVES continued


	2009		2008		2007
	£m		£m		£m
Revaluation reserve in respect of available-for-sale financial assets
At 1 January	(2,982	)	(399	)	—
Exchange and other adjustments	(199	)	(541	)	(1	)
Change in fair value of available-for-sale financial assets	2,234		(2,721	)	(483	)
Change in fair value attributable to minority interests	(1	)	2		—
Deferred tax	(276	)	566		1
Current tax	(2	)	94		46
	1,955		(2,059	)	(436	)
Income statement transfers:
Disposals (note 9)	(97	)	(19	)	(5	)
Deferred tax	23		—		—
	(74	)	(19	)	(5	)
Impairment	621		130		(70	)
Deferred tax	(168	)	—		—
Current tax	—		(28	)	(21	)
	453		102		49
Other transfers	(93	)	(91	)	—
Deferred tax	26		—		—
Current tax	—		25		—
	(67	)	(66	)	—
Disposal of businesses	—		—		(6	)
At 31 December	(914	)	(2,982	)	(399	)

	2009		2008		2007
	£m		£m		£m
Cash flow hedging reserve
At 1 January	(15	)	(3	)	12
Change in fair value of hedging derivatives	(530	)	(33	)	(20	)
Deferred tax	148		9		6
	(382	)	(24	)	(14	)
Income statement transfer (note 5)	121		16		(1	)
Deferred tax	(29	)	(4	)	—
	92		12		(1	)
At 31 December	(305	)	(15	)	(3	)

	2009		2008
	£m		£m
Foreign currency translation reserve
At 1 January	178		(1	)	(19	)
Currency translation differences arising in the year	(652	)	2,533		257
Foreign currency losses on net investment hedges	814		(3,310	)	(342	)
Amounts transferred to income statement in respect of hedge ineffectiveness	—		14		—
Current tax	176		584		103
Deferred tax	(358	)	358		—
	632		(2,354	)	(239	)
At 31 December	158		178		(1	)

F-79

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


48 RETAINED PROFITS

	2009	2008 ¹		2007 ¹
	£m	£m		£m
At 1 January	8,260	9,471		8,124
Profit for the year	2,827	772		3,288
Dividends	—	(2,042	)	(1,957	)
Purchase/sale of treasury shares	45	16		(1	)
Employee share option schemes – value of employee services	116	43		17
At 31 December	11,248	8,260		9,471


¹ Restated for IFRS 2 (Revised)

Retained profits are stated after deducting £48 million (2008: £40 million; 2007: £75 million) representing 49 million (2008: 15 million; 2007: 15 million) treasury shares held.

Value of employee services includes a credit of £111 million (2008: £59 million; 2007: £29 million) reflecting the income statement charge in respect of SAYE and executive options, together with a related tax credit of £5 million (2008: tax charge £16 million; 2007: tax charge £14 million). Purchase/sale of treasury shares includes a credit of £128 million (2008: £31 million; 2007: £29 million) relating to the cost of other share scheme awards.


49 ORDINARY DIVIDENDS

	2009 Pence per share		2008 Pence per share		2007 Pence per share		2009 £m	2008 £m	2007 £m
Final dividend for previous year paid during the current year		—		24.7		23.5	—	1,394	1,325
Interim dividend		—		11.4		11.2	—	648	632
		—		36.1		34.7	—	2,042	1,957

The directors do not propose to pay a final dividend (2008: none).

Bank of New York Nominees Limited have waived the right to all dividends on Lloyds Banking Group plc shares that they hold (holding at 31 December 2009: nil shares and at 31 December 2008: 10 shares).

In addition, the trustees of the following holdings of Lloyds Banking Group plc shares in relation to employee share schemes retain the right to receive dividends but chose to waive their entitlement to the dividends on those shares as indicated: the Lloyds TSB Group Shareplan (holding at 31 December 2009: 3,028,623 shares, at 31 December 2008: 972,151 shares, waived right to all dividends), the Lloyds TSB Group Employee Share Ownership Trust (holding at 31 December 2009: 1,301,968 shares, at 31 December 2008: 1,442,116 shares, waived right to all dividends), Lloyds TSB Group Holdings (Jersey) Limited (holding at 31 December 2009: 42,846 shares, at 31 December 2008: 41,801 shares, waived right to all but a nominal amount of 1 penny in total) and the Lloyds TSB Qualifying Employee Share Ownership Trust (holding at 31 December 2009: 1,398 shares, at 31 December 2008: 1,364 shares, waived right to all but a nominal amount of 1 penny in total).

50 SHARE BASED PAYMENTS

CHARGE TO THE INCOME STATEMENT

The charge to the income statement is set out below:


	2009	2008 ¹	2007 ¹
	£m	£m	£m
Deferred bonus scheme	18	—	—
Executive and SAYE schemes:
Options granted in the year	13	28	6
Options granted in prior years	98	31	25
	111	59	31
Share incentive plans:
Shares granted in the year	26	10	12
Shares granted in prior years	102	21	17
	128	31	29
	257	90	58


¹ Restated for IFRS 2 (Revised)

F-80

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

50 SHARE BASED PAYMENTS continued

SHARE BASED PAYMENT SCHEME DETAILS

During the year ended 31 December 2009 the Group operated the following share based payment schemes, all of which are equity settled.

DEFERRED BONUS SCHEME 2009

Bonuses in respect of the performance in 2009 of certain employees within the Group’s Wholesale division have been recognised in these financial statements in full. Individual bonus payments of up to £2,000 for employees earning up to £39,000 are not subject to deferral and as they will be settled in cash are not included in the preceding table.

EXECUTIVE SCHEMES

The executive share option schemes were long-term incentive schemes available to certain senior executives of the Group, with grants usually made annually. Options were granted within limits set by the rules of the schemes relating to the number of shares under option and the price payable on the exercise of options. The last grant of executive options was made in August 2005. These options were granted without a performance multiplier and the maximum limit for the grant of options in normal circumstances was three times annual salary. Between April 2001 and August 2004, the aggregate value of the award based upon the market price at the date of grant could not exceed four times the executive’s annual remuneration and, normally, the limit for the grant of options to an executive in any one year would be equal to 1.5 times annual salary with a maximum performance multiplier of 3.5. Prior to 18 April 2001, the normal limit was equal to one year’s remuneration and no performance multiplier was applied.

PERFORMANCE CONDITIONS FOR EXECUTIVE OPTIONS

FOR OPTIONS GRANTED UP TO MARCH 2001


Options granted		Performance conditions
March 1999 – August 1999		Growth in earnings per share which is equal to the aggregate percentage change in the Retail Price Index plus two percentage points for each complete year of the relevant period together with a further condition that Lloyds Banking Group plc’s ranking based on total shareholder return (calculated by reference to both dividends and growth in share price) over the relevant period should be in the top fifty companies of the FTSE 100.

March 2000 – March 2001		As for March 1999 – August 1999 except that there must have been growth in the earnings per share equal to the change in the Retail Price Index plus three percentage points for each complete year of the relevant period.

In respect of options granted between March 1999 and March 2001, the relevant period for the performance conditions began at the end of the financial year preceding the date of grant and continued until the end of the third subsequent year following commencement or, if not met, the end of such later year in which the conditions were met. Once the conditions were satisfied the options remain exercisable without further conditions. If they were not satisfied by the tenth anniversary of the grant the options would lapse.

FOR OPTIONS GRANTED FROM AUGUST 2001 TO AUGUST 2004

The performance condition was linked to the performance of Lloyds Banking Group plc’s total shareholder return (calculated by reference to both dividends and growth in share price) against a comparator group of 17 companies including Lloyds Banking Group plc.

The performance condition was measured over a three year period which commenced at the end of the financial year preceding the grant of the option and continued until the end of the third subsequent year. If the performance condition was not then met, it was measured at the end of the fourth financial year. If the condition was not then met, the options would lapse.

To meet the performance conditions, the Group’s ranking against the comparator group required to be at least ninth. The full grant of options only became exercisable if the Group was ranked first. A performance multiplier (of between nil and 100 per cent) was applied below this level to calculate the number of shares in respect of which options granted to executive directors would become exercisable, and were calculated on a sliding scale. If Lloyds Banking Group plc was ranked below median the options would not be exercisable.

Options granted to senior executives other than executive directors were not so highly leveraged and, as a result, different performance multipliers were applied to their options. For the majority of executives, options were granted with the performance condition but with no performance multiplier.

Options granted in 2004 became exercisable as the performance condition was met on the re-test. The performance condition vested at 14 per cent for executive directors, 24 per cent for managing directors, and 100 per cent for all other executives.

FOR OPTIONS GRANTED IN 2005

The same conditions applied as for grants made up to August 2004, except that:


–	the performance condition was linked to the performance of Lloyds Banking Group plc’s total shareholder return (calculated by reference to both dividends and growth in share price) against a comparator group of 15 companies including Lloyds Banking Group plc;

–	if the performance condition was not met at the end of the third subsequent year, the options would lapse; and

–	the full grant of options became exercisable only if the Group was ranked in the top four places of the comparator group. A sliding scale applied between fourth and eighth positions. If Lloyds Banking Group was ranked below the median (ninth or below) the options would lapse.

Options granted in 2005 became exercisable as the performance condition was met when tested. The performance condition vested at 82.5 per cent for all options granted.

F-81

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

50 SHARE BASED PAYMENTS continued

Movements in the number of share options outstanding under the executive share option schemes during 2008 and 2009 are set out below:


	2009					2008
	Number of options			Weighted average exercise price (pence)		Number of options			Weighted average exercise price (pence)
Outstanding at 1 January		11,203,628			490.05		20,621,774			480.57
Exercised		—			—		(137,431	)		419.25
Forfeited		(2,418,650	)		536.46		(9,280,715	)		470.02
Outstanding at 31 December		8,784,978			476.56		11,203,628			490.05
Exercisable at 31 December		8,784,978			476.56		9,132,197			453.77

No options were exercised during 2009 therefore the weighted average share price was £nil (2008: £4.53). The weighted average remaining contractual life of options outstanding at the end of the year was 4.3 years (2008: 5.1 years).

SAVE-AS-YOU-EARN SCHEMES

Eligible employees may enter into contracts through the Save-As-You-Earn schemes to save up to £250 per month and, at the expiry of a fixed term of three, five or seven years, have the option to use these savings within six months of the expiry of the fixed term to acquire shares in the Group at a discounted price of no less than 80 per cent of the market price at the start of the invitation.

Movements in the number of share options outstanding under the SAYE schemes are set out below:


	2009					2008
	Number of options			Weighted average exercise price (pence)		Number of options			Weighted average exercise price (pence)
Outstanding at 1 January		190,478,449			152.54		85,673,227			342.49
Adjustment on acquisition		53,755,275			300.91		—			—
Granted		—			—		215,737,733			173.80
Exercised		—			—		(40,612,608	)		290.77
Forfeited		(9,581,800	)		397.07		(2,394,415	)		388.11
Cancelled		(93,599,380	)		170.24		(62,963,491	)		373.21
Expired		(10,918,552	)		453.64		(4,961,997	)		311.47
Outstanding at 31 December		130,133,992			157.84		190,478,449			152.54
Exercisable at 31 December		754,554			317.32		3,157,524			332.12

No options were exercised during 2009 therefore the weighted average share price was £nil (2008: £3.70). The weighted average remaining contractual life of options outstanding at the end of the year was 2.7 years (2008: 3.4 years).

Similarly as no SAYE options were granted during the year, the weighted share price was £nil (2008: £0.61). The values for the SAYE options have been determined using a standard Black-Scholes model.

For the HBOS sharesave plan, no options were exercised during 2009 therefore the weighted average share price was £nil. The options outstanding at 31 December 2009 had exercise prices in the range of £2.20 to £3.64 and a weighted average remaining contractual life of 4.0 years.

F-82

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

50 SHARE BASED PAYMENTS continued

OTHER SHARE OPTION PLANS

LLOYDS TSB GROUP EXECUTIVE SHARE PLAN 2003

The plan was adopted in December 2003 and under the plan share options may be granted to senior employees. Options granted under this plan have been granted specifically to facilitate recruitment and as such were not subject to any performance conditions. The plan has now been extended to not only compensate new recruits for any lost share awards but also to make grants to key individuals for retention purposes with, in some instances, the grant being made subject to individual performance conditions.

2009

2008

Number of
options

Weighted average
exercise price
(pence)

Number of
options

Weighted average
exercise price
(pence)

Outstanding at 1 January

857,611

Nil

308,718

Nil

Granted

24,704,070

Nil

681,931

Nil

Rebasement adjustment

1,876,005

Nil

—

Nil

Exercised

(157,105

)

Nil

(117,236

)

Nil

Forfeited

(1,181,396

)

Nil

(15,802

)

Nil

Outstanding at 31 December

26,099,185

Nil

857,611

Nil

Exercisable at 31 December

33,794

Nil

—

Nil

The weighted average fair value of options granted in the year was £0.68 (2008: £2.92). The weighted average share price at the time that the options were exercised during 2009 was £0.71 (2008: £2.91). The weighted average remaining contractual life of options outstanding at the end of the year was 3.0 years (2008: 2.5 years).

Options granted under this plan were adjusted on 2 July 2009 as a result of the Placing and Compensatory Open Offer. The adjustment was made using a standard HMRC formula, to negate the dilutionary impact of the capital raising event.

HBOS SHARE OPTION PLANS

The table below includes details of the outstanding options for the HBOS Share Option Plan, the St James’s Place Share Option Plan, and the 1995 and 1996 Bank of Scotland Executive Stock Option schemes. The final award under the HBOS Share Option Plan was made in 2004. Under this plan, options over shares, at market value with a face value equal to 20 per cent of salary, were granted to employees with the exception of certain senior executives. A separate option plan exists for some of the partners of St James’s Place, which grants options in respect of Lloyds Banking Group plc shares. Movements in the number of share options outstanding under these schemes are set out below:


	2009
	Number of options			Weighted average exercise price (pence)
Share option plans
Outstanding at 16 January, date of acquisition of HBOS		13,040,430			670.01
Granted during the year		4,040,555			104.50
Exercised during the year		—			—
Forfeited during the year		(2,779,237	)		689.48
Outstanding at 31 December		14,301,748			506.46
Exercisable at 31 December		8,638,542			694.19

No options were exercised during 2009. The options outstanding under the HBOS Share Option Plan and St James’s Place Share Option Plan at 31 December 2009 had exercise prices in the range of £1.05 to £17.576 and a weighted average remaining contractual life of 1.4 years.

The options outstanding under the Bank of Scotland Executive Stock Option schemes at 31 December 2009 had exercise prices in the range of £8.834 to £10.009 and a weighted average remaining contractual life of 0.8 years.

OTHER SHARE PLANS

LLOYDS TSB LONG-TERM INCENTIVE PLAN

The Long-Term Incentive Plan (LTIP) introduced in 2006 is aimed at delivering shareholder value by linking the receipt of shares to an improvement in the performance of the Group over a three year period. Awards are made within limits set by the rules of the plan, with the limits determining the maximum number of shares that can be awarded equating to three times annual salary. In exceptional circumstances this may increase to four times annual salary.

F-83

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

50 SHARE BASED PAYMENTS continued

The performance conditions for awards made in May and August 2006 are as follows:


(i)	For 50 per cent of the award (the ‘EPS Award’) – the percentage increase in earnings per share of the Group (on a compound annualised basis) over the relevant period must be at least an average of 6 percentage points per annum greater than the percentage increase (if any) in the Retail Price Index over the same period. If it is less than 3 per cent per annum the EPS Award will lapse. If the increase is more than 3 per cent but less than 6 per cent per annum then the proportion of shares released will be on a straight line basis between 17.5 per cent and 100 per cent. The relevant period commenced on 1 January 2006 and ended on 31 December 2008.

(ii)	For the other 50 per cent of the award (the ‘TSR Award’) – it will be necessary for the Group’s total shareholder return (calculated by reference to both dividends and growth in share price) to exceed the median of a comparator group (14 companies) over the relevant period by an average of 7.5 per cent per annum for the TSR Award to vest in full. 17.5 per cent of the TSR Award will vest where the Group’s total shareholder return is equal to median and vesting will occur on a straight line basis in between these points. Where the Group’s total shareholder return is below the median of the comparator group, the TSR Award will lapse. The relevant period commenced on 1 January 2006 and ended on 31 December 2008.

	When tested at the end of the relevant performance period, neither the EPS nor the TSR performance conditions were met and all awards made in 2006 lapsed.

The performance conditions for awards made in March and August 2007 are as follows:

(i)	For 50 per cent of the award (the ‘EPS Award’) – the performance condition is as described for May 2006 with the relevant performance period commencing on 1 January 2007 and ending on 31 December 2009.

(ii)	For the other 50 per cent of the award (the ‘TSR Award’) – the performance condition is as described for May 2006 with the relevant performance period commencing on 8 March 2007 (the date of the first award) and ending on 7 March 2010.

The performance conditions for awards made in March, April, August and September 2008 are as follows:

(i)	For 50 per cent of the award (the EPS Award) – the performance condition is as described for May 2006 with the relevant performance period commencing on 1 January 2008 and ending on 31 December 2010.

(ii)	For the other 50 per cent of the award (the TSR Award) – the performance condition is as described for May 2006, except that the comparator group comprises of 13 companies, with the relevant performance period commencing on 6 March 2008 (the date of the first award) and ending on 5 March 2011.

The current LTIP rules allow for awards to be made of up to 400 per cent of base salary. Under normal circumstances awards are made of 300 per cent of salary with the additional 100 per cent available for circumstances that the remuneration committee deems to be exceptional. In 2008, awards were made of 375 per cent of base salary to the chief executive and two of the executive directors for retention purposes, and in light of data reviewed by the committee which showed total remuneration to be behind median both for the FTSE 20, and the other major UK banks.

The performance conditions for awards made in April, May and September 2009 are as follows:

(i)	EPS:The release of 50 per cent of the shares will be dependent on the extent to which the growth in EPS achieves cumulative EPS targets over the three-year period.

(ii)	Economic profit: The release of the remaining 50 per cent of shares will be dependent on the extent to which Lloyds Banking Group achieves cumulative economic profit targets over a three-year period.

The EPS and economic profit performance measures applying to this 2009 LTIP award were set on the basis that the Group would enter into the Government Asset Protection Scheme (GAPS). Now that the Group is not participating in GAPS, the Remuneration Committee has determined that these performance measures be restated on a basis consistent with the EPS and economic profit measures used for the 2010 LTIP awards.

In addition in 2009 an additional discretionary award was made in April, May and September 2009. The performance conditions for those awards are as follows:

(i)	Synergy savings: The release of 50 per cent of the shares will be dependent on the achievement of target run-rate synergy savings in 2009 and 2010 as well as the achievement of sustainable synergy savings of at least £1.5 billion by the end of 2011. The award will be broken down into three equally weighted annual tranches. Performance will be assessed at the end of each year against annual performance targets based on a trajectory to meet the 2011 target. The extent to which targets have been achieved will determine the proportion of shares to be banked each year. Any release of shares will be subject to the remuneration committee judging the overall success of the delivery of the integration programme.

(ii)	Integration balanced scorecard: The release of the remaining 50 per cent of the shares will be dependent on the outcome of a Balanced Scorecard of non-financial measures of the success of the integration in each of 2009, 2010 and 2011. The Balanced scorecard element will be broken down into three equally weighted tranches. The tranches will be crystallised and banked for each year of the performance cycle subject to separate annual performance targets across the four measurement categories of Building the Business, Customer, Risk and People and Organisation Development.

Performance against the first year of the award has been assessed and all targets have been met or exceeded.

F-84

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

50 SHARE BASED PAYMENTS continued


	2009 Number of shares			2008 Number of shares

Outstanding at 1 January		22,237,282			13,209,081
Granted		199,293,192			10,519,609
Rebasement adjustment		10,443,102			—
Forfeited		(8,740,524	)		(1,491,408	)

Outstanding at 31 December		223,233,052			22,237,282

The fair value of the share awards granted in 2009 was £0.68 (2008: £2.28).

Conditional awards of shares made under this plan were adjusted on 2 July 2009 as a result of the placing and compensatory open offer. The adjustment was made using a standard HMRC formula, to negate the dilutionary impact of the capital raising event.

PERFORMANCE SHARE PLAN

Under the performance share plan, introduced during 2005, participating executives will be eligible for an award of free shares, known as performance shares, to match the bonus shares awarded as part of their 2004 and 2005 bonus. The maximum match was two performance shares for each bonus share, awarded at the end of a three year period. The actual number of shares awarded was dependent on the Group’s total shareholder return performance measured over a three year period, compared to other companies in the comparator group. The maximum of two performance shares for each bonus share was awarded only if the Group’s total shareholder return performance placed it first in the comparator group; one performance share for each bonus share was granted if the Group was placed fifth; and one performance share for every two bonus shares if the Group was placed eighth (median). Between first and fifth position, and fifth and eighth position, sliding scales would apply. If the total shareholder return performance was below median, no performance shares were awarded. There was no retest. Whilst income tax and national insurance was deducted from the bonus before deferral into the plan, where a match of performance shares was justified, these shares were awarded as if income tax and national insurance had not been deducted.

The performance condition attached to the March 2006 award was not met, with Lloyds Banking Group ranked in ninth place. Bonus shares were released on 20 March 2009, at which time the performance shares lapsed.


	2009 Number of shares			2008 Number of shares

Outstanding at 1 January		941,324			1,767,594
Forfeited		—			(74,691	)
Lapsed		(941,324	)		(375,790	)
Released		—			(375,789	)

Outstanding at 31 December		—			941,324

The weighted average share price at the date the shares were released during 2008 was £4.4613.

The ranges of exercise prices, weighted average exercise prices, weighted average remaining contractual life and number of options outstanding for the option schemes were as follows:

Executive schemes

SAYE schemes

Other share option plans

Weighted
average
exercise price
(pence)

Weighted
average
remaining life
(years)

Number of
options

Weighted
average
exercise price
(pence)

Weighted
average
remaining life
(years)

Number of
options

Weighted
average
exercise price
(pence)

Weighted
average
remaining life
(years)

Number of
options

31 December 2009

Exercise price range

£0 to £1

—

Nil

3.1

26,099,185

£1 to £2

—

139.00

2.5

107,939,699

104.50

2.3

4,019,026

£2 to £3

—

220.98

3.9

18,054,765

—

£3 to £4

—

349.18

2.0

2,842,644

394.64

5.2

721,886

£4 to £5

464.19

4.9

7,526,441

427.04

1.8

1,296,884

499.91

0.2

273,986

£5 to £6

552.02

0.2

515,527

—

573.60

0.6

53,328

£6 to £7

653.55

1.2

743,010

—

640.00

0.0

2,388,026

£7 to £8

—

707.40

0.2

6,845,496

F-85

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

50 SHARE BASED PAYMENTS continued


	Executive schemes						SAYE schemes						Other share option plans

	Weighted average exercise price (pence)		Weighted average remaining life (years)		Number of options		Weighted average exercise price (pence)		Weighted average remaining life (years)		Number of options		Weighted average exercise price (pence)		Weighted average remaining life (years)		Number of options

31 December 2008
£0 to £1		—		—		—		—		—		—		Nil		2.5		857,611
£1 to £2		—		—		—		139.00		3.5		178,932,603		—		—		—
£2 to £3		—		—		—		284.00		0.4		941,414		—		—		—
£3 to £4		—		—		—		344.75		1.9		7,366,320		—		—		—
£4 to £5		453.77		5.9		9,132,197		423.49		2.0		3,200,532		—		—		—
£5 to £6		551.25		1.2		741,905		588.50		0.3		37,580		—		—		—
£6 to £7		652.30		2.1		997,326		—		—		—		—		—		—
£7 to £8		—		—		—		—		—		—		—		—		—
£8 to £9		863.63		0.3		332,200		—		—		—		—		—		—

The fair value calculations at 31 December 2009 for grants made in the year are based on the following assumptions:


	SAYE		Other option schemes			Other share plans

Risk-free interest rate		Nil		2.01	%		2.23	%
Expected life		Nil		2.6 years			3.0 years
Expected volatility		Nil		90	%		84	%
Expected dividend yield		Nil		1.7	%		1.8	%
Weighted average share price		Nil		£0.71			£0.71
Weighted average exercise price		Nil		Nil			Nil
Expected forfeitures		Nil		4	%		4	%

Expected volatility is a measure of the amount by which the Group’s shares are expected to fluctuate during the life of an option. The expected volatility is estimated based on the historical volatility of the closing daily share price over the most recent period that is commensurate with the expected life of the option. The historical volatility is compared to the implied volatility generated from market traded options in the Group’s shares to assess the reasonableness of the historical volatility and adjustments made where appropriate.

SHARE INCENTIVE PLAN

FREE SHARES

An award of shares may be made annually to employees based on a percentage of each employee’s salary in the preceding year up to a maximum of £3,000. The percentage is normally announced concurrently with the Group’s annual results and the price of the shares awarded is announced at the time of award. The shares awarded are held in trust for a mandatory period of three years on the employee’s behalf. The award is subject to a non-market based condition: if an employee leaves the Group within this three year period for other than a ‘good’ reason, all of the shares awarded will be forfeited.

No free shares were awarded in 2009 (2008: 8,862,823 shares, with an average fair value of £4.38 based on the market price at the date of award).

MATCHING SHARES

The Group undertakes to match shares purchased by employees up to the value of £30 per month; these shares are held in trust for a mandatory period of three years on the employees’ behalf. The award is subject to a non-market based condition: if an employee leaves within this three year period for other than a ‘good’ reason, 100 per cent of the matching shares are forfeited. Similarly if the employees sell their purchased shares within three years, their matching shares are forfeited.

The number of shares awarded relating to matching shares in 2009 was 16,746,310 (2008: 4,475,264), with an average fair value of £0.69 (2008: £2.56), based on market prices at the date of award.

F-86

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

51 RELATED PARTY TRANSACTIONS

KEY MANAGEMENT PERSONNEL

Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of an entity; the Group’s key management personnel are the members of Lloyds Banking Group plc group executive committee together with its non-executive directors.

The table below details, on an aggregated basis, key management personnel compensation:


	2009 £m	2008 £m	2007 £m

Compensation
Salaries and other short-term benefits	17	8	15
Post-employment benefits	1	1	4
Share based payments	—	4	4

	18	13	23

Aggregate contributions in respect of key management personnel to defined contribution pension schemes were £0.4 million (2008: £0.2 million; 2007: £0.2 million).


	2009 million	2008 million		2007 million

Share options
At 1 January	2	7		11
Granted (exercised/lapsed) (including options of former directors)	—	(5	)	(4	)

At 31 December	2	2		7


	2009 million		2008 million		2007 million

Share incentive plans
At 1 January	7		6		4
Granted (including entitlements of appointed directors)	17		3		2
Exercised/lapsed (including entitlements of former directors)	(5	)	(2	)	—

At 31 December	19		7		6

The tables below detail, on an aggregated basis, balances outstanding at the year end and related income and expense, together with information relating to other transactions between the Group and its key management personnel:


	2009 £m		2008 £m		2007 £m

Loans
At 1 January	3		2		2
Advanced (including loans of appointed directors)	—		2		1
Repayments (including loans of former directors)	(1	)	(1	)	(1	)

At 31 December	2		3		2

The loans are on both a secured and unsecured basis and are expected to be settled in cash. The loans attracted interest rates of between 1.28 per cent and 24.90 per cent in 2009 (2008: 2.14 per cent and 34.01 per cent; 2007: 4.95 per cent and 30.0 per cent).

No provisions have been recognised in respect of loans given to key management personnel (2008: £nil).

F-87

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

51 RELATED PARTY TRANSACTIONS continued


	2009 £m		2008 £m		2007 £m

Deposits
At 1 January	6		5		5
Placed (including deposits of appointed directors)	12		27		21
Withdrawn (including deposits of former directors)	(14	)	(26	)	(21	)

At 31 December	4		6		5

Deposits placed by key management personnel attracted interest rates of up to 6.5 per cent (2008: 6.0 per cent; 2007: 8.0 per cent).

At 31 December 2009, the Group did not provide any guarantees in respect of key management personnel (2008: none; 2007: £6,154 in respect of one director).

At 31 December 2009, transactions, arrangements and agreements entered into by the Group’s banking subsidiaries with directors and connected persons included amounts outstanding in respect of loans and credit card transactions of £2 million with seven directors and four connected persons (2008: £3 million with eight directors and six connected persons; 2007: £2 million with five directors and three connected persons).

SUBSIDIARIES

Details of the principal subsidiaries are given in note 9 to the parent company financial statements. In accordance with IAS 27, transactions and balances with subsidiaries have been eliminated on consolidation.

On 16 January 2009, the Company acquired 100 per cent of the ordinary share capital of HBOS plc. From this date, HBOS plc and its subsidiaries became controlled entities. In accordance with IAS 27, transactions and balances with subsidiaries have been eliminated on consolidation.

HM TREASURY

On 13 January 2009, HM Treasury subscribed for approximately 2,597 million shares in the Company which gave it a 30.2 per cent interest in the Company’s ordinary share capital and consequently HM Treasury became a related party of the Company from this date. On 16 January 2009, the Company acquired HBOS plc in an all share acquisition which, together with the shares subscribed for on 13 January 2009, gave HM Treasury a 43.4 per cent interest in the Company’s ordinary share capital. The material transactions entered into with HM Treasury from 13 January 2009 are described below:

CAPITAL TRANSACTIONS

On 15 January 2009, the Company issued £1,000 million 12 per cent non-cumulative fixed to floating rate preference shares to HM Treasury. In addition, £3,000 million non-cumulative 12 per cent fixed to floating rate preference shares were issued by the Company to HM Treasury on 16 January 2009 in exchange for the £3,000 million non-cumulative 12 per cent fixed to floating rate preference shares which had been issued by HBOS plc to HM Treasury on 15 January 2009.

In June 2009 the Company issued 10,408 million new ordinary shares as part of a placing and compensatory open offer; HM Treasury subscribed for approximately 4,521 million of these new ordinary shares at a price of 38.43 pence per share. As placees were procured for all the new ordinary shares for which valid acceptances were not received under the placing and compensatory open offer, HM Treasury’s shareholding remained at 43.4 per cent. The Company used the proceeds from this placing and compensatory open offer to redeem the £4,000 million preference shares issued by the Company to HM Treasury described above at 101 per cent of their issue price (in accordance with the terms agreed with HM Treasury) together with accrued dividends thereon.

In December 2009 the Company issued 36,505 million new ordinary shares in respect of a rights issue as part of an alternative to the Group’s proposed participation in GAPS (together with a liability management exercise). The Company entered into an Undertaking to Subscribe agreement with HM Treasury whereby HM Treasury undertook, amongst other things, to take up its rights to subscribe for all of the new shares to which it was entitled under the rights issue. HM Treasury subscribed for approximately 15,854 million new shares at a price of 37 pence per share. As subscribers were procured for all the new ordinary shares for which valid acceptances were not received under the rights issue, HM Treasury’s shareholding remained at 43.4 per cent. In addition, the Group paid HM Treasury a commission payment of approximately £132 million in consideration, inter alia, of HM Treasury’s pre-launch commitment to participate in full in respect of its entitlements under the rights issue.

MATERIAL RELATED PARTY AGREEMENTS IN CONNECTION WITH CAPITAL TRANSACTIONS

In connection with the placing and compensatory open offer, an Open Offer Agreement dated 7 March 2009 was entered into between the Company and HM Treasury (as amended and restated, amongst other things, to include certain other parties) pursuant to which, amongst other things, HM Treasury agreed that, to the extent not placed or taken up under the compensatory open offer and subject to the terms and conditions set out in the Open Offer Agreement, HM Treasury would subscribe for the open offer shares itself at the issue price. In consideration of the provision of its services under the Open Offer Agreement, the Company agreed to pay to HM Treasury (i) a commission of 0.5 per cent of the aggregate value of the open offer shares at the issue price; and (ii) a further commission of 1 per cent of the aggregate value of the open offer shares subscribed for by HM Treasury or by placees (including HM Treasury) at the issue price.

F-88

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

51 RELATED PARTY TRANSACTIONS continued

The Company also agreed to (i) pay to each of HM Treasury, the joint sponsors and joint bookrunners all legal and other costs and expenses, and those of HM Treasury’s financial advisors incurred in connection with the placing and compensatory open offer, the redemption of the preference shares or any arrangements referred to in the 2009 Open Offer Agreement; and (ii) bear all costs and expenses relating to the placing and compensatory open offer and the preference share redemption. The costs and commissions incurred by the joint bookrunners in connection with the rump placing were deducted from the aggregate proceeds of the rump placing. The Company also gave certain representations and warranties and indemnities to each of HM Treasury, the joint sponsors and joint bookrunners under the 2009 Open Offer Agreement. The Company’s liabilities thereunder are unlimited as to time and amount. HM Treasury is entitled to novate its rights under the agreement to any entity that is wholly-owned, directly or indirectly, by HM Treasury.

Pursuant to its obligations to HM Treasury under the 2009 Open Offer Agreement, the Company entered into a Resale Rights Agreement with HM Treasury with effect from 11 June 2009, in which it agreed to provide its assistance to HM Treasury in connection with any proposed sale by HM Treasury of ordinary shares and other securities held by HM Treasury in the Company from time to time and of any securities caused by HM Treasury to be issued by any person which are exchangeable for, convertible into, give rights over or are referable to such ordinary shares or other securities issued by the Group, to be sold in such jurisdictions (other than the United States) and in such manner as HM Treasury may determine. Such assistance may include the provision by the Company of assistance with due diligence and the preparation of marketing and such other documentation (including any offering memorandum, whether or not a prospectus) as HM Treasury may reasonably request.

Pursuant to its obligations under the open offer agreement entered into by the Company with effect from 13 October 2008, the Company entered into a Registration Rights Agreement with HM Treasury on 12 January 2009, granting customary demand and ‘piggyback’ registration rights in the United States under the United States Securities Act of 1933, as amended, to HM Treasury with respect to any ordinary shares of the Group held by HM Treasury.

GOVERNMENT ASSET PROTECTION SCHEME

The Company entered into a Pre-Accession Deed dated 7 March 2009 and a Lending Commitments Deed dated 6 March 2009 with HM Treasury both relating to the Company’s proposed participation in GAPS. Under the Lending Commitments Deed, the Company agreed to support lending to creditworthy borrowers in the UK in a commercial manner with effect from 1 March 2009 and agreed to increase lending by £14,000 million in the 12 months commencing 1 March 2009 to support UK businesses (£11,000 million) and homeowners (£3,000 million) and to maintain similar levels of lending in the 12 months commencing 1 March 2010, subject to adjustment to reflect circumstances at the start of the 12 month period commencing 1 March 2010. This additional lending is expressed to be subject to the Group’s prevailing terms and conditions (including pricing and risk assessment) and, in relation to mortgage lending, the Group’s standard credit and other acceptance criteria.

Pursuant to the successful rights issue, the Company withdrew from its proposed participation in GAPS and on 3 November 2009, the Company entered into a GAPS Withdrawal Deed with HM Treasury pursuant to which, among other matters, the Company agreed that the Group would pay HM Treasury an amount of £2,500 million in recognition of the benefits to the Group’s trading operations arising as a result of HM Treasury proposing to make GAPS available to the Group.

On 2 November 2009, the Group entered into a Cost Reimbursement Deed with HM Treasury under which the Group has agreed to pay for the UK Government’s set-up costs relating to the proposed participation in GAPS and the UK Government’s costs associated with the European Union’s approval of state aid to the Group.

CREDIT GUARANTEE SCHEME

HM Treasury launched the Credit Guarantee Scheme in October 2008 as part of a range of measures announced by the UK Government intended to ease the turbulence in the UK banking system. It charges a commercial fee for the guarantee of new short and medium-term debt issuance. The fee payable to HM Treasury on guaranteed issues is based on a per annum rate of 50 basis points plus the median five-year Credit Default Swap spread. At 31 December 2009, the Group had £49,070 million of debt issued under the CGS. During the year, fees of £498 million payable to HM Treasury in respect of guaranteed funding were included in the Group’s income statement.

There were no other material transactions between the Group and HM Treasury during the period between 13 January 2009 and 31 December 2009 that were not made in the ordinary course of business or that are unusual in their nature or conditions.

F-89

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

51 RELATED PARTY TRANSACTIONS continued

OTHER RELATED PARTY TRANSACTIONS

PENSIONS FUNDS

At 31 December 2009, customer deposits of £99 million (2008: £23 million) and investment and insurance contract liabilities of £691 million (2008: £nil) related to the Group’s pension funds.

OEICS

The Group manages 382 (2008: 105) Open Ended Investment Companies (OEICs), and of these 108 (2008: 47) are consolidated. The Group invested £1,271 million (2008: £455 million) and redeemed £1,076 million (2008: £343 million) in the unconsolidated OEICs during the year and had investments, at fair value, of £6,954 million (2008: £2,661 million) at 31 December. The Group earned fees of £217 million from the unconsolidated OEICs (2008: £206 million). The Company held no investments in OEICs at any time during 2008 or 2009.

JOINT VENTURES AND ASSOCIATES

In the year ended 31 December 2009, the Group provided both administration and processing services to its principal joint venture, Sainsbury’s Bank plc. The amounts receivable by the Group during the year were £34 million (2008: £nil), of which £10 million was outstanding at 31 December 2009 (2008: £nil). At 31 December 2009, Sainsbury’s Bank plc also had balances with the Group that were included in loans and advances to banks of £1,218 million (2008: £nil) and deposits by banks of £1,405 million (2008: £nil).

At 31 December 2009 there were loans and advances to customers of £12,235 million (2008: £nil) outstanding and balances within customer deposits of £254 million (2008: £nil) relating to other joint ventures and associates.

In addition to the above balances, the Group has a number of other associates held by its venture capital business that it accounts for at fair value through profit or loss. At 31 December 2009, these companies had total assets of approximately £14,840 million (2008: £5,838 million), total liabilities of approximately £15,300 million (2008: £5,780 million) and for the year ended 31 December 2009 had turnover of approximately £10,570 million (2008: £2,088 million) and made a net loss of approximately £572 million (2008: net loss of £80 million). In addition, the Group has provided £6,014 million (2008: £825 million) of financing to these companies on which it received £191 million (2008: £46 million) of interest income in the year.

52 CONTINGENT LIABILITIES AND COMMITMENTS

PAYMENT PROTECTION INSURANCE

In January 2009, the UK Competition Commission (the ‘Competition Commission’) completed its formal investigation into the supply of Payment Protection Insurance (PPI) services (except store card PPI) to non-business customers in the UK and published its final report setting out its remedies. Prior to this the Group had made the commercial decision to sell only regular monthly premium PPI to its personal loan customers. The Competition Commission decided to adopt various remedies including a prohibition on the active sale of PPI by a distributor to a customer within seven days of the distributor’s sale of credit to that customer.

On 30 March 2009, Barclays Bank plc lodged an appeal in the UK Competition Appeal Tribunal (the ‘Competition Appeal Tribunal’) against the Competition Commission’s findings. Lloyds Banking Group was granted permission by the Competition Appeal Tribunal to intervene in the appeal. The Competition Appeal Tribunal handed down its judgment on 16 October 2009 finding in favour of Barclays in respect of its challenge to the Competition Commission’s prohibition of distributors selling PPI at the credit point of sale but it did not uphold Barclays’ challenge to the Competition Commission’s findings on market definition. The matter has now been referred back to the Competition Commission. This may or may not result in the Competition Commission ultimately reaching a different conclusion.

On 1 July 2008 the Financial Ombudsman Service referred concerns regarding the handling of PPI complaints to the FSA as an issue of wider implication. The Group has been working with other industry members and trade associations in preparing an industry response to address regulatory concerns regarding the handling of PPI complaints. On 29 September 2009, the FSA issued a consultation paper on PPI complaints handling. The FSA has escalated its regulatory activity in relation to past PPI sales generally and has proposed new guidance on the fair assessment of a complaint and the calculation of redress and a new rule requiring firms to reassess historically rejected complaints.

The statement on 29 September 2009 also announced that several firms had agreed to carry out reviews of past sales of single premium loan protection insurance. The Group has subsequently agreed in principle that it will undertake a review in relation to sales of single premium loan protection insurance made through its branch network since 1 July 2007. The precise details of the review are still being discussed with the FSA. The ultimate impact on the Group of any review and/or reassessment can only be known at the conclusion of these discussions and on publication of the FSA’s final rules.

F-90

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

52 CONTINGENT LIABILITIES AND COMMITMENTS continued

US ECONOMIC SANCTIONS

Starting in 2007 Lloyds TSB Bank plc provided information in relation to its review of historic US Dollar payments involving countries, persons or entities subject to US economic sanctions administered by the Office of Foreign Assets Control (OFAC) to a number of authorities reported to be conducting a review of sanctions compliance by non-US financial institutions. On 9 January 2009 the settlement reached by Lloyds TSB Bank plc with both the US Department of Justice and the New York County District Attorney’s Office in relation to their investigations was announced. The settlement documentation contains details of the results of the investigations including the identification of certain activities relating to Iran, Sudan and Libya which Lloyds TSB Bank plc conducted during the relevant period. In 2008, Lloyds TSB Bank plc made a provision of £180 million which fully covered the settlement amount paid to the Department of Justice and the New York County District Attorney’s Office. On 22 December 2009 OFAC announced the settlement it had reached with Lloyds TSB Bank plc in relation to its investigation and confirmed that the settlement sum due to OFAC had been fully satisfied by Lloyds TSB Bank plc’s payment to the Department of Justice and the New York County District Attorney’s Office. No further enforcement actions are expected in relation to the matters set out in the settlement agreements. A purported shareholder filed a derivative civil action in the Supreme Court of New York, Nassau County on 26 February 2009 against certain current and former directors, and nominally against the Lloyds TSB Bank plc and Lloyds Banking Group, seeking various forms of relief following the settlement. The derivative action is at a very early stage but the ultimate outcome of the action is not expected to have a material impact on the Group.

INTERCHANGE FEES

The European Commission has adopted a formal decision finding that an infringement of European Commission competition laws has arisen from arrangements whereby MasterCard issuers charged a uniform fallback interchange fee in respect of cross-border transactions in relation to the use of a MasterCard or Maestro branded payment card. The European Commission has required that the fee be reduced to zero for relevant cross-border transactions within the European Economic Area. This decision has been appealed to the General Court of the European Union (the ‘General Court’). Bank of Scotland plc and Lloyds TSB Bank plc (along with certain other MasterCard issuers) have successfully applied to intervene in the appeal in support of MasterCard’s position that the arrangements for the charging of a uniform fallback interchange fee are compatible with European Commission competition laws. Meanwhile, the European Commission and the UK’s OFT are pursuing investigations with a view to deciding whether arrangements adopted by other payment card schemes for the levying of uniform fallback interchange fees in respect of domestic and/or cross-border payment transactions also infringe European Commission and/or UK competition laws. As part of this initiative the OFT will also intervene in the General Court appeal supporting the European Commission’s position. The ultimate impact of the investigations on the Group can only be known at the conclusion of these investigations and any relevant appeal proceedings.

UNARRANGED OVERDRAFT CHARGES

The Supreme Court published its judgment in respect of the fairness of unarranged overdraft charges on personal current accounts on 25 November 2009, finding in favour of the litigant banks. On 22 December 2009, the OFT announced that it will not continue its investigation into the fairness of these charges. The Group is working with the regulators to ensure that outstanding customer complaints are concluded as quickly as possible and anticipate that most cases in the county courts will be discontinued. The Group expects that some customers will argue that despite the test case ruling they are entitled to a refund of unarranged overdraft charges on the basis of other legal arguments or challenges. The Group would robustly defend any such complaints or claims and does not expect the outcome of any such complaints or claims to have a material adverse effect on its financial position.

OTHER LEGAL PROCEEDINGS

In addition, during the ordinary course of business the Group is subject to threatened or actual legal proceedings both in the UK and overseas. All such material cases are periodically reassessed, with the assistance of external professional advisors where appropriate, to determine the likelihood of the Group incurring a liability. In those instances where it is concluded that it is more likely than not that a payment will be made, a provision is established to management’s best estimate of the amount required to settle the obligation at the relevant balance sheet date. In some cases it will not be possible to form a view, either because the facts are unclear or because further time is needed to properly assess the merits of the case and no provisions are held against such cases. However the Group does not currently expect the final outcome of any such case to have a material adverse effect on its financial position.

CONTINGENT LIABILITIES AND COMMITMENTS ARISING FROM THE BANKING BUSINESS

Acceptances and endorsements arise where Lloyds Banking Group agrees to guarantee payment on a negotiable instrument drawn up by a customer.

Other items serving as direct credit substitutes include standby letters of credit, or other irrevocable obligations, where Lloyds Banking Group has an irrevocable obligation to pay a third party beneficiary if the customer fails to repay an outstanding commitment; they also include acceptances drawn under letters of credit or similar facilities where the acceptor does not have specific title to an identifiable underlying shipment of goods.

Performance bonds and other transaction-related contingencies (which include bid or tender bonds, advance payment guarantees, VAT Customs & Excise bonds and standby letters of credit relating to a particular contract or non-financial transaction) are undertakings where the requirement to make payment under the guarantee depends on the outcome of a future event.

Lloyds Banking Group’s maximum exposure to loss is represented by the contractual nominal amount detailed in the table below. Consideration has not been taken of any possible recoveries from customers for payments made in respect of such guarantees under recourse provisions or from collateral held.

F-91

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

52 CONTINGENT LIABILITIES AND COMMITMENTS continued


	2009 £m		2008 £m
Contingent liabilities
Acceptances and endorsements		59		49
Other:
Other items serving as direct credit substitutes		1,494		1,870
Performance bonds and other transaction-related contingencies		4,555		2,850
		6,049		4,720
		6,108		4,769

The contingent liabilities of the Group, as detailed above, arise in the normal course of its banking business and it is not practicable to quantify their future financial effect.


	2009 £m		2008 £m
Commitments
Documentary credits and other short-term trade-related transactions		288		319
Forward asset purchases and forward deposits placed		758		613
Undrawn formal standby facilities, credit lines and other commitments to lend:
Less than 1 year original maturity:
Mortgage offers made		9,058		3,056
Other commitments		64,786		46,006
		73,844		49,062
1 year or over original maturity		53,693		31,761
		128,583		81,755

Of the amounts shown above in respect of undrawn formal standby facilities, credit lines and other commitments to lend, £74,477 million (2008: £46,890 million) was irrevocable.

OPERATING LEASE COMMITMENTS

Where a Group company is the lessee the future minimum lease payments under non-cancellable premises operating leases are as follows:


	2009 £m		2008 £m
Not later than 1 year		392		216
Later than 1 year and not later than 5 years		1,213		647
Later than 5 years		1,817		774
		3,422		1,637

Operating lease payments represent rental payable by the Group for certain of its properties. Some of these operating lease arrangements have renewal options and rent escalation clauses, although the effect of these is not material. No arrangements have been entered into for contingent rental payments.

CAPITAL COMMITMENTS

Excluding commitments in respect of investment property (note 26), capital expenditure contracted but not provided for at 31 December 2009 amounted to £203 million (2008: £92 million). Of this amount, £198 million (2008: £85 million) related to assets to be leased to customers under operating leases. The Group’s management is confident that future net revenues and funding will be sufficient to cover these commitments.

F-92

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

53 FINANCIAL INSTRUMENTS

(1) MEASUREMENT BASIS OF FINANCIAL ASSETS AND LIABILITIES

The accounting policies in note 2 describe how different classes of financial instruments are measured, and how income and expenses, including fair value gains and losses, are recognised. The following table analyses the carrying amounts of the financial assets and liabilities by category and by balance sheet heading.

Derivatives
designated
as hedging
instruments
£m

At fair value
through profit or loss

Held for
trading
£m

Designated
upon initial
recognition
£m

Available-
for-sale
£m

Loans and
receivables
£m

Held at
amortised
cost
£m

Insurance
contracts
£m

Total
£m

As at 31 December 2009

Financial assets

Cash and balances at central banks

—

38,994

—

38,994

Items in the course of collection from banks

—

1,579

—

1,579

Trading and other financial assets at fair value through profit or loss

—

27,245

122,766

—

150,011

Derivative financial instruments

9,430

40,498

—

49,928

Loans and receivables:

Loans and advances to banks

—

35,361

—

35,361

Loans and advances to customers

—

626,969

—

626,969

Debt securities

—

32,652

—

32,652

—

694,982

—

694,982

Available-for-sale financial assets

—

46,602

—

46,602

Total financial assets

9,430

67,743

122,766

46,602

694,982

40,573

—

982,096

Financial liabilities

Deposits from banks

—

82,452

—

82,452

Customer deposits

—

406,741

—

406,741

Items in course of transmission to banks

—

1,037

—

1,037

Trading and other financial liabilities at fair value through profit or loss

—

22,111

6,160

—

28,271

Derivative financial instruments

8,687

31,798

—

40,485

Debt securities in issue

—

233,502

—

233,502

Liabilities arising from insurance contracts and participating investment contracts

—

76,179

Liabilities arising from non-participating investment contracts

—

46,348

Unallocated surplus within insurance businesses

—

1,082

Subordinated liabilities

—

34,727

—

34,727

Total financial liabilities

8,687

53,909

6,160

—

758,459

123,609

950,824

F-93

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

53 FINANCIAL INSTRUMENTS continued


	Derivatives designated as hedging instruments £m		At fair value through profit or loss
	Derivatives designated as hedging instruments £m		Held for trading £m		Designated upon initial recognition £m		Available- for-sale £m		Loans and receivables £m		Held at amortised cost £m		Insurance contracts £m		Total £m
As at 31 December 2008
Financial assets
Cash and balances at central banks		—		—		—		—		—		5,008		—		5,008
Items in the course of collection from banks		—		—		—		—		—		946		—		946
Trading and other financial assets at fair value through profit or loss		—		857		44,207		—		—		—		—		45,064
Derivative financial instruments		435		28,449		—		—		—		—		—		28,884
Loans and receivables:
Loans and advances to banks		—		—		—		—		38,733		—		—		38,733
Loans and advances to customers		—		—		—		—		240,344		—		—		240,344
Debt securities		—		—		—		—		4,416		—		—		4,416
		—		—		—		—		283,493		—		—		283,493
Available-for-sale financial assets		—		—		—		55,707		—		—		—		55,707
Total financial assets		435		29,306		44,207		55,707		283,493		5,954		—		419,102
Financial liabilities
Deposits from banks		—		—		—		—		—		66,514		—		66,514
Customer deposits		—		—		—		—		—		170,938		—		170,938
Items in course of transmission to banks		—		—		—		—		—		508		—		508
Trading and other financial liabilities at fair value through profit or loss		—		6		6,748		—		—		—		—		6,754
Derivative financial instruments		4,169		22,723		—		—		—		—		—		26,892
Debt securities in issue		—		—		—		—		—		75,710		—		75,710
Liabilities arising from insurance contracts and participating investment contracts		—		—		—		—		—		—		33,792		33,792
Liabilities arising from non-participating
investment contracts		—		—		—		—		—		—		14,243		14,243
Unallocated surplus within insurance businesses		—		—		—		—		—		—		270		270
Subordinated liabilities		—		—		—		—		—		17,256		—		17,256
Total financial liabilities		4,169		22,729		6,748		—		—		330,926		48,305		412,877

(2) RECLASSIFICATION OF FINANCIAL ASSETS

In accordance with the amendment to IAS 39 that became applicable during 2008, the Group reviewed the categorisation of its financial assets classified as held for trading and available-for-sale.

On the basis that there was no longer an active market for some of those assets, which are therefore more appropriately managed as loans, with effect from 1 July 2008, the Group transferred £2,993 million of assets previously classified as held for trading into loans and receivables. With effect from 1 November 2008, the Group transferred £437 million of assets previously classified as available-for-sale into loans and receivables. At the time of these transfers, the Group had the intention and ability to hold them for the foreseeable future or until maturity. As at the date of reclassification, the weighted average effective interest rate of the assets transferred was 6.3 per cent with the estimated recoverable cash flows of £3,524 million.

No assets have been reclassified in 2009.

F-94

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

53 FINANCIAL INSTRUMENTS continued

CARRYING AMOUNT AND FAIR VALUES OF RECLASSIFIED ASSETS

The table below sets out the carrying value and fair value of reclassified financial assets.

31 December 2009

31 December 2008

Carrying
value
£m

Fair
value
£m

Carrying
value
£m

Fair
value
£m

From held for trading to loans and receivables

1,833

1,822

2,883

2,926

From available-for-sale financial assets to loans and receivables

394

422

454

402

2,227

2,244

3,337

3,328

During the year ended 31 December 2009, the carrying value of reclassified assets decreased by £1,110 million due to sales and maturities of £990 million, accretion of discount of £61 million and foreign exchange and other movements of £181 million.

Additional fair value gains/(losses) that would have been recognised had the reclassifications not occurred

The table below shows the additional gains/(losses) that would have been recognised in the Group’s income statement if the reclassifications had not occurred.


	2009						2008
	Reclassified in 2009 £m		Reclassified in 2008 £m		Total £m		Reclassified in 2008 £m			Total £m
From held for trading to loans and receivables		—		208		208		(347	)		(347	)

The table below shows the additional gains/(losses) that would have been recognised in other comprehensive income if the reclassifications had not occurred.


	2009						2008
	Reclassified in 2009 £m		Reclassified in 2008 £m		Total £m		Reclassified in 2008 £m			Total £m
From available-for-sale financial assets to loans and receivables		—		161		161		(108	)		(108	)

Actual amounts recognised in respect of reclassified assets

After reclassification the reclassified financial assets contributed the following amounts to the Group income statement.


	2009								2008
	Reclassified in 2009 £m		Reclassified in 2008 £m			Total £m			Reclassified in 2008 £m			Total £m
From held for trading to loans and receivables:
Net interest income		—		55			55			31			31
Impairment losses		—		(49	)		(49	)		(158	)		(158	)
		—		6			6			(127	)		(127	)


	2009								2008
	Reclassified in 2009 £m		Reclassified in 2008 £m			Total £m			Reclassified in 2008 £m			Total £m
From available-for-sale financial assets to loans and receivables:
Net interest income		—		34			34			3			3
Impairment losses		—		(56	)		(56	)		(23	)		(23	)
		—		(22	)		(22	)		(20	)		(20	)

F-95

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

53 FINANCIAL INSTRUMENTS continued

(3) FAIR VALUES OF FINANCIAL ASSETS AND LIABILITIES

The following table summarises the carrying values of financial assets and liabilities presented on the Group’s balance sheet. The fair values presented in the table are at a specific date and may be significantly different from the amounts which will actually be paid or received on the maturity or settlement date.


	Carrying value 2009 £m		Carrying value 2008 £m		Fair value 2009 £m		Fair value 2008 £m

Financial assets
Trading and other financial assets at fair value through profit or loss		150,011		45,064		150,011		45,064
Derivative financial instruments		49,928		28,884		49,928		28,884
Loans and receivables:
Loans and advances to banks		35,361		38,733		35,335		37,954
Loans and advances to customers		626,969		240,344		609,647		235,569
Debt securities		32,652		4,416		31,907		3,931
Available-for-sale financial assets		46,602		55,707		46,602		55,707
Financial liabilities
Deposits from banks		82,452		66,514		82,366		66,504
Customer deposits		406,741		170,938		406,555		171,119
Trading and other financial liabilities at fair value through profit or loss		28,271		6,754		28,271		6,754
Derivative financial instruments		40,485		26,892		40,485		26,892
Debt securities in issue		233,502		75,710		235,170		76,291
Liabilities arising from non-participating investment contracts		46,348		14,243		46,348		14,243
Financial guarantees		38		35		38		35
Subordinated liabilities		34,727		17,256		33,660		11,199

VALUATION METHODOLOGY

Financial instruments include financial assets, financial liabilities and derivatives. The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale.

Wherever possible, fair values have been calculated using unadjusted quoted market prices in active markets for identical instruments held by the Group. Where quoted market prices are not available, or are unreliable because of poor liquidity, fair values have been determined using valuation techniques which, to the extent possible, use market observable inputs, but in some cases use non-market observable inputs. Valuation techniques used include discounted cash flow analysis and pricing models and, where appropriate, comparison to instruments with characteristics similar to those of the instruments held by the Group.

Because a variety of estimation techniques are employed and significant estimates made, comparisons of fair values between financial institutions may not be meaningful. Readers of these financial statements are thus advised to use caution when using this data to evaluate the Group’s financial position.

Fair value information is not provided for items that do not meet the definition of a financial instrument. These items include intangible assets, such as the value of the Group’s branch network, the long-term relationships with depositors and credit card relationships; premises and equipment; and shareholders’ equity. These items are material and accordingly the Group believes that the fair value information presented does not represent the underlying value of the Group.

FAIR VALUE OF FINANCIAL INSTRUMENTS CARRIED AT AMORTISED COST

LOANS AND RECEIVABLES

The Group provides loans and advances to commercial, corporate and personal customers at both fixed and variable rates. The carrying value of the variable rate loans and those relating to lease financing is assumed to be their fair value. For fixed rate lending, several different techniques are used to estimate fair value, as considered appropriate. For commercial and personal customers, fair value is principally estimated by discounting anticipated cash flows (including interest at contractual rates) at market rates for similar loans offered by the Group and other financial institutions. The fair value for corporate loans is estimated by discounting anticipated cash flows at a rate which reflects the effects of interest rate changes, adjusted for changes in credit risk. Certain loans secured on residential properties are made at a fixed rate for a limited period, typically two to five years, after which the loans revert to the relevant variable rate. The fair value of such loans is estimated by reference to the market rates for similar loans of maturity equal to the remaining fixed interest rate period. The fair values of asset-backed securities and secondary loans, which were previously within assets held for trading and were reclassified to loans and receivables (see page F-94), are determined predominantly from lead manager quotes and, where these are not available, by alternative techniques including reference to credit spreads on similar assets with the same obligor, market standard consensus pricing services, broker quotes and other research data.

F-96

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

53 FINANCIAL INSTRUMENTS continued

DEPOSITS FROM BANKS AND CUSTOMER DEPOSITS

The fair value of deposits repayable on demand is considered to be equal to their carrying value. The fair value for all other deposits is estimated using discounted cash flows applying either market rates, where applicable, or current rates for deposits of similar remaining maturities.

DEBT SECURITIES IN ISSUE AND SUBORDINATED LIABILITIES

The fair value of short-term debt securities in issue is approximately equal to their carrying value. Fair value for other debt securities and for subordinated liabilities is estimated using quoted market prices.

VALUATION OF FINANCIAL INSTRUMENTS CARRIED AT FAIR VALUE

The table below provides an analysis of the financial assets and liabilities of the Group that are carried at fair value in the Group’s consolidated balance sheet, grouped into levels 1 to 3 based on the degree to which the fair value is observable.

VALUATION HIERARCHY

At 31 December 2009

Level 1
£m

Level 2
£m

Level 3
£m

Total
£m

Trading and other financial assets at fair value through profit or loss

103,853

43,246

2,912

150,011

Available-for-sale financial assets

12,881

31,110

2,611

46,602

Derivative financial instruments

977

47,014

1,937

49,928

Financial assets

117,711

121,370

7,460

246,541

Trading and other financial liabilities at fair value through profit or loss

511

27,760

—

28,271

Derivative financial instruments

40,222

197

40,485

Financial guarantees

—

Financial liabilities

577

67,982

235

68,794

There were no significant transfers between level 1 and level 2 during the year.


	At 31 December 2008

	Level 1 £m		Level 2 £m		Level 3 £m		Total £m

Trading and other financial assets at fair value through profit or loss		38,019		5,373		1,672		45,064
Available-for-sale financial assets		30,184		22,362		3,161		55,707
Derivative financial instruments		2,147		26,601		136		28,884

Financial assets		70,350		54,336		4,969		129,655

Trading and other financial liabilities at fair value through profit or loss		6		6,748		—		6,754
Derivative financial instruments		153		26,161		578		26,892
Financial guarantees		—		—		35		35

Financial liabilities		159		32,909		613		33,681

The valuations of financial instruments have been classified into three levels according to the quality and reliability of information used to determine the fair values.

LEVEL 1 PORTFOLIOS

Level 1 fair value measurements are those derived from unadjusted quoted prices in active markets for identical assets or liabilities. Products classified as level 1 predominantly comprise treasury bills and other government securities.

LEVEL 2 PORTFOLIOS

Level 2 valuations are those where quoted market prices are not available, for example where the instrument is traded in a market that is not considered to be active or valuation techniques are used to determine fair value and where these techniques use inputs that are based significantly on observable market data, the instrument is considered to be level 2. Examples of such financial instruments include most over-the-counter derivatives, financial institution issued securities, certificates of deposit and certain asset-backed securities.

LEVEL 3 PORTFOLIOS

Level 3 portfolios are those where at least one input which could have a significant effect on the instrument’s valuation is not based on observable market data. Such instruments would include the Group’s venture capital and unlisted equity investments which are valued using various valuation techniques that require significant management judgement in determining appropriate assumptions, including earnings multiples and estimated future cash flows. Certain of the Group’s asset-backed securities and derivatives, principally where there is no trading activity in such securities, are also classified as level 3.

F-97

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

53 FINANCIAL INSTRUMENTS continued


At 31 December 2009	Valuation basis/technique	Main assumptions	Carrying value £m	Effect of reasonably possible alternative as- sumptions £m

Trading and other financial assets at fair value through profit or loss
Asset-backed securities	Lead manager or broker quote/ consensus pricing from market data provider	Use of single pricing source	970	74
Venture capital investments	Various valuation techniques using IPEV Guidelines	Earnings multiples	1,162	n/a
Equity investments	Various valuation techniques	Earnings, net asset value, underlying asset values, property prices, forecast cash flows	234	n/a
Unlisted equities and property partnerships in the life funds	Third party valuations	n/a	546	n/a

			2,912

Available-for-sale financial assets
Asset-backed securities	Lead manager or broker quote/ consensus pricing from market data provider	Use of single pricing source	744	10
Equity investments	Various valuation techniques	Earnings, net asset value, underlying asset values, property prices, forecast cash flows	1,867	n/a

			2,611

Derivative financial instruments	Industry standard model / consensus pricing from market data provider	Prepayment rates, probability of default, loss given default and yield curves. Equity conversion feature spread	1,937	96

Financial assets			7,460

Derivative financial liabilities	Industry standard model / consensus pricing from market data provider	Prepayment rates, probability of default, loss given default and yield curves	197	8

Financial guarantees			38	n/a

Financial liabilities			235

Reasonably possible alternative valuations have been calculated for asset-backed securities by using alternative pricing sources and calculating an absolute difference. In respect of derivative financial instruments, reasonably possible alternative valuations have been calculated by flexing the spread between the underlying asset and the credit derivative, or adjusting market yields, by a reasonable amount.

The valuation techniques used for unlisted equities and venture capital investments vary depending on the nature of the investment. Further details of these are given below. Third party valuers have been used to determine the value of unlisted equities and property partnerships included in the Group’s life insurance funds. As these factors differ for each investment depending on the nature of the valuation technique used and the inputs there is no single common factor that could be adjusted to provide a reasonable alternative valuation for these investments portfolios.

The main products where level 3 valuations have been used are described below:

ASSET-BACKED SECURITIES

Where there is no trading activity in asset-backed securities, valuation models, consensus pricing information from third party pricing services and broker or lead manager quotes are used to determine an appropriate valuation. Asset-backed securities are then classified as either level 2 or level 3 depending on whether there is more than one consistent independent source of data. If there is a single, uncorroborated market source for a significant valuation input or where there are materially inconsistent levels then the valuation is reported as level 3. Asset classes classified as level 3 mainly comprise certain Residential Mortgage-Backed Securities, Collateralised Loan Obligations and Collateralised Debt Obligations.

F-98

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

53 FINANCIAL INSTRUMENTS continued

VENTURE CAPITAL INVESTMENTS

The investments in venture capital activities comprise interests in funds and unlisted equity investments that are valued using techniques that are considered appropriate for that investment. Interests in funds are valued in the same manner as investments in the life funds below.

Valuations of unlisted venture capital equities that are accounted for as trading and other financial assets at fair value through profit or loss are calculated using International Private Equity and Venture Capital Guidelines. The majority of investments are valued using the industry standard earnings model. This involves applying the relevant earnings multiple to the maintainable earnings of the business being valued. A number of earnings multiples are used in valuing the portfolio including price earnings, earnings before interest and tax and earnings before interest, tax, depreciation and amortisation. The particular multiple selected being appropriate for the type of business being valued and is derived by reference to the current market-based multiple. Consideration is given to the risk attributes, growth prospects and financial gearing of comparable businesses when selecting an appropriate multiple. Recent transactions involving the sale of similar businesses may sometimes be used as a frame of reference in deriving an appropriate multiple. Another valuation technique involved, although rarely, is the discounting of projected cash flows at the appropriate cost of capital.

EQUITY INVESTMENTS

Unlisted equities and funds accounted for as available-for-sale assets are valued using different techniques as a result of the variety of investments across the portfolio. A valuation technique is selected for each investment in accordance with the Group’s valuation policy. Depending on the business sector and the circumstances of the investment unlisted equity valuations are based on earnings multiples, net asset values or discounted cash flows.


–	The earnings multiple methodology is described in the section on venture capital investments above.

–	Valuations using net asset values are often used for property-based businesses and use the latest valuations included in management or statutory accounts adjusted for subsequent movements in property valuations and other factors including recoverability.

–	Discounted cash flow valuations use estimated future cash flows, usually based on management forecasts, with the application of appropriate exit yields or terminal multiples and discounted using rates appropriate to the specific investment, business sector or recent economic rates of return.

For fund investments the most recent capital account value calculated by the fund manager is used as the basis for the valuation and adjusted, if necessary, to align valuation techniques with the Group’s valuation policy.

UNQUOTED EQUITIES AND PROPERTY PARTNERSHIPS IN THE LIFE FUNDS

Third party valuations are used to obtain the fair value of unquoted investments. Management take account of any pertinent information, such as recent transactions and information received on particular investments, to adjust the third party valuations where necessary.

DERIVATIVES

Where the Group’s derivative assets and liabilities are not traded on an exchange, they are valued using valuation techniques, including discounted cash flow and options pricing models, as appropriate. The types of derivatives classified as level 2 and the valuation techniques used include:


–	Interest rate swaps are valued using discounted cash flow models; the most significant inputs into those models are interest rate yield curves which are developed from publicly quoted rates.

–	Foreign exchange derivatives that do not contain options are priced using rates available from publicly quoted sources.

–	Credit derivatives, except for the items classified as level 3, are valued using publicly available yield and credit default swap (CDS) curves; the Group uses standard models with observable inputs.

–	Less complex interest rate and foreign exchange option products are valued using volatility surfaces developed from publicly available interest rate cap, interest rate swaption and other option volatilities; option volatility skew information is derived from a market standard consensus pricing service. For more complex option products, the Group calibrates its models using observable at-the-money data; where necessary, the Group adjusts for out-of-the-money positions using a market standard consensus pricing service.

Where credit protection, usually in the form of credit default swaps, has been purchased or written on asset-backed securities, the security is referred to as a negative basis ABS and the resulting derivative assets or liabilities have been classified as either level 2 or level 3 according to the classification of the underlying ABS.

–

The Group’s level 3 derivatives include £1,797 million in respect of the value of the embedded equity conversion feature of the enhanced capital notes issued in December 2009. Level 3 derivatives also include £140 million of credit default swaps written on level 3 negative basis ABS and £197 million of embedded derivatives included in investments of synthetic CDOs. The embedded equity conversion feature is valued by comparing the market price of the ECNs with the market price of similar bonds without the conversion feature. The latter is calculated by discounting the expected ECN cash flows in the absence of a conversion using prevailing market yields for similar capital securities without the conversion feature. The market price of the ECNs was calculated with reference to multiple broker quotes. Movements in the fair value of the derivative are recorded in net trading income.

F-99

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

53 FINANCIAL INSTRUMENTS continued

CREDIT VALUATION ADJUSTMENT

A Credit Valuation Adjustment (CVA) is applied to the Group’s over-the-counter corporate derivative exposures to adjust the counterparty credit risk-free derivative valuations provided by standard interbank lending interest rate curves. The Group uses a simulation model to develop expected future exposures and calculate a pricing reserve based on the relative credit spread of the counterparty compared to the Group. At 31 December 2009 the CVA balance was £663 million (31 December 2008: £203 million). This adjustment has been made to the valuation of over-the-counter derivative instruments classified as level 2.

Observable CDS spreads and recovery rates are used to develop the probability of default for quoted clients. Observable sector CDS curves and recovery rates are used for unquoted clients. The Loss Given Default (LGD) is based on observable recovery rates and internal credit assessments. The combination of a one notch deterioration in credit rating of derivative counterparties and a 10 per cent increase in LGD increases the CVA charge by £181 million. Current market value is used to estimate the projected exposure for products not supported by the model. For these, CVA is calculated on an add-on basis (in total contributing 10 per cent of the overall CVA balance at 31 December 2009). A separate reserve of £43 million is held against features not supported by the current CVA model including rate/credit and wrong-way risk (where exposure to the counterparty is adversely correlated with the credit quality of the counterparty). A separate provision of £25 million is held against pricing risk on collateralised counterparties.

In addition, credit valuation adjustments have been applied to the Group’s credit derivative exposures with monoline insurance counterparties leaving a net exposure of £75 million as shown in note 54 on page F-111.

MOVEMENTS IN LEVEL 3 PORTFOLIO

The table below analyses movements in the Level 3 financial assets portfolio.

Trading and other financial
assets at fair value through
profit or loss
£m

Available-
for-sale
£m

Derivative
assets
£m

Total financial
assets
£m

At 31 December 2008

1,672

3,161

136

4,969

Exchange and other adjustments

(232

)

(205

)

(363

)

Acquired on acquisition

3,386

2,291

569

6,246

Gains (losses) recognised in the income statement

(114

)

(452

)

(1,005

)

(1,571

)

Gains (losses) recognised in other comprehensive income

—

191

—

191

Purchases

374

422

2,224

3,020

Sales

(465

)

(671

)

(61

)

(1,197

)

Transfers into the Level 3 portfolio

—

Transfers out of the Level 3 portfolio

(1,742

)

(2,174

)

—

(3,916

)

At 31 December 2009

2,912

2,611

1,937

7,460

F-100

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

53 FINANCIAL INSTRUMENTS continued

The table below analyses movements in the Level 3 financial liabilities portfolio.


	Derivative liabilities £m			Financial guarantees £m		Total financial liabilities £m

At 31 December 2008		578			35		613
Exchange and other adjustments		(179	)		—		(179	)
Acquired on acquisition		1,102			—		1,102
Gains recognised in the income statement		(47	)		—		(47	)
Additions		—			3		3
Redemptions		(474	)		—		(474	)
Transfers out of the Level 3 portfolio		(783	)		—		(783	)

At 31 December 2009		197			38		235

Transfers out of the Level 3 portfolio arise when inputs that could have a significant impact on the instrument’s valuation become market observable after previously having been non-market observable. In the case of asset-backed securities this can arise if more than one consistent independent source of data becomes available. Conversely transfers into the portfolio arise when consistent sources of data cease to be available.

Included within the gains (losses) recognised in the income statement are losses of £1,542 million related to financial instruments that are held in the Level 3 portfolio at the year end. These amounts are included in other operating income.

54 FINANCIAL RISK MANAGEMENT

As a bancassurer, financial instruments are fundamental to the Group’s activities and, as a consequence, the risks associated with financial instruments represent a significant component of the risks faced by the Group.

The primary risks affecting the Group through its use of financial instruments are: credit risk; market risk, which includes interest rate risk and foreign exchange risk; and liquidity risk. Information about the Group’s exposure to each of the above risks, the Group’s objectives, policies and processes for measuring and managing risk and the Group’s management of capital can be found on pages 57 to 96. The following additional disclosures, which provide quantitative information about the risks within financial instruments held or issued by the Group, should be read in conjunction with that earlier information.

(1) INTEREST RATE RISK

In the Group’s retail banking business interest rate risk arises from the different repricing characteristics of the assets and liabilities. Liabilities are either insensitive to interest rate movements, for example interest free or very low interest customer deposits, or are sensitive to interest rate changes but bear rates which may be varied at the Group’s discretion and that for competitive reasons generally reflect changes in the Bank of England’s base rate. There is a relatively small volume of deposits whose rate is contractually fixed for their term to maturity.

Many banking assets are sensitive to interest rate movements; there is a large volume of managed rate assets such as variable rate mortgages which may be considered as a natural offset to the interest rate risk arising from the managed rate liabilities. However, a significant proportion of the Group’s lending assets, for example personal loans and mortgages, bear interest rates which are contractually fixed for periods of up to five years or longer.

The Group establishes two types of hedge accounting relationships for interest rate risk: fair value hedges and cash flow hedges. The Group is exposed to fair value interest rate risk on its fixed rate customer loans, its fixed rate customer deposits and the majority of its subordinated debt, and to cash flow interest rate risk on its variable rate loans and deposits together with its floating rate subordinated debt. The majority of the Group’s hedge accounting relationships are fair value hedges where interest rate swaps are used to hedge the interest rate risk inherent in the fixed rate mortgage portfolio.

At 31 December 2009 the aggregate notional principal of interest rate swaps designated as fair value hedges was £80,085 million (2008: £37,243 million) with a net fair value asset of £3,004 million (2008: liability of £1,231 million) (note 18). The losses on the hedging instruments were £995 million (2008: losses of £584 million). The gains on the hedged items attributable to the hedged risk were £1,181 million (2008: gains of £426 million).

In addition the Group has cash flow hedges which are primarily used to hedge the variability in the cost of funding within the wholesale business. These cash flows are expected to occur over the next six years and the hedge accounting adjustments will be reported in the income statement as the cash flows arise. The notional principal of the interest rate swaps designated as cash flow hedges at 31 December 2009 was £222,548 million (2008: £867 million) with a net fair value liability of £2,536 million (2008: £90 million) (note 18). In 2009, there is no ineffectiveness recognised in the income statement that arises from cash flow hedges (2008: nil). There were no transactions for which cash flow hedge accounting had to be ceased in 2009 or 2008 as a result of the highly probable cash flows no longer being expected to occur.

F-101

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

54 FINANCIAL RISK MANAGEMENT continued

(2) CURRENCY RISK

Foreign exchange exposures comprise those originating in treasury trading activities and structural foreign exchange exposures, which arise from investment in the Group’s overseas operations.

The corporate and retail businesses incur foreign exchange risk in the course of providing services to their customers. All non-structural foreign exchange exposures in the non-trading book are transferred to the trading area where they are monitored and controlled. These risks reside in the authorised trading centres who are allocated exposure limits. The limits are monitored daily by the local centres and reported to the market and liquidity risk function in London. Associated VaR and the closing, average, maximum and minimum for 2008 and 2009 are disclosed on page 78.

Risk arises from the Group’s investments in its overseas operations. The Group’s structural foreign currency exposure is represented by the net asset value of the foreign currency equity and subordinated debt investments in its subsidiaries and branches. Gains or losses on structural foreign currency exposures are taken to reserves.

The Group hedges part of the currency translation risk of the net investment in certain foreign operations using cross currency swaps and borrowings. At 31 December 2009 the aggregate notional principal of these cross currency swaps was £2,507 million (2008: £6,318 million) with a net fair value asset of £25 million (2008: liability of £2,413 million) (note 18) and they were designated on an after-tax basis as hedges of net investments in foreign operations. In 2009, ineffectiveness of £nil before tax and £nil after tax (2008: ineffectiveness of £14 million before tax and £10 million after tax) was recognised in the income statement arising from net investment hedges.

The Group’s main overseas operations are in the Americas, Asia, Australasia and Europe. Details of the Group’s structural foreign currency exposures, after net investment hedges, are as follows:

FUNCTIONAL CURRENCY OF GROUP OPERATIONS


	2009 £m			2008 £m
Euro:
Gross exposure		2,764			133
Net investment hedge		(2,651	)		—
		113			133
US dollar:
Gross exposure		(184	)		(907	)
Net investment hedge		62			—
		(122	)		(907	)
Swiss franc:
Gross exposure		2,552			2,784
Net investment hedge		(2,467	)		(2,663	)
		85			121
Australian dollar:
Gross exposure		1,869			—
Net investment hedge		(1,832	)		—
		37			—
Japanese yen:
Gross exposure		3,220			3,667
Net investment hedge		(3,207	)		(3,645	)
		13			22
Other non-sterling		316			296
		442			(335	)

F-102

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

54 FINANCIAL RISK MANAGEMENT continued

(3) CREDIT RISK

The Group’s credit risk exposure arises predominantly in the United Kingdom, the European Union, Australia and the United States.

The maximum credit risk exposure of the Group in the event of other parties failing to perform their obligations is detailed below. No account is taken of any collateral held and the maximum exposure to loss is considered to be the balance sheet carrying amount or, for non-derivative off-balance sheet transactions and financial guarantees, their contractual nominal amounts.


	2009 £m			2008 £m
Loans and receivables:
Loans and advances to banks		35,510			38,868
Loans and advances to customers		641,770			243,803
Debt securities		33,082			4,549
Deposit amounts available for offset ¹		(13,373	)		(4,837	)
Impairment allowances		(15,380	)		(3,727	)
		681,609			278,656
Available-for-sale financial assets (excluding equity shares)		44,571			55,666
Trading and other financial assets at fair value through profit or loss (excluding equity shares)		65,861			21,790
Derivative assets, before netting		49,928			28,884
Amounts available for offset under master netting arrangements ¹		(21,698	)		(10,598	)
		28,230			18,286
Assets arising from reinsurance contracts held		1,875			385
Financial guarantees		18,021			10,382
Irrevocable loan commitments and other credit-related contingencies ²		80,585			51,659
Maximum credit risk exposure		920,752			436,824
Maximum credit risk exposure before offset items		955,823			452,259


¹	Deposit amounts available for offset and amounts available for offset under master netting arrangements do not meet the criteria under IAS 32 to enable loans and advances and derivative assets respectively to be presented net of these balances in the financial statements.

²	See note 52 – Contingent liabilities and commitments for further information.

A general description of collateral held in respect of financial instruments is disclosed on page 65.

Loans and advances to banks – the Group may require collateral before entering into a credit commitment with another bank, depending on the type of the financial product and the counterparty involved, and netting agreements are obtained whenever possible and to the extent that such agreements are legally enforceable.

Available-for-sale debt securities, treasury and other bills, and trading and other financial assets at fair value through profit or loss – the credit quality of the Group’s available-for-sale debt securities, treasury and other bills, and the majority of the Group’s trading and other financial assets at fair value through profit or loss held is set out below. An analysis of trading and other financial assets at fair value through profit or loss is included in note 17 and a similar analysis for available-for-sale financial assets is included in note 25. The Group’s non-participating investment contracts are all unit-linked. Trading and other financial assets at fair value through profit or loss which back those investment contracts were £118,573 million (2008: £39,899 million). Movements in the fair value of such assets, including movements arising from credit risk, are borne by the contract holders.

Derivative assets – the Group reduces exposure to credit risk by using master netting agreements and by obtaining cash collateral. An analysis of derivative assets is given in note 18. Of the net derivative assets of £28,230 million (31 December 2008: £18,286 million), cash collateral of £6,645 million (31 December 2008: £2,970 million) was held and a further £13,004 million was due from OECD banks (31 December 2008: £5,840 million).

Assets arising from reinsurance contracts held – of the assets arising from reinsurance contracts held at 31 December 2009 of £1,875 million (31 December 2008: £385 million), £510 million (31 December 2008: £380 million) were due from insurers with a credit rating of AA or above.

F-103

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

54 FINANCIAL RISK MANAGEMENT continued

Financial guarantees – these represent undertakings that the Group will meet a customer’s obligation to third parties if the customer fails to do so. Commitments to extend credit represent unused portions of authorisations to extend credit in the form of loans, guarantees or letters of credit. The Group is theoretically exposed to loss in an amount equal to the total guarantees or unused commitments, however, the likely amount of loss is expected to be significantly less; most commitments to extend credit are contingent upon customers maintaining specific credit standards.

Reverse repo and repo transactions – for reverse repo transactions which are accounted for as collateralised loans, it is the Group’s policy to seek collateral which is at least equal to the amount loaned. At 31 December 2009, the fair value of collateral accepted under reverse repo transactions that the Group is permitted by contract or custom to sell or repledge was £26,732 million (2008: £5,858 million). Of this, £26,732 million (2008: £5,855 million) was sold or repledged as at 31 December 2009. The fair value of collateral pledged in respect of repo transactions, accounted for as secured borrowings, where the secured party is permitted by contract or custom to repledge was £38,102 million (31 December 2008: £5,734 million).

LOANS AND ADVANCES


																Loans and advances designated at fair value through profit or loss £m

	Loans and advances to banks £m			Loans and advances to customers

				Retail – mortgages £m			Retail – other £m			Wholesale £m			Total £m

31 December 2009
Neither past due nor impaired		35,333			347,292			48,429			185,872			581,593			19,082
Past due but not impaired		—			12,587			1,873			5,118			19,578			—
Impaired – no provision required		—			2,034			449			6,603			9,086			—
– provision held		153			5,918			5,902			37,927			49,747			—

Gross		35,486			367,831			56,653			235,520			660,004			19,082
Allowance for impairment losses		(149	)		(1,774	)		(3,379	)		(20,835	)		(25,988	)		—
Fair value adjustments		24												(7,047	)		—

Net		35,361												626,969			19,082

31 December 2008
Neither past due nor impaired		38,716			110,148			33,571			86,707			230,426			608
Past due but not impaired		17			3,134			1,146			555			4,835			—
Impaired – no provision required		—			479			150			1,253			1,882			—
– provision held		135			882			4,327			1,451			6,660			—

Gross		38,868			114,643			39,194			89,966			243,803			608
Allowance for impairment losses		(135	)		(186	)		(2,345	)		(928	)		(3,459	)		—

Net		38,733			114,457			36,849			89,038			240,344			608

The criteria that the Group uses to determine that there is objective evidence of an impairment loss are disclosed in note 3. All impaired loans which exceed certain thresholds, principally within the Group’s Wholesale division, are individually assessed for impairment by reviewing expected future cash flows including those that could arise from the realisation of security. Included in loans and receivables are advances individually determined to be impaired with a gross amount before impairment allowances of £44,675 million (31 December 2008: £2,699 million) which have associated collateral with a fair value of £10,217 million (31 December 2008: £518 million).

F-104

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

54 FINANCIAL RISK MANAGEMENT continued

LOANS AND ADVANCES WHICH ARE NEITHER PAST DUE NOR IMPAIRED


											Loans and advances designated at fair value through profit or loss £m

	Loans and advances to banks £m		Loans and advances to customers

			Retail – mortgages £m		Retail – other £m		Wholesale £m		Total £m

31 December 2009
Good quality		34,434		335,482		30,743		61,810				18,702
Satisfactory quality		135		9,614		12,654		59,752				267
Lower quality		15		746		1,480		45,986				90
Below standard, but not impaired		749		1,450		3,552		18,324				23

		35,333		347,292		48,429		185,872		581,593		19,082

31 December 2008
Good quality		38,283		109,815		21,373		49,349				129
Satisfactory quality		215		264		9,192		31,042				411
Lower quality		204		—		900		5,831				56
Below standard, but not impaired		14		69		2,106		485				12

		38,716		110,148		33,571		86,707		230,426		608

The definitions of good quality, satisfactory quality, lower quality and below standard, but not impaired applying to retail and wholesale are not the same, reflecting the different characteristics of these exposures and the way they are managed internally, and consequently totals are not provided. Wholesale lending has been classified using internal probability of default rating models mapped so that they are comparable to external credit ratings. Good quality lending comprises the lower assessed default probabilities, with other classifications reflecting progressively higher default risk. Classifications of retail lending incorporate expected recovery levels for mortgages, as well as probabilities of default assessed using internal rating models. Good quality lending includes the lower assessed default probabilities and all loans with low expected losses in the event of default, with other categories reflecting progressively higher risks and lower expected recoveries.

F-105

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

54 FINANCIAL RISK MANAGEMENT continued

LOANS AND ADVANCES WHICH ARE PAST DUE BUT NOT IMPAIRED


											Loans and advances designated at fair value through profit or loss £m
			Loans and advances to customers
	Loans and advances to banks £m
			Retail – mortgages £m		Retail – other £m		Wholesale £m		Total £m



31 December 2009
0-30 days		—		6,018		1,316		2,347		9,681		—
30-60 days		—		2,649		376		825		3,850		—
60-90 days		—		1,702		74		825		2,601		—
90-180 days		—		2,216		48		560		2,824		—
Over 180 days		—		2		59		561		622		—

		—		12,587		1,873		5,118		19,578		—

Fair value of collateral held				10,845		n/a		n/a		n/a

31 December 2008
0-30 days		—		1,527		853		289		2,669		—
30-60 days		—		633		259		90		982		—
60-90 days		17		424		32		70		526		—
90-180 days		—		549		2		77		628		—
Over 180 days		—		1		—		29		30		—

		17		3,134		1,146		555		4,835		—

Fair value of collateral held				2,637		n/a		n/a		n/a

A financial asset is ‘past due’ if a counterparty has failed to make a payment when contractually due.

Collateral held against retail mortgage lending is principally comprised of residential properties; their fair value has been estimated based upon the last actual valuation, adjusted to take into account subsequent movements in house prices, after making allowance for indexation error and dilapidations. The resulting valuation has been limited to the principal amount of the outstanding advance in order to provide a clearer representation of the Group’s credit exposure.

Lending decisions are based on an obligor’s ability to repay from normal business operations rather than reliance on the disposal of any security provided. Collateral values for non-mortgage lending are assessed more rigorously at the time of loan origination or when taking enforcement action and may fluctuate, as in the case of floating charges, according to the level of assets held by the customer. Whilst collateral is reviewed on a regular basis in accordance with business unit credit policy, this varies according to the type of lending and collateral involved. It is therefore not practicable to estimate and aggregate current fair values of collateral for non-mortgage lending.

RENEGOTIATED LOANS AND ADVANCES

Loans and advances that were renegotiated during the year and that would otherwise have been past due or impaired at 31 December 2009 totalled £3,919 million (31 December 2008: £144 million).

F-106

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

54 FINANCIAL RISK MANAGEMENT continued

FORBEARANCE

Customers can have their arrears balance recapitalised once they have demonstrated they can pay the original contractual minimum payment, but are unable to clear their arrears. This is usually demonstrated by the customer making six consecutive contractual monthly payments. Customers are not however able to recapitalise more than twice in a five year period. Recapitalised mortgages will return to the non-impaired book and will be managed in accordance with the recapitalised terms of the mortgage.

REPOSSESSED COLLATERAL


	2009 £m		2008 £m

Residential property		1,353		221
Other		701		26

		2,054		247

In respect of retail portfolios, the Group does not take physical possession of properties or other assets held as collateral and uses external agents to realise the value as soon as practicable, generally at auction, to settle indebtedness. Any surplus funds are returned to the borrower or are otherwise dealt with in accordance with appropriate insolvency regulations. In certain circumstances the Group takes physical possession of assets held as collateral against wholesale lending. In such cases, the assets are carried on the Group’s balance sheet and are classified according to the Group’s accounting policies.

LOAN-TO-VALUE RATIO OF MORTGAGE LENDING


	2009 £m		2008 £m

Analysis by loan-to-value ratio of the Group’s residential mortgage lending which is neither past due nor impaired:
Less than 70 per cent		142,614		55,040
70 per cent to 80 per cent		54,079		15,812
80 per cent to 90 per cent		52,238		15,954
Greater than 90 per cent		98,361		23,342

		347,292		110,148

F-107

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

54 FINANCIAL RISK MANAGEMENT continued

Debt securities, treasury and other bills – analysis by credit rating:

Rated BB

AAA

BBB

or lower

Not rated

Total

£m

As at 31 December 2009

Debt securities held at fair value through profit or loss

Trading assets:

Government securities

2,100

806

—

2,936

Other public sector securities

—

Bank and building society certificates of deposit

—

1,037

997

—

2,034

Other asset-backed securities

331

379

181

—

891

Corporate and other debt securities

1,025

312

1,328

348

3,097

Total held as trading assets

3,456

2,534

2,512

348

8,964

Other assets held at fair value through profit or loss:

Government securities

16,025

581

337

—

17,025

Other public sector securities

675

—

700

Asset-backed securities:

Mortgage-backed securities

316

134

—

520

Other asset-backed securities

403

325

654

333

265

1,999

719

459

699

357

265

2,519

Corporate and other debt securities

4,070

1,359

4,540

3,407

1,062

3,133

17,571

Total other assets held at fair value through profit or loss

21,489

2,415

5,576

3,790

1,327

3,218

37,815

Total held at fair value through profit or loss

24,945

4,949

8,088

4,138

1,399

3,260

46,779

Available-for-sale financial assets

Debt securities:

Government securities

8,222

263

—

149

8,669

Other public sector securities

—

Bank and building society certificates of deposit

499

452

—

1,014

Asset-backed securities:

Mortgage-backed securities

3,820

555

215

156

—

4,781

Other asset-backed securities

6,080

731

448

179

186

7,640

9,900

1,286

663

335

221

12,421

Corporate and other debt securities

2,002

7,342

8,802

1,350

228

180

19,904

Total debt securities

20,146

9,390

9,952

1,707

468

376

42,039

Treasury bills and other bills

269

2,263

—

2,532

Total held as available-for-sale assets

20,415

11,653

9,952

1,707

468

376

44,571

Debt securities classified as loans and receivables

Asset-backed securities:

Mortgage-backed securities

9,183

2,470

805

682

182

—

13,322

Other asset-backed securities

11,824

2,465

1,449

277

965

157

17,137

21,007

4,935

2,254

959

1,147

157

30,459

Corporate and other debt securities

—

439

823

306

986

2,623

Total debt securities classified as loans and receivables

21,007

5,374

3,077

1,028

1,453

1,143

33,082

F-108

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

54 FINANCIAL RISK MANAGEMENT continued

Debt securities, treasury and other bills – analysis by credit rating:


					Rated BB
	AAA	AA	A	BBB	or lower	Not rated	Total
	£m	£m	£m	£m	£m	£m	£m

As at 31 December 2008
Debt securities held at fair value through profit or loss
Trading assets:
Government securities	38	—	—	—	—	—	38
Corporate and other debt securities	76	187	38	68	87	80	536

Total held as trading assets	114	187	38	68	87	80	574

Other assets held at fair value through profit or loss:
Government securities	7,025	45	138	1	—	117	7,326
Other public sector securities	—	—	—	—	—	18	18
Bank and building society certificates of deposit	96	337	—	—	—	—	433
Asset-backed securities:
Mortgage-backed securities	207	108	23	16	—	15	369
Other asset-backed securities	206	362	391	277	105	1	1,342
	413	470	414	293	105	16	1,711
Corporate and other debt securities	3,194	864	2,911	2,142	599	1,410	11,120

Total other assets held at fair value through profit or loss	10,728	1,716	3,463	2,436	704	1,561	20,608

Total held at fair value through profit or loss	10,842	1,903	3,501	2,504	791	1,641	21,182

Available-for-sale financial assets
Debt securities:
Government securities	851	—	1	—	—	16	868
Other public sector securities	—	—	—	—	—	12	12
Bank and building society certificates of deposit	—	9,418	166	—	18	—	9,602
Asset-backed securities:
Mortgage-backed securities	5,523	59	59	18	41	—	5,700
Other asset-backed securities	7,412	235	134	73	184	54	8,092
	12,935	294	193	91	225	54	13,792
Corporate and other debt securities	168	1,257	192	—	—	566	2,183

Total debt securities	13,954	10,969	552	91	243	648	26,457
Treasury bills and other bills	26,858	2,351	—	—	—	—	29,209

Total held as available-for-sale assets	40,812	13,320	552	91	243	648	55,666

Debt securities classified as loans and receivables
Asset-backed securities:
Mortgage-backed securities	431	6	—	31	10	—	478
Other asset-backed securities	73	72	162	53	10	170	540
	504	78	162	84	20	170	1,018
Corporate and other debt securities	18	1,204	1,663	114	—	532	3,531

Total debt securities classified as loans and receivables	522	1,282	1,825	198	20	702	4,549

There are no material amounts for debt securities, treasury and other bills which are past due but not impaired.

F-109

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

54 FINANCIAL RISK MANAGEMENT continued

CREDIT MARKET EXPOSURES

The Group’s credit market exposures primarily relate to asset-backed securities exposures held in the Wholesale division. These exposures are classified as loans and receivables (note 23), available-for-sale (note 25) and trading and other financial assets at fair value through profit or loss (note 17) depending on the nature of the investment.

Loans and
receivables
£m

Available-for-sale
£m

Trading and other
financial assets at
fair value through
profit or loss
£m

Net exposure
as at
31 December
2009
£m

Net exposure
as at
31 December
2008
£m

Asset-backed securities

Mortgage-backed securities:

US residential mortgage-backed securities

4,826

—

4,826

488

Non-US residential mortgage-backed securities

6,078

3,577

—

9,655

4,585

Commercial mortgage-backed securities

2,561

1,176

—

3,737

1,328

13,465

4,753

—

18,218

6,401

Collateralised debt obligations:

Corporate

—

Commercial real estate

509

—

509

—

Other

151

—

196

189

Collateralised loan obligation

4,006

1,739

—

5,745

2,319

4,752

1,784

—

6,536

2,508

Personal sector:

Auto loans

1,006

724

—

1,730

796

Credit cards

2,938

782

—

3,720

1,126

Personal loans

769

230

—

999

4,713

1,736

—

6,449

1,961

Federal family education loan programme student loans

5,938

3,306

—

9,244

2,951

Other asset-backed securities

400

783

—

1,183

1,050

Total uncovered asset-backed securities

29,268

12,362

—

41,630

14,871

Negative basis ¹

—

1,174

1,233

584

Total Wholesale asset-backed securities

29,268

12,421

1,174

42,863

15,455

Direct

19,386

7,039

1,174

27,599

8,728

Conduits (note 22)

9,882

5,382

—

15,264

6,727

Total Wholesale asset-backed securities

29,268

12,421

1,174

42,863

15,455

Other asset-backed securities

1,191

—

2,236

3,427

1,066

Total asset-backed securities

30,459

12,421

3,410

46,290

16,521


¹	Negative basis means bonds held with separate matching credit default swap protection.

F-110

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

54 FINANCIAL RISK MANAGEMENT continued

The table below sets out the Wholesale division’s net exposure to US RMBS by vintage.


	Pre-2005 £m		2005 £m		2006 £m		2007 £m		Net exposure as at 31 December 2009 £m		Net exposure as at 31 December 2008 £m

Asset class
Prime		274		282		196		107		859		—
Alt-A		125		806		1,525		1,511		3,967		488
Sub-prime		—		—		—		—		—		—

		399		1,088		1,721		1,618		4,826		488

EXPOSURES TO MONOLINES

During the year all exposure to sub-investment grade monolines on CDS contracts was written down to zero, leaving limited exposure to monoline insurers as set out below.

Credit default swaps

Wrapped loans and receivables

Wrapped bonds

Notional
£m

Exposure ¹
£m

Notional
£m

Exposure ² £m

Notional
£m

Exposure ³ £m

Investment grade

1,030

401

260

156

101

Sub-investment grade

—

234

1,030

401

260

390

109


¹	The exposure to monolines arising from credit default swaps is calculated as the mark-to-market of the CDS protection purchased from the monoline after credit valuation adjustments.

²	The exposure to monolines on wrapped loans and receivables and bonds is the internal assessment of amounts that will be recovered from the monoline guarantor on interest and principal shortfalls.

³	In addition, the Group has £2,703 million of monoline wrapped bonds and £791 million of monoline liquidity commitments on which the Group currently places no reliance on the guarantor.

F-111

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

54 FINANCIAL RISK MANAGEMENT continued

CREDIT RATINGS

An analysis of external credit ratings as at 31 December 2009 of the Wholesale division’s asset-backed securities portfolio by asset class is provided below. These ratings are based on the lowest of Moody’s, Standard & Poor’s and Fitch.


	Net							Below
	Exposure	AAA	AA	A	BBB	BB	B	B
	£m	£m	£m	£m	£m	£m	£m	£m

Asset class
Mortgage-backed securities
US residential mortgage-backed securities:
Prime	859	435	245	42	16	22	31	68
Alt-A	3,967	2,819	729	286	102	27	2	2
Sub-prime	—	—	—	—	—	—	—	—

	4,826	3,254	974	328	118	49	33	70
Non-US residential mortgage-backed securities	9,655	8,742	862	48	3	—	—	—
Commercial mortgage-backed securities	3,737	1,067	1,325	476	755	58	—	56

	18,218	13,063	3,161	852	876	107	33	126

Collateralised debt obligations
Corporate	86	24	45	6	—	11	—	—
Commercial real estate	509	99	158	159	33	45	15	—
Other	196	—	130	—	—	—	10	56

	791	123	333	165	33	56	25	56
Collateralised loan obligation	5,745	2,200	2,206	963	111	239	18	8

	6,536	2,323	2,539	1,128	144	295	43	64
Personal sector
Auto loans	1,730	1,430	24	74	10	192	—	—
Credit Cards	3,720	3,606	114	—	—	—	—	—
Personal loans	999	789	56	154	—	—	—	—

	6,449	5,825	194	228	10	192	—	—
Federal family education loan programme
Student loans	9,244	9,152	92	—	—	—	—	—
Other asset-backed securities	1,183	297	1	492	246	131	16	—
Negative basis ¹
Monolines	970	376	379	215	—	—	—	—
Banks	263	50	9	—	—	—	—	204

	1,233	426	388	215	—	—	—	204

Total as at 31 December 2009	42,863	31,086	6,375	2,915	1,276	725	92	394

Total as at 31 December 2008	15,455	13,518	436	131	260	—	—	1,110


¹	The external credit rating is based on the bond ignoring the benefit of the CDS.

F-112

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

54 FINANCIAL RISK MANAGEMENT continued

(4) LIQUIDITY RISK

The table below analyses assets and liabilities of the Group into relevant maturity groupings based on the remaining contractual period at the balance sheet date; balances with no fixed maturity are included in the over 5 years category.

MATURITIES OF ASSETS AND LIABILITIES

Up to

1-3

3-12

1-5

Over 5

1 month

months

years

Total

£m

As at 31 December 2009

Assets

Trading and other financial assets at fair value through profit or loss

22,912

6,047

10,517

9,666

100,869

150,011

Derivative financial instruments

15,222

1,245

3,756

15,611

14,094

49,928

Loans and advances to banks

24,641

2,783

4,759

1,880

1,298

35,361

Loans and advances to customers

84,441

12,623

30,296

126,355

373,254

626,969

Debt securities held as loans and receivables

143

557

4,149

27,711

32,652

Available-for-sale financial assets

1,205

3,134

3,172

19,885

19,206

46,602

Other assets

44,816

448

587

385

39,496

85,732

193,329

26,423

53,644

177,931

575,928

1,027,255

Liabilities

Deposits from banks

45,877

15,522

16,612

1,106

3,335

82,452

Customer deposits

326,931

26,637

18,234

30,627

4,312

406,741

Derivative financial instruments, trading and other liabilities at fair value through profit or loss

26,494

4,655

9,330

17,827

10,450

68,756

Debt securities in issue

37,981

36,321

33,475

75,912

49,813

233,502

Liabilities arising from insurance and investment contracts

57,797

1,480

2,975

12,151

49,206

123,609

Other liabilities

3,674

502

1,372

4,056

23,757

33,361

Subordinated liabilities

280

754

8,568

25,070

34,727

498,809

85,397

82,752

150,247

165,943

983,148

As at 31 December 2008

Assets

Trading and other financial assets at fair value through profit or loss

196

216

606

3,059

40,987

45,064

Derivative financial instruments

7,366

1,956

3,362

7,570

8,630

28,884

Loans and advances to banks

23,585

4,712

7,002

5,354

105

40,758

Loans and advances to customers

39,854

7,254

15,430

56,331

123,866

242,735

Available-for-sale financial assets

31,204

6,800

2,076

8,843

6,784

55,707

Other assets

9,647

590

249

12,377

22,885

111,852

21,528

28,498

81,406

192,749

436,033

Liabilities

Deposits from banks

49,579

13,580

1,399

1,956

—

66,514

Customer deposits

152,065

8,449

7,925

2,054

445

170,938

Derivative financial instruments, trading and other liabilities at fair value through profit or loss

6,725

1,977

3,204

11,871

9,869

33,646

Debt securities in issue

24,236

26,718

8,636

12,783

3,337

75,710

Liabilities arising from insurance and investment contracts

382

983

2,695

8,117

36,128

48,305

Other liabilities

5,701

404

552

186

7,122

13,965

Subordinated liabilities

—

2,809

14,334

17,256

238,704

52,111

24,508

39,776

71,235

426,334

F-113

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

54 FINANCIAL RISK MANAGEMENT continued

The above tables are provided on a contractual basis. The Group’s assets and liabilities may be repaid or otherwise mature earlier or later than implied by their contractual terms and readers are, therefore, advised to use caution when using data to evaluate the Group’s liquidity position.

The table below analyses financial instrument liabilities of the Group, excluding those arising from insurance and participating investment contracts, on an undiscounted future cash flow basis according to contractual maturity, into relevant maturity groupings based on the remaining period at the balance sheet date; balances with no fixed maturity are included in the over 5 years category.


	Up to 1 month £m		1-3 months £m		3-12 months £m		1-5 years £m		Over 5 years £m		Total £m

As at 31 December 2009
Deposits from banks	46,260		15,250		19,232		1,229		892		82,863
Customer deposits	305,782		37,691		32,848		28,229		4,020		408,570
Trading and other financial liabilities at fair value through profit or loss	14,592		3,668		6,116		3,224		1,275		28,875
Debt securities in issue	40,505		38,431		34,909		117,856		25,863		257,564
Liabilities arising from non-participating investment contracts	46,040		4		58		185		186		46,473
Subordinated liabilities	75		1,004		1,745		15,702		35,737		54,263

Total non-derivative financial liabilities	453,254		96,048		94,908		166,425		67,973		878,608

Derivative financial liabilities:
Gross settled derivatives – outflows	10,707		4,844		8,309		35,793		38,505		98,158
Gross settled derivatives – inflows	(6,547	)	(4,501	)	(8,165	)	(35,306	)	(36,311	)	(90,830	)
Gross settled derivatives – net flows	4,160		343		144		487		2,194		7,328
Net settled derivatives liabilities	15,107		2,180		9,395		8,721		1,777		37,180

Total derivative financial liabilities	19,267		2,523		9,539		9,208		3,971		44,508

As at 31 December 2008
Deposits from banks	49,620		13,617		1,480		1,986		5		66,708
Customer deposits	151,164		8,258		9,675		2,303		697		172,097
Trading and other financial liabilities at fair value through profit or loss	29,479		1,077		5,295		7,203		3,818		46,872
Debt securities in issue	24,381		26,944		9,192		13,643		3,489		77,649
Liabilities arising from non-participating investment contracts	14,243		—		—		—		—		14,243
Subordinated liabilities	34		130		563		5,382		20,516		26,625

Total non-derivative financial liabilities	268,921		50,026		26,205		30,517		28,525		404,194

Derivative financial liabilities:
Gross settled derivatives – outflows	5,210		284		4,602		990		1,154		12,240
Gross settled derivatives – inflows	(3,136	)	(33	)	(3,248	)	—		—		(6,417	)
Gross settled derivatives – net flows	2,074		251		1,354		990		1,154		5,823
Net settled derivative liabilities	1,824		640		415		350		970		4,199

Total derivative financial liabilities	3,898		891		1,769		1,340		2,124		10,022

Cash flows for undated subordinated liabilities whose terms give the Group the option to redeem at a future date are included within the table on the basis that the Group will exercise its option to redeem.

The principal amount for undated subordinated liabilities with no redemption option is included within the over five years column; interest of approximately £555 million (2008: £412 million) per annum which is payable in respect of those instruments for as long as they remain in issue is not included beyond five years.

Further information on the Group’s liquidity exposures is provided on pages 83 to 86.

F-114

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

54 FINANCIAL RISK MANAGEMENT continued

Liabilities arising from insurance and participating investment contracts are analysed on a behavioural basis, as permitted by IFRS 4, as follows:

Up to
1 month
£m

1-3
months
£m

3-12
months
£m

1-5
years
£m

Over 5
years
£m

Total
£m

As at 31 December 2009

6,263

2,303

4,796

17,890

44,927

76,179

As at 31 December 2008

340

927

2,626

7,030

22,869

33,792

The following tables set out the amounts and residual maturities of Lloyds Banking Group’s off balance sheet contingent liabilities and commitments.


	Within 1 year £m		1-3 years £m		3-5 years £m		Over 5 years £m		Total £m
31 December 2009
Acceptances		59		—		—		—		59
Other contingent liabilities		2,670		1,356		1,144		879		6,049
Total contingent liabilities		2,729		1,356		1,144		879		6,108
Lending commitments		82,997		20,497		18,040		6,003		127,537
Other commitments		921		105		14		6		1,046
Total commitments		83,918		20,602		18,054		6,009		128,583
Total contingents and commitments		86,647		21,958		19,198		6,888		134,691

	Within 1 year £m		1-3 years £m		3-5 years £m		Over 5 years £m		Total £m
31 December 2008
Acceptances		49		—		—		—		49
Other contingent liabilities		1,722		1,525		402		1,071		4,720
Total contingent liabilities		1,771		1,525		402		1,071		4,769
Lending commitments		54,155		15,029		8,014		3,625		80,823
Other commitments		572		181		80		99		932
Total commitments		54,727		15,210		8,094		3,724		81,755
Total contingents and commitments		56,498		16,735		8,496		4,795		86,524

55 CONSOLIDATED CASH FLOW STATEMENT

(A) CHANGE IN OPERATING ASSETS


	2009 £m			2008 £m			2007 £m
Change in loans and receivables		50,935			(33,717	)		(12,123	)
Change in derivative financial instruments, trading and other financial assets at fair value through profit or loss		12,063			(8,990	)		(4,348	)
Change in other operating assets		(1,056	)		(318	)		(511	)
Change in operating assets		61,942			(43,025	)		(16,982	)

F-115

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

55 CONSOLIDATED CASH FLOW STATEMENT continued

(B) CHANGE IN OPERATING LIABILITIES


	2009 £m			2008 £m			2007 £m
Change in deposits from banks		(71,267	)		25,279			2,136
Change in customer deposits		11,474			13,088			17,172
Change in debt securities in issue		(26,578	)		22,401			(2,450	)
Change in derivative financial instruments, trading and other liabilities at fair value through profit or loss		(27,037	)		22,565			3,840
Change in investment contract liabilities		5,415			(3,061	)		(58	)
Change in other operating liabilities		2,066			661			901
Change in operating liabilities		(105,927	)		80,933			21,541

(C) NON-CASH AND OTHER ITEMS

	2009 £m			2008 £m		¹	2007 £m		¹
Depreciation and amortisation		2,560			686			630
Revaluation of investment properties		214			1,058			321
Allowance for loan losses		16,028			2,876			1,721
Write-off of allowance for loan losses		(4,090	)		(1,498	)		(1,405	)
Impairment of available-for-sale financial assets		602			130			70
Impairment of goodwill		240			100			—
Change in insurance contract liabilities		5,986			(4,555	)		853
Other provision movements		95			7			(52	)
Net charge in respect of defined benefit schemes		529			164			175
Contributions to defined benefit schemes		(1,867	)		(547	)		(452	)
Gain on acquisition		(11,173	)		—			—
Other non-cash items		(2,806	)		(3,324	)		871
Total non-cash items		6,318			(4,903	)		2,732
Interest expense on subordinated liabilities		2,550			896			741
Profit on disposal of businesses		—			—			(657	)
Other		39			(10	)		(31	)
Total other items		2,589			886			53
Non-cash and other items		8,907			(4,017	)		2,785

¹ Restated for IFRS 2 (Revised).

(D) ANALYSIS OF CASH AND CASH EQUIVALENTS AS SHOWN IN THE BALANCE SHEET

	2009 £m			2008 £m			2007 £m
Cash and balances with central banks		38,994			5,008			4,330
Less: mandatory reserve deposits ²		(728	)		(545	)		(338	)
		38,266			4,463			3,992
Loans and advances to banks		35,361			40,758			34,845
Less: amounts with a maturity of three months or more		(7,937	)		(12,461	)		(6,946	)
		27,424			28,297			27,899
Total cash and cash equivalents		65,690			32,760			31,891


²	Mandatory reserve deposits are held with local central banks in accordance with statutory requirements; these deposits are not available to finance the Group’s day-to-day operations.

Included within cash and cash equivalents at 31 December 2009 is £13,323 million (2008: £8,255 million; 2007: £7,426 million) held within the Group’s life funds, which is not immediately available for use in the business.

F-116

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

55 CONSOLIDATED CASH FLOW STATEMENT continued

(E) ANALYSIS OF CHANGES IN FINANCING DURING THE YEAR


	2009 £m			2008 £m			2007 £m
Share capital (including share premium account and merger reserve):
At 1 January		3,952			3,073			3,038
Issued on acquisition of HBOS		7,651			—			—
Transfer to capital redemption reserve		(26	)		—			—
Cash proceeds from issue of share capital:
Private placement		—			760			—
Placing and open offer		4,430			—			—
Placing and compensatory open offer		3,905			—			—
Rights issue		13,112			—			—
Other		41			119			35
		21,488			879			35
At 31 December		33,065			3,952			3,073

	2009 £m			2008 £m			2007 £m
Minority interests:
At 1 January		306			284			352
Exchange and other adjustments		(19	)		28			(1	)
Adjustment on acquisition of HBOS		5,567			—			—
Repayment of capital to minority shareholders and extinguishment of minority interests		(5,035	)		(3	)		(80	)
Minority share of profit after tax		126			26			32
Dividends paid to minority shareholders		(116	)		(29	)		(19	)
At 31 December		829			306			284

	2009 £m			2008 £m			2007 £m
Subordinated liabilities:
At 1 January		17,256			11,958			12,072
Exchange and other adjustments		133			2,658			186
Adjustment on acquisition of HBOS		20,048			—			—
Issue of subordinated liabilities		4,187			3,021			—
Repayments of subordinated liabilities		(6,897	)		(381	)		(300	)
At 31 December		34,727			17,256			11,958

F-117

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

55 CONSOLIDATED CASH FLOW STATEMENT continued

(F) ACQUISITION OF GROUP UNDERTAKINGS AND BUSINESSES


	2009 £m		2008 £m		2007 £m

Net assets acquired:
Cash and balances at central banks	2,123		—		—
Derivatives, trading and other financial assets at fair value through profit or loss	137,889		—		—
Loans and receivables:
Loans and advances to customers	436,839		—		—
Loans and advances to banks	15,794		—		—
Debt securities	38,408		—		—
	491,041		—		—
Available-for-sale financial assets	27,151		—		—
Investment properties	3,002		—		—
Value of in-force business	3,713		—		—
Intangible assets	4,754		—		—
Tangible fixed assets	5,707		—		—
Other assets	11,398		—		—
Deposits from banks	(87,840	)	—		—
Customer deposits	(224,694	)	—		—
Derivatives, trading and other financial liabilities at fair value through profit or loss	(62,158	)	—		—
Debt securities in issue	(185,319	)	—		—
Insurance liabilities	(36,687	)	—		—
Liabilities arising from non-participating investment contracts	(28,181	)	—		—
Other liabilities	(17,316	)	—		—
Retirement benefit obligations	(358	)	—		—
Subordinated liabilities	(20,048	)	—		—
Preference shares	(3,917	)	—		—
Minority interests	(1,300	)	—		—
	18,960		—		—
Satisfied by:
Issue of shares	(7,651	)	—		—
Gain on acquisition	(11,173	)	—		—
Cash and cash equivalents acquired, net of acquisition costs	16,341		—		—
	(2,483	)	—		—
Net cash inflow arising from acquisition of HBOS	16,477		—		—
Acquisition of and additional investment in joint ventures	(215	)	—		—
Net cash inflow arising from acquisitions in the year	16,262		—		—
Payments to former members of Scottish Widows Fund and Life Assurance Society acquired during 2000	(35	)	(19	)	(8	)
Net cash inflow (outflow)	16,227		(19	)	(8	)

F-118

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

55 CONSOLIDATED CASH FLOW STATEMENT continued

(G) DISPOSAL AND CLOSURE OF GROUP UNDERTAKINGS AND BUSINESSES


	2009 £m	2008 £m	2007 £m

Cash and balances at central banks	—	—	37
Trading and other financial assets at fair value through profit or loss	—	—	10,999
Loans and advances to banks	—	—	1,150
Value of in-force business	—	—	412
Intangible assets	170	—	—
Liabilities arising from insurance contracts and participating investment contracts	—	—	(4,349	)
Liabilities arising from non-participating investment contracts	—	—	(7,283	)
Unallocated surplus within insurance businesses	—	—	(15	)
Other net assets and liabilities	241	—	(95	)

	411	—	856
Profit on sale of businesses	—	—	657
Cash and cash equivalents disposed of	—	—	(37	)

Net cash inflow from disposals	411	—	1,476

56 FUTURE ACCOUNTING DEVELOPMENTS

The following pronouncements will be relevant to the Group but were not effective at 31 December 2009 and have not been applied in preparing these financial statements. The full impact of these accounting changes is being assessed by the Group. With the exception of IFRS 9 Financial Instruments: Classification and Measurement , the initial view is that none of these pronouncements are expected to cause any material adjustments to reported numbers in the financial statements.

IFRS 9 is the initial stage of a project to replace IAS 39 Financial Instruments: Recognition and Measurement and will fundamentally change the way in which the Group accounts for financial instruments. Future stages are expected to result in amendments to IFRS 9 to deal with classification and measurement of financial liabilities, amortised cost and impairment and hedge accounting. Until all stages of the replacement project are complete, it is not possible to determine the overall impact on the financial statements from the replacement of IAS 39.



Pronouncement	Nature of change	IASB effective date


IFRS 3 Business Combinations	The revised standard continues to apply the acquisition method to business combinations, however all payments to purchase a business are to be recorded at fair value at the acquisition date, some contingent payments are subsequently remeasured at fair value through income, goodwill may be calculated based on the parent’s share of net assets or it may include goodwill related to the minority interest, and all transaction costs are expensed.	Annual periods beginning on or after 1 July 2009.

IAS 27 Consolidated and Separate Financial Statements	Requires the effects of all transactions with non-controlling interests to be recorded in equity if there is no change in control; any remaining interest in an investee is re-measured to fair value in determining the gain or loss recognised in profit or loss where control over the investee is lost.	Annual periods beginning on or after 1 July 2009.

IFRIC 17 Distributions of Non-cash Assets to Owners	Provides accounting guidance for non-reciprocal distributions of non-cash assets to owners (and those in which owners may elect to receive a cash alternative).	Annual periods beginning on or after 1 July 2009.

Amendment to IAS 39 Financial Instruments: Recognition and Measurement – ‘Eligible Hedged Items’	Clarifies how the principles underlying hedge accounting should be applied in particular situations.	Annual periods beginning on or after 1 July 2009.

Improvements to IFRSs ¹ (issued April 2009)	Sets out minor amendments to IFRS standards as part of annual improvements process.	Dealt with on a standard by standard basis but not earlier than annual periods beginning on or after 1 January 2010.

Amendments to IFRS 2 Share-based Payment – ‘Group Cash-settled Share-based Payment Transactions’ ¹	Clarifies that an entity that receives goods or services in a share-based payment arrangement must account for those goods or services no matter which entity in the group settles the transaction, whether or not settled in shares or cash.	Annual periods beginning on or after 1 January 2010.

Amendment to IAS 32 Financial Instruments: Presentation – ‘Classification of Rights Issues’	Requires rights issues denominated in a currency other than the functional currency of the issuer to be classified as equity regardless of the currency in which the exercise price is denominated.	Annual periods beginning on or after 1 February 2010.

F-119

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

56 FUTURE ACCOUNTING DEVELOPMENTS continued



Pronouncement	Nature of change	IASB effective date


IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments ¹	Clarifies that when an entity renegotiates the terms of its debt with the result that the liability is extinguished by the debtor issuing its own equity instruments to the creditor, a gain or loss is recognised in profit or loss representing the difference between the carrying value of the financial liability and the fair value of the equity instruments issued; the fair value of the financial liability is used to measure the gain or loss where the fair value of the equity instruments cannot be reliably measured.	Annual periods beginning on or after 1 July 2010.

IAS 24 Related Party Disclosures ¹	Simplifies the definition of a related party and provides a partial exemption from the disclosure requirements for government related entities	Annual periods beginning on or after 1 January 2011.

Amendment to IFRIC 14 Prepayments of a Minimum Funding Requirement ¹	Applies when an entity is subject to minimum funding requirements and makes an early payment of contributions to cover those requirements and permits such an entity to treat the benefit of such an early payment as an asset.	Annual periods beginning on or after 1 January 2011.

IFRS 9 Financial Instruments: Classification and Measurement ¹	Replaces those parts of IAS 39 Financial Instruments: Recognition and Measurement relating to the classification and measurement of financial assets. Requires financial assets to be classified into two measurement categories, fair value and amortised cost, on the basis of the objectives of the entity’s business model for managing its financial assets and the contractual cash flow characteristics of the instrument. The available-for-sale financial asset and held-to-maturity categories in existing IAS 39 will be eliminated.	Annual periods beginning on or after 1 January 2013.


¹	At the date of this report, these pronouncements are awaiting EU endorsement.

57 POST BALANCE SHEET EVENTS

As part of the Group’s recapitalisation and exit from the GAPS the Group announced on 27 November 2009 that an aggregate amount of £1,484 million would be issued in the form of new ordinary shares of Lloyds Banking Group in exchange for certain existing preference shares, and preferred securities. The conversion price was determined as the five day weighted average price for the five trading days ending on 11 February 2010.

F-120

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

58 PARENT COMPANY DISCLOSURES

A COMPANY INCOME STATEMENT


	2009 £m			2008 ¹ £m			2007 ¹ £m

Net interest expense		(367	)		(85	)		(46	)
Other income		599			2,386			1,957

Total income		232			2,301			1,911
Operating expenses		(50	)		(79	)		(42	)

Profit on ordinary activities before tax		182			2,222			1,869
Taxation charge		121			(13	)		(15	)

Profit for the year		303			2,209			1,854


¹	Restated for IFRS 2 (Revised)

B COMPANY BALANCE SHEET


	2009 £m		2008 £ million

Assets
Non-current assets:
Investment in subsidiaries		32,584		5,589
Loans to subsidiaries		7,466		3,009
Deferred tax assets		3		—

		40,053		8,598
Current assets:

Derivative financial instruments		2,260		1,297
Other assets		304		205
Amounts due from subsidiaries		1,446		216
Cash and cash equivalents		2,837		1,201
Current tax recoverable		72		—

		6,919		2,919

Total assets		46,972		11,517

Equity and liabilities
Capital and reserves:
Share capital		10,472		1,513
Share premium account		14,472		2,096
Merger reserve		7,778		—
Capital redemption reserve		26		—
Retained profits		2,547		2,147

Total equity		35,295		5,756

Non-current liabilities:
Subordinated liabilities		4,205		2,875
Current liabilities:

Debt securities in issue		326		2,644
Current tax liabilities		—		116
Other liabilities		7,146		126

		7,472		2,886

Total liabilities		11,677		5,761

Total equity and liabilities		46,972		11,517

F-121

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

58 PARENT COMPANY DISCLOSURES continued

C COMPANY STATEMENT OF CHANGES IN EQUITY


	Share capital and premium £ million			Merger reserve £ million			Capital redemption reserve £ million		Retained ¹ profits £ million			Total £ million

Balance at 1 January 2007		2,695			—			—		2,026			4,721
Total comprehensive income ²		—			—			—		1,854			1,854
Dividends		—			—			—		(1,957	)		(1,957	)
Purchase/sale of treasury shares		—			—			—		(19	)		(19	)
Employee share option schemes:
Value of employee services		—			—			—		31			31
Proceeds from shares issued		35			—			—		—			35

Balance at 31 December 2007		2,730			—			—		1,935			4,665
Total comprehensive income ²		—			—			—		2,209			2,209
Dividends		—			—			—		(2,042	)		(2,042	)
Purchase/sale of treasury shares		—			—			—		(14	)		(14	)
Shares issued via private placement		760			—			—		—			760
Employee share option schemes:
Value of employee services		—			—			—		59			59
Proceeds from shares issued		119			—			—		—			119

Balance at 31 December 2008		3,609			—			—		2,147			5,756
Total comprehensive income ²		—			—			—		303			303
Issue of ordinary shares:
Placing and open offer		649			3,781			—		—			4,430
Issued on acquisition of HBOS		1,944			5,707					—			7,651
Placing and compensatory open offer		3,905			—			—		—			3,905
Rights issue		13,112			—			—		—			13,112
Issued to Lloyds TSB Foundations		41			—			—		—			41
Transfer to merger reserve		(1,000	)		1,000			—		—			—
Redemption of preference shares		2,684			(2,710	)		26		—			—
Purchase/sale of treasury shares		—			—			—		23			23
Employee share option schemes:
Value of employee services		—			—			—		74			74

Balance at 31 December 2009		24,944			7,778			26		2,547			35,295


¹	Restated for IFRS 2 (Revised)

²	Total comprehensive income comprises only the profit for the year.

F-122

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

58 PARENT COMPANY DISCLOSURES continued

D COMPANY CASH FLOW STATEMENT


	2009 £ million			2008 ¹ £ million			2007 ¹ £ million

Profit before tax		182			2,222			1,869
Dividend income		(354	)		(2,294	)		(1,957	)
Fair value and exchange adjustments		(428	)		(68	)		10
Change in other assets		(1,277	)		(166	)		103
Change in other liabilities and other items		7,020			89			(127	)
Tax (paid) received		(70	)		77			(32	)

Net cash provided by (used in) operating activities		5,073			(140	)		(134	)

Cash flows from investing activities
Costs incurred in respect of the acquisition of HBOS plc		(138	)		—			—
Additional capital injection into HBOS plc		(8,500	)		—			—
Additional capital injection into Lloyds TSB Bank plc		(5,600	)		—			—
Amounts advanced to subsidiaries		(7,593	)		—			(1,111	)
Redemption of loans to subsidiaries		1,552			—			—

Net cash used in investing activities		(20,279	)		—			(1,111	)

Cash flows from financing activities
Dividends received from subsidiaries		354			2,294			1,957
Dividends paid to equity shareholders		—			(2,042	)		(1,957	)
Proceeds from issue of debt securities		—			1,896			1,770
Repayment of debt securities in issue		(2,045	)		(1,744	)		—
Proceeds from issue of subordinated liabilities		1,000			—			—
Proceeds from issue of ordinary shares		21,533			879			35
Repayment of subordinated liabilities		(4,000	)		—			—

Net cash provided by financing activities		16,842			1,283			90

Change in cash and cash equivalents		1,636			1,143			(1,155	)
Cash and cash equivalents at beginning of year		1,201			58			1,213

Cash and cash equivalents at end of year		2,837			1,201			58


¹	Restated for IFRS 2 (Revised)

E INTERESTS IN SUBSIDIARIES

The principal subsidiaries, all of which have prepared accounts to 31 December and whose results are included in the consolidated accounts of Lloyds Banking Group plc, are:


	Country of registration/ Incorporation	Percentage of equity share capital and voting rights held	Nature of business

Lloyds TSB Bank plc	England	100%	Banking and financial services
Scottish Widows plc	Scotland	100%†	Life assurance
HBOS plc	Scotland	100%	Holding Company
Bank of Scotland plc	Scotland	100%†	Banking and financial services
HBOS Insurance & Investment Group Limited	England	100%†	Investment holding
St. Andrew’s Insurance plc	England	100%†	General insurance
Clerical Medical Investment Group Limited	England	100%†	Life assurance
Clerical Medical Managed Funds Limited	England	100%†	Life assurance


^†	Indirect interest.

The principal area of operation for each of the above subsidiaries is the United Kingdom.

F-123

THIS PAGE IS INTENTIONALLY LEFT BLANK

G LOSSARY


Term used		US equivalent or brief description.

Accounts		Financial statements.

Allotted		Issued.

Associates		Long–term equity investments accounted for by the equity method.

Attributable profit		Net income.

ATM		Automatic Teller Machine.

Balance sheet		Statement of financial position.

Broking		Brokerage.

Building society		A building society is a mutual institution set up to lend money to its members for house purchases. See also ‘Demutualisation’.

Called-up share capital		Ordinary shares, issued and fully paid.

Contract hire		Leasing.

Creditors		Payables.

Debtors		Receivables.

Deferred tax		Deferred income tax.

Demutualisation		Process by which a mutual institution is converted into a public limited company.

Depreciation		Amortisation.

Endowment mortgage		An interest–only mortgage to be repaid by the proceeds of an endowment insurance policy which is assigned to the lender providing the mortgage. The sum insured, which is payable on maturity or upon the death of the policyholder, is used to repay the mortgage.

Finance lease		Capital lease.

Freehold		Ownership with absolute rights in perpetuity.

Interchange		System allowing customers of different ATM operators to use any ATM that is part of the system.

ISA		Individual Savings Account.

Leasehold		Land or property which is rented from the owner for a specified term under a lease. At the expiry of the term the land or property reverts back to the owner.

Lien		Under UK law, a right to retain possession pending payment.

Life assurance		Life insurance.

Loan capital		Long–term debt.

Members		Shareholders.

Memorandum and articles of association		Articles and bylaws.

National Insurance		A form of taxation payable in the UK by employees, employers and the self-employed, used to fund benefits at the national level including state pensions, medical benefits through the National Health Service (NHS), unemployment and maternity. It is part of the UK’s national social security system and ultimately controlled by HM Revenue & Customs.

Nominal value		Par value.

Open Ended Investment Company (OEIC)		Mutual fund.

Ordinary shares		Common stock.

Overdraft		A line of credit, contractually repayable on demand unless a fixed–term has been agreed, established through a customer’s current account.

Preference shares		Preferred stock.

165

GLOSSARY


Term used		US equivalent or brief description.

Premises		Real estate.

Profit attributable to equity shareholders		Net income.

Provisions		Reserves.

Regular premium		Premiums which are payable throughout the duration of a policy or for some shorter fixed period.

Reinsurance		The insuring again by an insurer of the whole or part of a risk that it has already insured with another insurer called a reinsurer.

Retained profits		Retained earnings.

Share capital		Capital stock.

Shareholders’ equity		Stockholders’ equity.

Share premium account		Additional paid-in capital.

Shares in issue		Shares outstanding.

Single premium		A premium in relation to an insurance policy payable once at the commencement of the policy.

Tangible fixed assets		Property and equipment.

Undistributable reserves		Restricted surplus.

Write-offs		Charge-offs.

166

F ORM 20-F CROSS-REFERENCE SHEET


	Form 20–F Item Number and Caption		Location	Page
Part I
Item 1.	Identity of Directors, Senior Management and Advisers
	A.	Directors and senior management	Not applicable.
	B.	Advisers	Not applicable.
	C.	Auditors	Not applicable.
Item 2.	Offer Statistics and Expected Timetable
	A.	Offer statistics	Not applicable.
	B.	Method and expected timetable	Not applicable.
Item 3.	Key Information
	A.	Selected financial data	“Selected consolidated financial data”	3
			“Exchange rates”	4
	B.	Capitalisation and indebtedness	Not applicable.
	C.	Reason for the offer and use of proceeds	Not applicable.
	D.	Risk factors	“Risk factors”	150
Item 4.	Information on the Company
	A.	History and development of the company	“Business – History and development of Lloyds Banking Group”	4
			“Business – Recent developments”	9
	B.	Business overview	“Business overview”	2
			“Regulation”	133
	C.	Organisational structure	“Lloyds Banking Group structure”	163
	D.	Property, plant and equipment	“Business – Properties”	7
Item 4A.	Unresolved Staff Comments		Not applicable.
Item 5.	Operating and Financial Review and Prospects
	A.	Operating results	“Regulation”	133
			“Operating and financial review and prospects”	11
	B.	Liquidity and capital resources	“Notes to the consolidated financial statements –
			note 54”	F-113
			“Operating and financial review and prospects –
			Financial soundness”	83
			“Dividends”	140
			“Operating and financial review and prospects –
			Risk elements in the loan portfolio – Cross border
			outstandings”	76
			“Operating and financial review and prospects –
			Financial soundness – Investment portfolio, maturities,
			deposits, short-term borrowings”	97
	C.	Research and development, patents and licenses, etc.	Not applicable.
	D.	Trend information	“Operating and financial review and prospects –
			Overview and trend information”	12
	E.	Off-balance sheet arrangements	“Operating and financial review and prospects –
			Financial soundness – Off balance sheet arrangements”	87
	F.	Tabular disclosure of contractual obligations	“Operating and financial review and prospects –
			Financial soundness – Liquidity and funding”	87
Item 6.	Directors, Senior Management and Employees
	A.	Directors and senior management	“Management and employees – Directors and senior
			management”	101
	B.	Compensation	“Compensation”	104
	C.	Board practices	“Management and employees”	101
			“Compensation – Service agreements”	113
			“Corporate governance – The board and its committees”	123
	D.	Employees	“Management and employees – Employees”	103
	E.	Share ownership	“Compensation – Directors’ interests”	117
Item 7.	Major Shareholders and Related Party Transactions
	A.	Major shareholders	“Major shareholders and related party transactions –
			Major shareholders”	129
	B.	Related party transactions	“Major shareholders and related party transactions –
			Related party transactions”	129
			“Notes to the consolidated financial statements –
			note 51”	F-87
	C.	Interests of experts and counsel	Not applicable.

167

FORM 20-F CROSS-REFERENCE SHEET


	Form 20–F Item Number and Caption		Location	Page
Item 8.	Financial Information
	A.	Consolidated statements and other financial information	“Consolidated financial statements”	F-1
			“Operating and financial review and prospects”	11
			“Business – Legal actions”	7
			“Dividends”	140
	B.	Significant changes	“Business – Recent developments”	9
Item 9.	The Offer and Listing
	A.	Offer and listing details	“Listing information”	137
	B.	Plan of distribution	Not applicable.
	C.	Markets	“Listing information”	137
	D.	Selling shareholders	Not applicable.
	E.	Dilution	Not applicable.
	F.	Expenses of the issue	Not applicable.
Item 10.	Additional Information
	A.	Share capital	Not applicable.
	B.	Memorandum and articles of association	“Memorandum and articles of association of
			Lloyds Banking Group plc”	141
	C.	Material contracts	“Business – Material contracts”.	5
	D.	Exchange controls	“Exchange controls”	145
	E.	Taxation	“Taxation”	146
	F.	Dividends and paying agents	Not applicable.
	G.	Statements by experts	Not applicable.
	H.	Documents on display	“Where you can find more information”	149
	I.	Subsidiary information	“Lloyds Banking Group structure”	163
Item 11.	Quantitative and Qualitative Disclosures about Market Risk		“Operating and financial review and prospects –
			Risk management”	57
			“Operating and financial review and prospects –
			Risk management – Market risk”	77
			“Notes to the consolidated financial statements –
			note 54 – Financial risk management”	F-101
Item 12.	Description of Securities Other than Equity Securities
	A.	Debt securities	Not applicable.
	B.	Warrants and rights	Not applicable.
	C.	Other securities	Not applicable.
	D.	American Depositary Shares	“Listing information – ADR fees”	139
Part II
Item 13.	Defaults, Dividends Arrearages and Delinquencies		Not applicable.
Item 14.	Material Modifications to the Rights of Security Holders and
	Use of Proceeds		Not applicable.
Item 15.	Controls and Procedures		“Corporate governance”	123
Item 16.	[Reserved by the Securities and Exchange Commission]
	A.	Audit committee financial expert	“Corporate governance – The board and its committees –
			Audit committee”	124
	B.	Code of ethics	“Management and employees – Employees”	103
	C.	Principal accountant fees and services	“Corporate governance – The board and its committees –
			Audit committee”	124
			“Notes to the consolidated financial statements –
			note 11 – Operating expenses”	F–35
	D.	Exemptions from the listing standards for audit committees	Not applicable.
	E.	Purchases of equity securities by the issuer and affiliated
		purchasers	Not applicable.
	F.	Change in registrant’s certifying accountant	Not applicable.
	G.	Corporate governance	“Corporate governance – Statement on
			US corporate governance standards”	123
Part III
Item 17.	Financial statements		Not applicable.
Item 18.	Financial statements		“Consolidated financial statements”	F–1
Item 19.	Exhibits		“Exhibit index” and the pages following	167

168

E XHIBIT INDEX


1.	Memorandum and articles of association of Lloyds Banking Group plc

2.	Neither Lloyds Banking Group plc nor any subsidiary is party to any single long-term debt instrument pursuant to which a total amount of securities exceeding 10 per cent of the Group’s total assets (on a consolidated basis) is authorised to be issued. Lloyds Banking Group plc hereby agrees to furnish to the Securities and Exchange Commission (the Commission), upon its request, a copy of any instrument defining the rights of holders of its long-term debt or the rights of holders of the long-term debt issued by it or any subsidiary for which consolidated or unconsolidated financial statements are required to be filed with the Commission.

4.	(a)	(i)	Placing and Open Offer Agreement dated 13 October 2008 between Lloyds Banking Group plc, The Commissioners of Her Majesty’s Treasury and the joint sponsors and joint bookrunners named therein ^†

		(ii)	Preference Share Subscription Agreement dated 13 October 2008 between Lloyds Banking Group plc and The Commissioners of Her Majesty’s Treasury ^†

		(iii)	Placing and Open Offer Agreement dated 13 October 2008 between HBOS plc, The Commissioners of Her Majesty’s Treasury and the joint sponsors and joint bookrunners named therein ^†

		(iv)	Preference Share Subscription Agreement dated 13 October 2008 between HBOS plc and The Commissioners of Her Majesty’s Treasury ^†

		(v)	Placing and Open Offer Agreement dated 7 March 2009 between Lloyds Banking Group plc and The Commissioners of Her Majesty’s Treasury (as amended and restated on 20 March 2009 between Lloyds Banking Group plc, The Commissioners of Her Majesty’s Treasury, Citigroup Global Markets U.K. Equity Limited, J.P. Morgan Cazenove Limited and UBS Limited and further amended and restated between the same parties on 18 May 2009)

		(vi)	Registration Rights Agreement dated 12 January 2009 between Lloyds Banking Group plc and The Commissioners of Her Majesty’s Treasury (as amended with effect from 11 June 2009)

		(vii)	Resale Rights Agreement effective 11 June 2009 between Lloyds Banking Group plc and The Commissioners of Her Majesty’s Treasury

		(viii)	Lending Commitments Deed by Lloyds Banking Group plc in favour of Her Majesty’s Treasury dated 6 March 2009 (as amended on 23 March 2010) ^²

		(ix)	Deed of Withdrawal dated 3 November 2009 between Lloyds Banking Group plc and The Lords Commissioners of Her Majesty’s Treasury ^²

		(x)	Undertaking to Subscribe dated 3 November 2009 between Lloyds Banking Group plc and The Lords Commissioners of Her Majesty’s Treasury

		(xi)	Costs Reimbursement Deed dated 2 November 2009 between Lloyds Banking Group plc and The Lords Commissioners of Her Majesty’s Treasury

		(xii)	Rights Issue Underwriting Agreement dated 3 November 2009 between Lloyds Banking Group plc, the banks, the senior co-lead managers, the co-lead managers and the co-bookrunner (all as named therein)

		(xiii)	Top Up Issues Underwriting Agreement dated 3 November 2009 between Lloyds Banking Group plc, LBG Capital No.2 plc, Lloyds TSB Bank plc and the joint bookrunners (as named therein)

4.	(b)	(i)	Service agreement dated 21 January 2009 between Lloyds TSB Bank plc and Helen A. Weir ^†

		(ii)	Service agreement dated 22 January 2009 between Lloyds TSB Bank plc and J. Eric Daniels ^†

		(iii)	Service agreement dated 23 January 2009 between Lloyds TSB Bank plc and Archie G. Kane ^†

		(iv)	Service agreement dated 26 January 2009 between Lloyds TSB Bank plc and Tim J.W. Tookey ^†

		(v)	Service agreement dated 9 February 2009 between Lloyds TSB Bank plc and G. Truett Tate ^†

		(vi)	Letter of appointment dated 18 November 2004 between Lloyds Banking Group plc and Sir Julian Horn-Smith Ÿ

		(vii)	Letter of appointment dated 14 September 2005 between Lloyds Banking Group plc and Lord Leitch Ÿ

		(viii)	Letter of appointment dated 7 August 2008 between Lloyds Banking Group plc and Martin A. Scicluna ^†

		(ix)	Letter of appointment dated 23 February 2009 between Lloyds Banking Group plc and T. Timothy Ryan ^†

		(x)	Letter of appointment dated 23 February 2009 between Lloyds Banking Group plc and Anthony Watson ^†

		(xi)	Letter of appointment dated 27 July 2009 between Lloyds Banking Group plc and Sir Winfried Bischoff

		(xii)	Letter of appointment dated 12 February 2010 between Lloyds Banking Group plc and David Roberts

		(xiii)	Letter of appointment dated 19 February 2010 between Lloyds Banking Group plc and Glen Moreno

8.1	List of subsidiaries, their jurisdiction of incorporation and the names under which they conduct business

12.1	Certification of J. Eric Daniels filed pursuant to 17 CFR 240.13a-14(a) and 15 U.S.C. 7241

12.2	Certification of Tim J. W. Tookey filed pursuant to 17 CFR 240.13a-14(a) and 15 U.S.C. 7241

13.1	Certification of J. Eric Daniels and Tim J. W. Tookey furnished pursuant to 17 CFR 240.13a-14(b) and 18 U.S.C. 1350

15.1	Consent of PricewaterhouseCoopers LLP

*	Previously filed with the SEC, together with Lloyds Banking Group’s registration statement, on 25 September 2001

^Ÿ	Previously filed with the SEC on Lloyds Banking Group’s Form 20–F filed 6 June 2006

^o	Previously filed with the SEC on Lloyds Banking Group’s Form 20–F filed 5 June 2008

^†	Previously filed with the SEC on Lloyds Banking Group’s Form 20–F filed 7 May 2009

^²	Pursuant to a request for confidential treatment filed with the SEC, the confidential portions of this exhibit have been omitted and filed separately with the SEC.

The exhibits shown above are listed according to the number assigned to them by the Form 20–F.

169

S IGNATURES

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorised the undersigned to sign this annual report.


LLOYDS BANKING GROUP plc

By:	/s/ T Tookey
Name:	Tim J W Tookey
Title:	Group Finance Director

Dated:	13 May 2010

170

Exhibit 1

(LLOYDS BANKING GROUP LOGO)

Memorandum and articles of association

Lloyds Banking Group plc

The Companies Act 2006

Public company limited by shares

Memorandum and articles of association

Lloyds Banking Group plc
(incorporated on 21st October 1985)

Registered in Scotland No. 95000

26 November 2009

(LOGO)

CERTIFICATE OF INCORPORATION
ON CHANGE OF NAME

Company No. 95000

The Registrar of Companies for Scotland hereby certifies that

LLOYDS TSB GROUP PLC

having by special resolution changed its name, is now incorporated under the name of

LLOYDS BANKING GROUP PLC

Given at Companies House on 16th January 2009


	THE OFFICIAL SEAL OF THE REGISTRAR OF COMPANIES

(LOGO)

CERTIFICATE OF INCORPORATION

ON CHANGE OF NAME

Company No. 95000

The Registrar of Companies for Scotland hereby certifies that

TSB GROUP PUBLIC LIMITED COMPANY

having by special resolution changed its name, is now incorporated under the name of

Lloyds TSB Group plc

Given at Companies House, Edinburgh, the 28th December 1995


	Registrar Of Companies

(LOGO)
C O M P A N I E S H O U S E

(LOGO)

CERTIFICATE OF INCORPORATION
OF A PUBLIC LIMITED COMPANY

Company Number

95000

I hereby certify that

TSB GROUP public limited company

is this day incorporated under the Companies Act 1985 as a public company and that the Company is limited.

Signed at Edinburgh

21 October 1985


	Registrar of Companies


Dd8688422 100 5/85 CLCo	C13A

Memorandum of association

Lloyds Banking Group plc

Note:

Paragraphs 1 to 6 of this memorandum of association were deleted by operation of law on 1 October 2009 and from that date would have been deemed to form part of the company’s articles of association. However, by a resolution passed at the company’s annual general meeting on 5 June 2009, which came into effect on 1 October 2009, the provisions deemed to be incorporated into the articles of association were deleted from the articles. Accordingly, paragraphs 1 to 6 of this memorandum of association are of no further effect in respect of the company.

1 October 2009

The Companies Act 1985

Public company limited by shares

Memorandum of association

Lloyds Banking Group plc
as altered by a special resolution passed on 11th May 2006


1	THE company’s name is “Lloyds Banking Group plc” ¹ .

2	THE company is to be a public company.

3	THE company’s registered office is to be situated in Scotland.

4	THE company’s objects are:-

	(1)	(a)	To take over and hold all or such part of the property and rights, and to assume and undertake all or such part of the liabilities and obligations, of the Trustee Savings Banks Central Board (“the Central Board”), Trustee Savings Banks (Holdings) Limited (“TSB Holdings”) and the trustee savings banks (meaning the banks defined as the existing banks in the Trustee Savings Banks Act 1985) as shall be transferred to and vested in the company under the said Act; and

		(b)	To act as the holding company for:-

			(i)	the companies formed or to be formed with objects including that of assuming and conducting, after the vesting day, as the same is defined in the said Act, the respective businesses of the said trustee savings banks and eligible to succeed them respectively within the meaning of Section 1(2) of the said Act; and

			(ii)	the companies which, immediately before the said vesting day, are subsidiaries of the said trustee savings banks, the Central Board or TSB Holdings

	(2)	To be the holding company of companies carrying on or engaged in, or about to carry on or engage in, or formed for the purpose of carrying on or engaging in, any businesses or transactions whether or not being businesses or transactions which the company is authorised to carry on or engage in, and for that purpose to acquire (whether by purchase, subscription or otherwise), hold, deal in and dispose of shares, stocks, debentures and other securities of any such companies and to exercise and enforce all rights and powers conferred by or incident to the ownership of any such shares, stocks, debentures and other securities and to promote, organise, incorporate, float, reorganise and finance and to aid and assist financially or otherwise any such companies



¹	The name of the company was on 16 January 2009 changed from Lloyds TSB Group plc pursuant to a resolution passed on 19 November 2008 .


(3)	To co-ordinate and manage the group (hereinafter called “the group”) consisting of the company, its subsidiary companies, any holding company of the company, any subsidiary of any such holding company, and any other company in which the company is for the time being directly or indirectly interested and to exercise all the rights and powers (if any) of the company over or in relation to any such companies; and in this clause any reference to the company’s advantage or to the company’s interests shall be construed as a reference to the advantage or to the interests, as the case may be, of any of (i) the group as a whole, and (ii) one or more of the companies for the time being comprised in the group

(4)	To make or do or assist in making or doing such arrangements and things as may be considered desirable with a view to causing any of the businesses of any of the companies for the time being comprised in the group to be carried on economically and profitably, and to promote the success or best interests of any such companies, by mutual assistance and by co-operation with one another or by any other means and in particular to take or concur in any steps or proceedings (including the undertaking of any obligation, monetary or otherwise) calculated to uphold or support the credit of any such companies, or to obtain, maintain or restore public confidence, or to avert or minimise financial disturbances directly or indirectly affecting or likely to affect the business of any such companies

(5)	To employ the funds of the company in the development and expansion of all or any of the businesses of any of the companies for the time being comprised in the group and of any other company, whether now existing or hereafter to be formed, engaged in any business like to, or ancillary to, or which can conveniently be carried on in connection with any of those of any of the companies for the time being comprising the group

(6)	To act as managers, secretaries, directors, registrars or transfer or other agents of or for any company, whether or not for the time being comprised in the group, or person and to take part in the formation, management, supervision or control of the business or operations of any such company or person, and to provide managerial, executive, supervisory, consultancy, advisory, technical, secretarial, administrative, accounting and other services, staff or supplies (including the provision of office, factory or other accommodation, plant or equipment), to engage, employ, remunerate, second or supply staff, to institute, manage and operate pension, insurance and other schemes and generally to perform any services or undertake any duties for or on behalf of or in other manner to assist any such company or person and either without remuneration or on such terms as to remuneration as may be agreed

(7)	To carry on the business of banking in all its aspects, including but not limited to all businesses of a financial or monetary nature and any business which now is or at any time during the existence of the company may be usually or commonly carried on as part of or in connection with, or which may conduce to or be calculated to facilitate or render profitable or more profitable the transaction of, the business of banking or of dealing in money or securities or the provision of financial services of any kind, in any part of the world, and in particular (but without prejudice to the generality of the foregoing):-

	(a)	to receive money on current account or on deposit or otherwise on any terms, and to borrow, raise or take up money, with or without security, and to employ and use the same;

	(b)	to deposit, lend or advance money, securities or property, with or without security, and generally to make or negotiate loans and advances of every kind;

- 2 -


	(c)	to draw, make, accept, endorse, grant, discount, issue, execute, guarantee, negotiate, transfer, acquire, subscribe or tender for, buy, sell, hold, invest or deal in, borrow, honour, retire, pay, secure or otherwise dispose of obligations, instruments and securities (whether transferable or negotiable or not) of every kind;

	(d)	to grant, issue, negotiate and in any manner deal with or in travellers’ cheques, letters of credit, circular notes, money orders, drafts and other forms of credit and instruments of every kind;

	(e)	to buy, sell and deal in foreign exchange, currencies, futures, precious metals, bullion, specie and commodities of every kind;

	(f)	to receive on deposit or for safe custody or otherwise cash, securities, documents and valuables of every description;

	(g)	to collect, hold and transmit money and securities and to act as agents for the receipt or payment of money or for the receipt or delivery of securities and documents, and to provide clearing and money transmission services of every kind;

	(h)	to issue and transact business in respect of all types of bankers’ cards, credit cards, charge cards, cash cards, cheque guarantee cards, debit cards and similar cards or tokens whether issued by the company or by any other person or company; and

	(i)	to act as agents, brokers, advisers, managers or consultants in relation to the investment of money, the lending of money or securities, financial transactions of all kinds, the management of property and all insurance, pension and taxation matters, and generally to transact all agency, broking, advisory, managerial or consultancy business of every kind

(8)	To the extent that the same would not be authorised under paragraph (7) of this clause to be transacted or done, to transact and do all or any of the following:

	(a)	to borrow or raise money in such manner and upon such terms and on such security as may seem to the directors to be expedient and in particular (but without prejudice to the generality of the foregoing) by the issue or deposit of debentures or debenture stock or other securities of any description and to secure all or any of the company’s liabilities in respect of money borrowed, raised or owing or any other debt or obligation of or binding on the company in such manner as may be thought expedient and in particular by mortgage, charge or lien upon all or any part of the undertaking, property and assets, present or future, and uncalled capital of the company;

	(b)	to receive on deposit or loan or for safe custody or otherwise cash, securities, documents and valuables of every description;

	(c)	to lend or advance money, securities or property or give credit to any person or company, including (but without limitation) any company comprised in the group or any company otherwise associated with the company in business, in any such case on such terms as may seem to the directors to be expedient and whether or not the company receives any consideration or advantage therefrom;

- 3 -


	(d)	to draw, make, accept, endorse, grant, discount, issue, execute, negotiate, transfer, acquire, subscribe or tender for, buy, sell, hold, invest or deal in, borrow, honour, retire, pay, secure or otherwise dispose of obligations, instruments and securities (whether transferable or negotiable or not) of every kind

(9)	To undertake and execute the office of executor, administrator, attorney, judicial and custodian trustee, judicial factor, receiver, committee and treasurer and to establish, undertake and execute trusts of all kinds, whether private or public, including religious and charitable trusts and generally to carry on trustee and executor business in all its aspects, either gratuitously or otherwise, and generally on such terms as may be thought expedient and in particular (but without prejudice to the generality of the foregoing) to act as trustees for the holders of any securities of any company or person and as managers and trustees of unit trusts, investment trusts and pension, benevolent and other funds and to transact all kinds of business arising in connection with any of the foregoing offices and trusts, and to establish, settle and regulate and, if thought fit, undertake and execute any trusts with a view to the issue of any securities, certificates or other documents based on or representing any securities or other assets appropriated for the purposes of any such trust

(10)	To undertake and provide any service required in connection with or relating to individual insolvency or bankruptcy or the administration, receivership or winding-up of any company

(11)	To carry on business as a finance house and issuing house and investment and trust company and as dealers in securities, and to introduce, promote, effect, negotiate, offer for sale by tender or otherwise, guarantee, underwrite, secure the subscription or placing of, subscribe or tender for or procure the subscription of (whether absolutely or conditionally), participate in, manage or carry out, on commission or otherwise, any issue, public or private, of the securities of any company, and to lend money for the purposes of any such issue

(12)	To carry on financial business and financial operations of all kinds and in particular (but without prejudice to the generality of the foregoing) to finance or assist in the financing of the acquisition, hire, lease or sale of heritable, real, moveable and personal property of every kind, and the provision of services in connection therewith, whether by way of personal loan, hire purchase, instalment finance, conditional or credit sale, deferred payment or otherwise; to acquire by assignation, assignment or otherwise debts owing to any person or company and to collect such debts, and generally to act as financiers, traders, factors, brokers, commission or other agents, dealers, carriers, merchants or in any other capacity and to import, export, buy, sell, let on hire, charter, barter, make advances upon, pledge or otherwise deal in heritable, real, moveable and personal property of every kind

(13)	To enter into any guarantee, bond, recognizance, cautionary obligation, contract of indemnity or suretyship and otherwise give security or become responsible for the performance of any obligation or duties by any company or person, including (but without limitation) any company comprised in the group or any company otherwise associated with the company in business, and in particular (but without prejudice to the generality of the foregoing) to guarantee, support or secure, whether by personal undertaking or covenant or by mortgaging or charging all or any part of the undertaking, property and assets, present or future, and uncalled capital of the company, or by both such methods, the performance of the obligations of, and the payment of monies secured by, or payable under or in respect of the securities of, any company or person, including as aforesaid, and to give and take counter-guarantees and indemnities, and to receive security for the implementation of any obligation; and to undertake the insurance, re-insurance and counter-insurance of all kinds of risks and generally to carry on the business of an insurance and guarantee company in all its aspects, in all such cases

- 4 -


		on such terms as may seem to the directors to be expedient and whether or not the company receives any consideration or advantage therefrom

	(14)	To purchase, take on lease or in exchange, hire or otherwise acquire and hold, any heritable, real, moveable or personal property or any interest in any such property, and to sell, feu, lease, exchange, hire, or otherwise dispose of and to improve, manage, develop, grant rights or privileges in respect of or otherwise deal with any such property or interest or otherwise turn the same to the company’s advantage

	(15)	To build, construct, maintain, alter, enlarge, pull down, remove or replace any buildings, works, plant and machinery and all other works and facilities which may seem to the directors necessary or convenient for the business of the company or likely to be to the company’s advantage and to work, manage and control the same or to join with any person or company in doing any of the above

	(16)	To apply for, purchase or otherwise acquire and protect, prolong and renew any patents, licences and the like, conferring any exclusive or non-exclusive or limited right of user, or any secret or other information as to any invention, which in the opinion of the directors may be likely to be to the company’s advantage and to use, develop, manufacture under or grant licences in respect of, or otherwise turn to account and expend money in experimenting upon and testing and carrying on all kinds of research and development work in connection with, and in improving or seeking to improve, any such rights and information so acquired or proposed to be acquired

	(17)	In any manner to invest and deal with the moneys of the company not immediately required

	(18)	To pay for any rights or property acquired by the company (including without prejudice to the generality of the foregoing all or any part of the undertaking and assets referred to in paragraph (1)), to remunerate any person or company rendering services to the company in any manner and to pay all or any of the preliminary expenses of the company and of any company formed or promoted by the company, in every case whether by cash payment or by the allotment of shares, debentures or other securities of the company credited as paid up in full or in part or otherwise

	(19)	To subscribe, donate or guarantee money for any national, political, charitable, benevolent, educational or social object, or for any exhibition, endeavour, artistic performance or sporting event, or for any other public, general or useful object, whether or not the company receives any advantage therefrom; and in particular (but without prejudice to the generality of the foregoing) to make covenanted or other donations or payments to any company having charitable purposes or objects or to any trustees for charitable purposes

	(20)	To establish and support, or to aid in the establishment and support of, any society, club, fund, trust, institution, organisation or scheme which in the opinion of the directors may further the company’s interests or may benefit any persons who are or were at any time directors, officers or employees of any company whether or not comprised in the group, or may be connected with any town or place where any company within the group carries on business, and to establish and support profit sharing or share purchase schemes for the benefit of any such persons and so far as the law allows to lend money to any such persons or to trustees on their behalf to enable any such schemes to be established or maintained

	(21)	To establish or continue and to maintain, or to procure the establishment or continuance and maintenance of, or to participate in any non-contributory or contributory pension or

- 5 -


		superannuation or death, disablement, sickness or other benefit funds or schemes for the benefit of, and to give or procure the giving of donations, gratuities, pensions, allowances or other benefits to, any persons who are or were at any time directors or officers of or in the employment or service of any company comprised in the group, or of any company which is or was a predecessor in business of, or the whole or any part of the undertaking of which has become mediately or immediately vested in, the company or any such other company as aforesaid, and the wives, husbands, widows, widowers, children or step-children and other relatives and the dependants of any such persons, and to include rights in respect of such pensions, allowances or benefits in the terms of engagement of any such persons, and to make payments for or towards the insurance of any such persons

	(22)	To apply for, promote or obtain any provisional order, Act of Parliament or licence of the Department of Trade or other authority or body for enabling the company to carry any of its objects into effect or to advance its interests or for effecting a modification of the company’s constitution or for any other purpose which may seem to the directors to be expedient, and to oppose any proceedings or applications which seem calculated, directly or indirectly to prejudice the company’s interests

	(23)	To enter into any arrangement with any government or other public body or authority, supreme, municipal, local or otherwise, or any company or person and to obtain from any such government, body, authority, company or person all charters, contracts, decrees, rights, concessions and privileges which may seem to the directors to be conducive to the company’s purposes or any of them or likely to be to the company’s advantage and to carry out, exercise and comply with any such charters, contracts, decrees, rights, concessions and privileges

	(24)	To purchase or otherwise acquire and undertake all or any part of the business, property, assets, liabilities and transactions of any person or company carrying on or engaged in or about to carry on or engage in any business which the company is authorised to carry on or engage in or which may seem likely to be to the company’s advantage

	(25)	To amalgamate in any manner or enter into partnership, or into any arrangement for sharing profits, union of interests, co-operation, participation, joint adventure or reciprocal concession, with any person or company carrying on or engaged in, or about to carry on or engage in, any business or transaction which the company is authorised to carry on or engage in, or which may seem likely to be to the company’s advantage

	(26)	To promote, finance or assist any other company for the purpose of acquiring all or any part of the property, rights and liabilities of the company or for any other purpose which may seem to the directors to be likely to be to the company’s advantage

	(27)	To subscribe for, take, purchase or otherwise acquire and hold shares, stocks, debentures, debenture stock, bonds, obligations and other securities issued or guaranteed by any company, government, sovereign, ruler, commissioner, public body or authority, supreme, municipal, local or otherwise, whether in the United Kingdom or elsewhere

	(28)	To sell or otherwise dispose of the undertaking of the company or any part thereof for such consideration as the directors may think fit, and in particular for shares (whether fully or partly paid), stock, debentures or other securities of any other company and to hold and retain, or sell, charge, mortgage and deal with any such shares, stock, debentures or other securities so received

- 6 -


(29)	To distribute among the members of the company in specie or in kind any property of the company, and in particular any shares, debentures or securities of other companies belonging to the company or of which the company may have the power of disposing

(30)	To carry on any other business or activities of any nature whatsoever which may seem to the directors to be capable of being conveniently or advantageously carried on by way of extension of, in connection with, or as ancillary to any of the businesses of the company, or to be calculated directly or indirectly to enhance the value of or facilitate the realisation of or render profitable or more profitable any of the property or rights of the company, or to be likely to be to the company’s advantage

(31)	To do in any part of the world all or any of the things mentioned in this clause and either as principals, agents, trustees, contractors or otherwise, and either alone or in conjunction with others and either by or through agents, trustees, sub-contractors or otherwise

(32) ²	To such extent as may be permitted by and consistent with law and relevant legislation, (A) to purchase and maintain insurance for or for the benefit of any persons who are or were at any time directors, officers, employees or trustees of the company, or of any associated company or organisation, including (without prejudice to the generality of the foregoing) insurance against any liability incurred by such persons in respect of any act or omission in the actual or purported execution and/or discharge of their duties and/or in the exercise or purported exercise of their powers and/or otherwise in relation to the company or associated company or organisation; (B) otherwise to indemnify any such person against or from any such liability; and (C) (1) to provide any such person with funds to meet expenditure incurred or to be incurred by him in defending any criminal or civil proceedings or, in connection with any application for relief from liability under the statutes and (2) to do anything to enable any such person to avoid incurring such expenditure. In this paragraph (32):

	(a)	an “associated company or organisation” is any company or other body, whether or not incorporated, (i) which is the company’s holding company or (ii) in which the company or its holding company or any of the predecessors of the company or of such holding company has any interest whether direct or indirect or (iii) which is in any way allied to or associated with the company or its holding company or any of the predecessors of the company or of such holding company (including any pension fund or employees’ share scheme in which any employees of the company or of any associated company or organisation are interested and any company acting as trustee for such pension fund or share scheme) or (iv) which is a subsidiary undertaking of any person mentioned in (iii) or (v) to which directors, officers, employees or trustees of the company or of any subsidiary undertaking or any holding company of the company are permitted by the company or any subsidiary undertaking or any holding company of the company to lend their services;

	(b)	“holding company” and “subsidiary undertaking” have the same meanings as in the Companies Act 1985 as amended by the Companies Act 1989; and

	(c)	“person” includes any natural person, partnership, other unincorporated association or body corporate.

(33)	To do all such other things as may be deemed incidental or conducive to the attainment of the above objects or any of them or usually carried on in connection therewith



²	Amended by a special resolution passed on 11th May 2006

- 7 -


		AND it is hereby declared that:-

		(a)	the objects set forth in each of the paragraphs of this clause shall not be restrictively construed, but the widest interpretation shall be given thereto, and they shall not, except where the context expressly so requires, be in any way limited to or restricted by reference to or inference from any other object or objects set forth in this clause or from the terms of any other paragraph of this clause or by the order in which such paragraphs appear or by the name of the company, but the company shall have full power to exercise all or any of the powers and to achieve or to endeavour to achieve all or any of the objects conferred by and provided in any one or more of such paragraphs;

		(b)	the word “company” in this clause, except where used in reference to this company, shall be deemed to include any partnership, organisation, government, authority or other body, whether corporate or unincorporate, and whether incorporated or domiciled in the United Kingdom or elsewhere; and

		(c)	the word “money” in this clause, except so far as the context otherwise requires, includes foreign currency and any right to receive money or foreign currency and shall include notes and coin.

5	THE liability of the members is limited.

6*	THE company’s share capital is £100,000 divided into 380,000 ordinary shares of 25p each and 20,000 limited voting ordinary shares of 25p each.

*Notes:

(1)		By resolution passed on 11th September, 1986 the authorised share capital of the company was increased from £100,000 to £525,000,000 divided into 2,021,052,632 ordinary shares of 25p each and 78,947,368 limited voting ordinary shares of 25p each.

(2)		By resolution passed on 30th March, 1989 the authorised share capital of the company was increased from £525,000,000 to £825,000,000 divided into 2,021,052,632 ordinary shares of 25p each and 300,000,000 preference shares of £1 each.

(3)		By resolution passed on 29th November, 1995 the authorised share capital of the company was increased from £825,000,000 to £2,047,500,000 divided into 6,911,052,632 ordinary shares of 25p each, 78,947,368 limited voting ordinary shares of 25p each and 300,000,000 preference shares of £1 each.

(4)		By resolution passed on 11th April, 2000, the authorised share capital of the company was changed to the following:-

		£1,791,250,000, comprising:

		(i)	£43,750,000 divided into 175,000,000 preference shares of 25p each;

		(ii)	£19,736,842 divided into 78,947,368 limited voting ordinary shares of 25p each; and

		(iii)	£1,727,763,158 divided into 6,911,052,632 ordinary shares of 25p each; US$40,000,000 divided into 160,000,000 preference shares of US 25 cents each; €40,000,000, divided into 160,000,000 preference shares of € 25 cents each; and Japanese ¥1,250,000,000 divided into 50,000,000 preference shares of Japanese ¥25 each.

- 8 -


(5)	By resolution passed on 19 November, 2008, the authorised share capital of the company was changed to the following:-

	£5,675,477,055, comprising:

	(i)	£200,000,000 divided into 800,000,000 preference shares of 25p each;

	(ii)	£19,736,842 divided into 78,947,368 limited voting ordinary shares of 25p each; and

	(iii)	£5,455,740,213 divided into 21,822,960,853 ordinary shares of 25p each; US$40,000,000 divided into 160,000,000 preference shares of US 25 cents each; €40,000,000, divided into 160,000,000 preference shares of €25 cents each; and Japanese ¥1,250,000,000 divided into 50,000,000 preference shares of Japanese ¥ 25 each.

(6)	By resolution passed at the company’s annual general meeting on 5 June, 2009, the authorised share capital of the company was changed to the following:-

	£7,043,396,347comprising:

	(i)	£200,000,000 divided into 800,000,000 preference shares of 25p each;

	(ii)	£19,736,842 divided into 78,947,368 limited voting ordinary shares of 25p each; and

	(iii)	£6,823,659,505 divided into 27,294,638,021 ordinary shares of 25p each;

	US$40,000,000 divided into 160,000,000 preference shares of US 25 cents each; €40,000,000, divided into 160,000,000 preference shares of €25 cents each; and Japanese ¥1,250,000,000 divided into 50,000,000 preference shares of Japanese ¥ 25 each.

(7)	By resolution passed a general meeting of the company on 5 June, 2009, the authorised share capital of the company was changed to the following:-

	£9,645,530,097 comprising:

	(i)	£200,000,000 divided into 800,000,000 preference shares of 25p each;

	(ii)	£19,736,842 divided into 78,947,368 limited voting ordinary shares of 25p each; and

	(iii)	£9,425,793,255 divided into 37,703,173,021 ordinary shares of 25p each;

	US$40,000,000 divided into 160,000,000 preference shares of US 25 cents each; €40,000,000, divided into 160,000,000 preference shares of €25 cents each; and Japanese ¥1,250,000,000 divided into 50,000,000 preference shares of Japanese ¥ 25 each.

(8)	By a further resolution passed a general meeting of the company on 5 June, 2009, the authorised share capital of the company was changed to the following:-

	£11,550,262,389 comprising:

	(i)	£200,000,000 divided into 800,000,000 preference shares of 25p each;

	(ii)	£19,736,842 divided into 78,947,368 limited voting ordinary shares of 25p each; and

	(iii)	£11,330,525,547 divided into 45,322,102,189 ordinary shares of 25p each;

	US$40,000,000 divided into 160,000,000 preference shares of US 25 cents each; €40,000,000, divided into 160,000,000 preference shares of €25 cents each; and Japanese ¥1,250,000,000 divided into 50,000,000 preference shares of Japanese ¥ 25 each.

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WE, the subscribers to this Memorandum of Association, wish to be formed into a company pursuant to this Memorandum; and we agree to take the number of shares shown opposite our respective names.


Names and Addresses of Subscribers		Number of Shares taken by each Subscriber


JOHN READ		199,999 ordinary shares
For and on behalf of
Trustee Savings Bank Central Board
25 Milk Street
London EC2V 8LU

JOHN READ		1 ordinary share
For and on behalf of
Trustee Savings Bank Central Board

and

PETER WILLIAM STUART ROWLAND
25 Milk Street
aforesaid

Total shares taken		200,000

Dated 10th October 1985

Witness to the above signatures,


	R.G.H. BOURNE
	25 Milk Street,

	aforesaid
	Solicitor

- 10 -

The Companies Act 2006

Public company limited by shares

Articles of association

Lloyds Banking Group plc ¹

as amended by a special resolution passed on 26 November 2009

Preliminary


1	Table A not to apply

	Neither the regulations in Table A in The Companies (Tables A to F) Regulations 1985 nor any other articles or regulations which may apply to companies under the statutes shall apply to the company.

2	Interpretation

	2.1	In these articles (if not inconsistent with the subject or context) the words and expressions set out in the first column below shall bear the meanings set opposite to them respectively:


	“Companies Acts”		shall have the meaning given thereto by section 2 of the Companies Act 2006 but shall only extend to provisions which are in force at the relevant date;

	“company communications provisions”		shall have the same meaning as in the Companies Act 2006;

	“CREST regulations”		the Uncertificated Securities Regulations 2001;

	“deed of covenant”		a deed of covenant entered into by the company on 4 January 1997 under which the company is obliged, inter alia, to make certain payments to the holder of limited voting shares named therein and any reference to any such deed shall include any instrument executed in substitution therefor in favour of such holder or any transferee of all or any of the limited voting shares formerly held by such holder in terms (taking such instruments together if more than one) which the directors consider to be no less favourable to the payee or payees thereunder;

	“deferred shares”		the deferred shares of 15p each of the company described in article 3;



¹	The name of the company was changed on 16 January 2009 from Lloyds TSB Group plc pursuant to a resolution passed on 19 November 2008.

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	“incapacity”		in relation to a member, includes death, bankruptcy, insanity, incapacity of any kind, dissolution, liquidation or other event where, by operation of law, the rights and obligations of a member are transferred to or vested in another person;

	“in writing”		written or produced by any substitute for writing (including anything in electronic form) or partly one and partly another;

	“limited voting shares”		limited voting shares of 10p each of the company;

	“Lloyds TSB Scotland”		Lloyds TSB Scotland plc (registered in Scotland under number 95237);

	“London stock exchange”		London Stock Exchange plc;

	“month”		calendar month;

	“office”		the registered office of the company for the time being;

	“operator”		CRESTCo Limited or such other person as may for the time being be approved by H.M. Treasury as operator under the CREST regulations;

	“operator instruction”		a properly authenticated dematerialised instruction attributable to the operator;

	“ordinary shares”		ordinary shares of 10p each of the company;

	“paid”		paid or credited as paid;

	“participating security”		a security title to units which is permitted by the operator to be transferred by means of a relevant system;

	“preference shares”		preference shares of the company described in article 3.1;

	“register”		the register of members of the company;

	“relevant system”		a computer-based system, and procedures, which enable title to units of a security to be evidenced and transferred without a written instrument pursuant to the CREST regulations;

	“seal”		the common seal of the company;

	“securities seal”		an official seal kept by the company for sealing documents issued by the company, or for sealing documents creating or evidencing securities so issued, as permitted by the Companies Act 2006;

	“statutes”		the Companies Acts, the CREST regulations and every other enactment (to the extent the same is in force) or any judgment or order of any court of competent jurisdiction (where applicable), concerning companies and affecting the company;

	“these articles”		these articles of association as from time to time altered;

	“transfer office”		the place where the register is situate for the time being;

	“treasury shares”		shares of the company which are acquired and are being held by the company;

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	“UK Listing Authority”		the Financial Services Authority in its capacity as competent authority for official listing under Part VI of the Financial Services and Markets Act 2000 and any successor thereto;

	“United Kingdom”		the United Kingdom of Great Britain and Northern Ireland; and

	“year”		calendar year.


2.2	Expressions and references:

	2.2.1	The expression “address” includes any number or address (including, in the case of any uncertificated proxy instruction permitted under article 70, an identification number of a participant in the relevant system) used for the purposes of sending or receiving documents or information by electronic means and/or by means of a website.

	2.2.2	The expressions “debenture” and “debenture holder” shall respectively include “debenture stock” and “debenture stockholder”.

	2.2.3	The expression “documents” shall include notices, information, certificates, reports and accounts, financial statements, forms, offer documents, documents needed for the public quotation of securities, deeds, agreements, records, circulars and cheques, warrants or orders in respect of dividends, distributions or interest, summonses, orders or other legal processes and registers.

	2.2.4	The expressions “ hard copy form ”, “ electronic form ” and “ electronic means ” shall have the same respective meanings as in the company communications provisions.

	2.2.5	The expression “mail” shall include any document sent by prepaid envelope or, where the context allows, sent by fax or other electronic means to the extent allowed by law.

	2.2.6	The expressions “member”, “holder” and “shareholder” shall include references, where the context so requires, to a person entitled by transmission or operation of law (including, without limitation, a person so entitled following incapacity of a member) to that member’s interest in the company.

	2.2.7	The expression “officer” shall include a director, manager and the secretary, but shall not include an auditor.

	2.2.8	The expressions “recognised clearing house” and “recognised investment exchange” shall mean any clearing house or investment exchange (as the case may be) granted recognition under the Financial Services and Markets Act 2000.

	2.2.9	The expression “record date” means any date specified by the directors by resolution (notwithstanding any other provision of these articles but subject to the statutes) as the date at the close of business (or such other time as the directors may determine) of which persons registered as the holders of shares or other securities shall be entitled to receipt of any dividend,

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		distribution, interest, allotment, issue, notice, information, document or circular.

	2.2.10	The expression “secretary” shall include any person appointed to perform any of the duties of the secretary including, but not limited to, a joint, assistant or deputy secretary.

	2.2.11	The expression “ shareholders’ meeting ” shall include both a general meeting and a meeting of the holders of any class of shares of the company. The expression “ general meeting ” shall include any general meeting of the company, including any general meeting held as the company’s annual general meeting in accordance with section 360 of the Companies Act 2006 (“ annual general meeting ”).

	2.2.12	All those provisions of these articles as are applicable to paid-up shares shall apply to stock, and the words “ share ” and “ shareholder ” shall be construed accordingly.

	2.2.13	References to an amount or sum payable on or in respect of a share or an amount to be paid or calculated on or in respect of a share, means an amount, or payment, in the currency in which the share is denominated.

	2.2.14	Words denoting the singular shall include the plural and vice versa. Words denoting the masculine shall include the feminine. Words denoting persons shall include bodies corporate and unincorporated associations.

	2.2.15	References to any statute or statutory provision shall be construed as relating to any statutory modification or re-enactment thereof for the time being in force (whether coming into force before or after the adoption of these articles).

	2.2.16	Any words or expressions defined in the Companies Acts or the CREST regulations shall (if not inconsistent with the subject or context and if not defined in this article 2) bear the same meanings in these articles.

	2.2.17	References to a share (or to a holding of shares) being in certificated or uncertificated form are references, respectively, to that share being a certificated or an uncertificated unit of a security for the purposes of the CREST regulations.

	2.2.18	A special resolution shall be effective for any purpose for which an ordinary resolution is expressed to be required under any provision of these articles or the statutes.

2.3	Wherever in these articles provision is included for the company to make payment, withhold, retain or not be obliged to make any payment in respect of any money which may be owing to any person, the following shall apply unless otherwise expressly provided:

	2.3.1	no interest shall be payable thereon, but any moneys earned in respect of such money shall accrue to and be for the benefit of the company;

	2.3.2	the company shall not be a trustee or hold such money in any fiduciary capacity, but shall be deemed to be the debtor of such person;

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		2.3.3	the company may pay such money in whole or in part into a separate bank account in the name of the person entitled, which shall be a good discharge to the company; and

		2.3.4	the company may employ any such money in the business of the company or invest it as the directors may from time to time think fit.

Share capital


3	Limited voting shares, preference shares and deferred shares

	3.1	The limited voting shares shall rank equally in all respects with the ordinary shares, save as otherwise provided in these articles or in the terms of issue of the limited voting shares.

		3.1.1	Each limited voting share shall be converted into an ordinary share:

			(i)	on the day following the last date on which an amount could become due and payable to a holder of limited voting shares under a deed of covenant; or

			(ii)	if an offer is made to ordinary shareholders of the company (or to all such shareholders other than the offeror and/or any body corporate controlled by the offeror and/or any persons acting in concert with the offeror) to acquire the whole or any part of the issued ordinary share capital of the company and the right to cast more than 50 per cent. of the votes which may ordinarily be cast on a poll at a general meeting of the company becomes or is certain to become vested in the offeror and/or such bodies corporate and/or persons aforesaid; in such event the directors shall as soon as reasonably practicable after they become aware that such right has or will become so vested serve a written notice on all holders of limited voting shares stating that such event has occurred. The publication of a scheme of arrangement under the statutes providing for the acquisition by any person of the whole or any part of the ordinary share capital of the company shall be deemed to be the making of an offer for the purposes of this article 3.1.1.

		3.1.2	The ordinary shares resulting from conversion shall carry the right to receive all dividends and other distributions declared, made or paid on the ordinary share capital of the company by reference to a record date on or after the date of conversion and shall rank equally in all other respects and form one class with the ordinary share capital of the company then in issue and fully paid.

		3.1.3	If while the limited voting shares remain unconverted any offer or invitation (not being an offer or invitation to which the provisions of article 3.1.1 apply) is made or extended to the holders of the ordinary shares to subscribe for or purchase any securities of the company or any other company, the company shall make or extend or, so far as it is able, procure that there is made or extended a like offer or invitation at the same time to each holder of limited voting shares as if such shares had been converted hereunder on the record date for such offer or invitation.

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	3.1.4	So long as the limited voting shares remain unconverted the following provisions shall apply:

		(i)	The company shall not consolidate or subdivide any of the ordinary shares without consolidating or subdividing the limited voting shares in like manner and to a like extent.

		(ii)	The company will not create any new class of equity share capital, other than in connection with or pursuant to an employees’ share scheme approved by the company in general meeting, provided that the creation of equity share capital which carries as compared with the existing ordinary share capital only restricted voting or no voting rights and no greater rights as regards dividends or capital shall not be deemed to be the creation of a new class of equity share capital. Without prejudice to the right of the company to consolidate or subdivide shares or convert shares into stock or to issue ordinary shares by way of capitalisation of profits or reserves, it will not alter the rights attached to all or any part of its equity share capital or attach any special rights or privileges or restrictions thereto.

		(iii)	The limited voting shares shall confer upon the holders thereof the right to have sent to them (at the same time as the same are sent to the holders of ordinary shares) a copy of every circular or other document sent out by the company to the holders of ordinary shares.

	3.1.5	The directors shall forthwith upon such conversion direct that appropriate entries be made in the register and that written notice of such conversion be sent within 14 days after the date of such conversion to the holders of the limited voting shares.

	3.1.6	Forthwith upon receipt by the company from a holder of limited voting shares of a certificate or certificates for such shares held by him on the date of conversion, the company shall deliver to such holder free of charge a new certificate for the ordinary shares to which such holder shall then have become entitled.

	3.1.7	If the ordinary shares in issue on the date of conversion are listed on a recognised investment exchange, the company shall forthwith on conversion make application and take such other action as may be required to list the shares so converted on such exchange.

3.2	The preference shares shall confer upon the holders thereof such rights (including rights of redemption in whole or in part) as may be determined by the directors on allotment, but unless the directors shall otherwise determine, fully paid preference shares shall confer identical rights in respect of capital, dividends (save as to the currency of payment thereof and save where and to the extent that any such share is issued on terms providing that it shall rank for dividend as from a particular date), voting and otherwise, notwithstanding that they are denominated in different currencies and shall be treated as if they are one single class of shares.

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3.3	The deferred shares shall confer upon the holder such rights, and shall be subject to the restrictions, as follows:

	3.3.1	notwithstanding any other provision of these articles, a deferred share:

		(i)	does not entitle its holder to receive any dividend or distribution declared, made or paid or any return of capital (save as provided in article 3.3.1(ii)) and does not entitle its holder to any further or other right of participation in the assets of the company;

		(ii)	entitles its holder to participate on a return of assets on a winding up of the company, such entitlement to be limited to the repayment of the amount paid up or credited as paid up on such share and shall be paid only after the holders of any and all ordinary shares and limited voting shares then in issue shall have received (a) payment in respect of such amount as is paid up or credited as paid up on those ordinary shares and/or limited voting shares held by them at that time plus (b) the payment in cash or in specie of £10,000,000 on each such ordinary share and/or limited voting share;

		(iii)	does not entitle its holder to receive a share certificate in respect of his or her shareholding, save as required by law;

		(iv)	does not entitle its holder to receive notice of, nor attend, speak or vote at, any general meeting of the company; and

		(v)	shall not be transferable at any time other than with the prior written consent of the directors;

	3.3.2	the company shall have the irrevocable authority to authorise and instruct the secretary (or any other person appointed for the purpose by the board) as agent for the holders of deferred shares to surrender the deferred shares to the company for no consideration and to execute on behalf of such holders such documents as are necessary in connection with such surrender without obtaining the sanction of the holder or holders thereof, and pending such surrender to retain the certificates, to the extent issued, for such deferred shares;

	3.3.3	any request by the company to surrender the deferred shares may be made by the directors depositing at the registered office of the company a notice addressed to such person as the directors shall have nominated on behalf of the holders of the deferred shares;

	3.3.4	the company shall have the irrevocable authority to appoint a single holder or any other person on behalf of all holders of deferred shares to exercise any vote to which holders of deferred shares may be entitled in any circumstances or for any other matter connected to the deferred shares;

	3.3.5	the rights attached to the deferred shares shall not be deemed to be varied or abrogated by the creation or issue of any new shares ranking in priority to or pari passu with or subsequent to such shares, any amendment or variation of the rights of any other class of shares of the company, the

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			company reducing its share capital or the surrender, or purchase of any share, whether a deferred share or otherwise; and

		3.3.6	the company shall have the irrevocable authority to cancel any deferred share without making any payment to the holder and such cancellation shall not be deemed to be a variation or abrogation of the rights attaching to such deferred share.

4	Deleted 2009

5	Fractions arising on consolidation or subdivision

	5.1	Whenever as a result of a consolidation or subdivision of shares any members would become entitled to fractions of a share, the directors may, on behalf of those members, sell the shares representing the fractions for the best price reasonably obtainable to any person (including, subject to the provisions of the act, the company) and distribute the net proceeds of sale in due proportion among those members in the same currency in which the shares were denominated. The directors may authorise some person to transfer the shares to, or in accordance with the directions of, the purchaser. The transferee shall not be bound to see to the application of the purchase money nor shall his title to the shares be affected by any irregularity in or invalidity of the proceedings in reference to the sale.

	5.2	So far as the statutes allow, the directors may treat shares of a member in certificated form and in uncertificated form as separate holdings in giving effect to subdivisions and/or consolidations and may cause any shares arising on consolidation or subdivision and representing fractional entitlements to be entered in the register as shares in certificated form where this is desirable to facilitate the sale thereof.

	5.3	Where any member’s entitlement to a portion of the proceeds of sale amounts to less than a minimum figure determined by the directors, that member’s portion may at the directors’ discretion be distributed to an organisation which is a charity for the purposes of the law of England and Wales or Scotland.

6	Deleted 2009

7	Reduction of capital

	Subject to the provisions of the statutes, the company may by special resolution reduce its share capital or any capital redemption reserve, share premium account or other undistributable reserve in any way.

Shares

8	Shares and special rights

	8.1	Without prejudice to any special rights previously conferred on the holders of any shares or class of shares for the time being issued, any share in the company may be issued with such preferred, deferred or other special rights (including their being denominated in any currency), or subject to such restrictions, whether as regards dividend, return of capital, voting or otherwise, as the company may from time to

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		time by ordinary resolution determine (or, in the absence of any such determination, as the directors may determine) or as otherwise provided in these articles and, subject to the provisions of the statutes, the company may issue any shares which are, or at the option of the company or the holder are, liable to be redeemed and the directors may determine the terms, conditions and manner of redemption of any such shares.

9	Deleted 2009

10	Commissions on issue of shares

	The company may exercise the powers of paying commissions conferred by the statutes to the full extent thereby permitted. The company may also on any issue of shares pay such brokerage as may be lawful.

11	Renunciation of allotment

	The directors may at any time after the allotment of any share but before any person has been entered in the register as the holder:

	11.1	recognise a renunciation thereof by the allottee in favour of some other person and accord to any allottee of a share a right to effect such renunciation; and/or

	11.2	allow the rights represented thereby to be one or more participating securities, in each case upon and subject to such terms and conditions as the directors may think fit to impose.

12	Trust etc. interests not recognised

	Except as required by these articles, the statutes or under the order of a court, no person shall be recognised by the company as holding any share upon any trust, and the company shall not be bound by or compelled in any way to recognise any equitable, contingent, future or partial interest in any share, or any interest in any fractional part of a share, or (except only as by these articles or by law otherwise provided) any other right in respect of any share, except an absolute right to the entirety thereof in the holder.

Share certificates

13	Issue of share certificates

	13.1	Every person (except a person to whom the company is not required by law to issue a certificate) whose name is entered in the register in respect of shares in certificated form shall upon the issue or transfer to him of such shares be entitled without payment to a certificate therefor:

		13.1.1	(in the case of issue) within one month (or such longer period as the terms of issue shall provide) after allotment; or

		13.1.2	(in the case of a transfer of fully-paid shares) within 5 business days after lodgment of the transfer; or

		13.1.3	(in the case of a transfer of partly-paid shares) within 2 months after lodgment of the transfer; or

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		13.1.4	(in the case of the surrender of a share warrant for cancellation) within 2 months of the surrender of the warrant.

	13.2	A certificate sent to a member under this article 13 or under article 127, is sent at the risk of the member and not the company.

14	Form of share certificate

	Every share certificate shall be executed by the company in such manner as the directors may decide (which may include use of the seal or the securities seal (or, in the case of shares on a branch register, an official seal for use in the relevant territory) and/or manual or facsimile signatures by one or more directors) and shall specify the number, denomination and class of shares to which it relates and the amount paid up thereon. No certificate shall be issued representing shares of more than one class.

15	Joint holders

	In the case of a share held jointly by several persons in certificated form the company shall not be bound to issue more than one certificate therefor and delivery of a certificate to one of the joint holders shall be sufficient delivery to all.

16	Replacement of share certificates

	16.1	Any two or more certificates representing shares of any one class held by any member may at his request be cancelled and a single new certificate for such shares issued instead with such charge as the directors may reasonably determine.

	16.2	If any member shall surrender for cancellation a share certificate representing shares held by him and request the company to issue instead two or more share certificates representing such shares in such proportions as he may specify, the directors may, if they think fit, comply with such request for such charge as the directors may reasonably determine.

	16.3	If a share certificate shall be damaged or defaced or alleged to have been lost, stolen or destroyed, a new certificate representing the same shares may be issued to the holder upon request subject to delivery up of the old certificate or (if alleged to have been lost, stolen or destroyed) compliance with such conditions as to evidence and indemnity and the payment of any exceptional out-of-pocket expenses of the company in connection with the request as the directors may think fit.

	16.4	In the case of shares held jointly by several persons any such request may be made by any one of the joint holders.

17	Share warrants to bearer

	17.1	Subject to the provisions of the act, the company may issue share warrants to bearer (each a “ warrant ”) and the directors may accordingly, with respect to any share which is fully paid up and with respect to any one or more such shares as may be specified from time to time in a warrant (in any case in which they shall in their discretion think fit so to do) issue a warrant stating that the bearer of the warrant is entitled to the shares specified therein, and may in any case in which a warrant is so issued provide by coupons or otherwise for payment of the future dividends or other moneys in respect of the shares included in such warrant.

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	17.2	Subject to the provisions of these articles and of the act the bearer of a warrant shall be deemed to be a member of the company, and shall be entitled to the same privileges and advantages as if his name had been included in the register of members as the holder of the shares specified in such warrant. The company shall not recognise joint holders of a warrant.

	17.3	No person shall, as the bearer of a warrant, be entitled (a) to sign a requisition for calling a meeting, or to give notice of intention to submit a resolution to a meeting, or (b) to attend or vote by himself or by his proxy or exercise any privilege as a member at a meeting, unless he shall, in case (a) before or at the time of lodging such requisition, or giving such notice of intention as aforesaid, or in case (b) four days at least before the day fixed for the meeting, have deposited at such address or one of such addresses (if any) as may have been specified for such purpose, or if no address has been so specified, the transfer office, the warrant in respect of which he claims to act, attend or vote as aforesaid (the place at which the warrant is so deposited being in this article called the “depository”), and unless the warrant shall remain so deposited until after the meeting and any adjournment thereof shall have been held.

	17.4	There shall be delivered to any person so depositing a warrant a certificate stating his name and address, and describing the shares included in the warrant so deposited, and bearing the date of issue of the certificate, and such certificate shall entitle him or his proxy, duly appointed as hereinafter provided, to attend and vote at any general meeting held within three months from the date of the certificate and prior to delivery up thereof pursuant to article 17.5 in the same way as if he were the registered holder of the shares specified in the certificate.

	17.5	Upon delivery up of the certificate at the depository, the bearer of the certificate shall be entitled to receive the warrant in respect of which the certificate was given.

	17.6	The holder of a warrant shall not, save as aforesaid, be entitled to exercise any right as a member unless (if called upon by any director or the secretary so to do) he produces his warrant or the certificate of its deposit, and states his name and address.

	17.7	The directors may from time to time make such other arrangements as they think fit, in addition to or in place of the arrangements referred to in articles 17.3 and 17.4, for persons entitled to warrants held through a recognised clearing house to exercise the rights of the bearer of the warrant in relation to shareholders’ meetings.

	17.8	The directors may issue new warrants or coupons in such manner, subject to such conditions and in respect of such number of shares as they think fit from time to time and the directors shall be empowered at any time and from time to time to amend any warrant then in issue so that by virtue of such amendments the number of shares which such warrant from time to time represents is accurately shown therein provided that no new warrant or coupon shall be issued in place of one lost unless the directors are satisfied beyond reasonable doubt that the original has been destroyed.

	17.9	The shares included in any warrant shall be transferred by the delivery of the warrant without any written transfer and without registration, and to shares so included the provisions hereinbefore contained with reference to the transfer of shares shall not apply.

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	17.10	The delivery to the company or to a duly authorised agent of the company of a coupon shall be a good discharge to the company for the dividend represented thereby.

	17.11	Upon surrender of his warrant to the company for cancellation, together with all coupons for the future dividends on the shares comprised in the warrant and an application in writing signed by him in such form and authenticated in such manner as the directors shall require requesting to be registered as a member in respect of the shares included in the warrant and stating in such application his name, address and occupation, the bearer of a warrant shall be entitled to have his name entered as a member in respect of the shares included in the warrant, but the company shall in no case be responsible for any loss or damage incurred by any person by reason of the company entering in its register of members, upon surrender of a warrant, the name of any person not the true and lawful owner of the warrant surrendered.

	17.12	Subject to any legislation from time to time, any notice to the bearer of a warrant or to any other person who holds or is interested in shares in the company in bearer form or any related coupons or talons (if any) shall be sufficiently given if advertised in such newspaper or newspapers as the directors, in their discretion, shall consider appropriate or by such other means as the directors consider appropriate (including, but without limiting the directors’ discretion, if warrants are held through a recognised clearing house by arranging for the notice to be given through that recognised clearing house). If notice is given by newspaper advertisement, it shall be deemed given on the day when the advertisement appears and if notice is given through a recognised clearing house it shall be deemed given on the day notice is issued by the recognised clearing system.

	17.13	The directors may from time to time as they think fit make and vary the terms and conditions upon which warrants may be issued and any matters incidental thereto. Subject to these articles the bearer of a warrant shall be subject to the conditions for the time being in force relating to warrants whether made before or after the issue of such warrant.

Calls on shares

18	Power to make calls

	The directors may from time to time make calls upon the members in respect of any moneys unpaid on their shares (whether on account of the nominal value of the shares or by way of premium) but subject to the terms of allotment of such shares. A call shall be deemed to have been made at the time when the resolution of the directors authorising the call was passed and may be made payable by instalments.

19	Liability for calls

	Each member shall (subject to being given at least 14 days’ notice specifying the time or times and place of payment) pay to the company at the time or times and place so specified the amount called on his shares. The joint holders of a share shall be jointly and severally liable to pay all calls in respect thereof. A call may be wholly or partly revoked or postponed as the directors may determine.

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20	Interest on overdue amounts

	If a sum called in respect of a share is not paid before or on the day appointed for payment thereof, the person from whom the sum is due shall pay interest on the sum from the day appointed for payment thereof to the time of actual payment at such rate as the directors determine, but the directors shall be at liberty in any case or cases to waive payment of such interest wholly or in part.

21	Other sums due on shares

	Any sum (whether on account of the nominal value of the share or by way of premium) which by the terms of allotment of a share becomes payable upon allotment or at any fixed date shall for all the purposes of these articles be deemed to be a call duly made and payable on the date on which by the terms of allotment the same becomes payable. In case of non-payment all the relevant provisions of these articles as to payment of interest and expenses, forfeiture or otherwise shall apply as if such sum had become payable by virtue of a call duly made and notified.

22	Power to differentiate between holders

	The directors may on the allotment of shares differentiate between the holders as to the amount of calls to be paid and the times of payment.

23	Payment of calls in advance

	The directors may if they think fit receive from any member willing to advance the same all or any part of the moneys (whether on account of the nominal value of the shares or by way of premium) uncalled and unpaid upon the shares held by him and such payment in advance of calls shall extinguish pro tanto the liability upon the shares in respect of which it is made. The company may pay interest upon the money so received (until and to the extent that the same would but for such advance become payable) at such rate as the member paying such sum and the directors may agree. No sum so paid up in advance shall entitle the member in respect of such share to participate in any dividend on such amount (until and to the extent that such sum would but for such advance become payable).

Forfeiture and lien

24	Notice on failure to pay a call

	24.1	If a member fails to pay in full any call or instalment of a call on or before the due date for payment thereof, the directors may at any time thereafter serve a notice on him requiring payment of so much of the call or instalment as is unpaid together with any interest which may have accrued thereon and any expenses incurred by the company by reason of such non-payment.

	24.2	The notice shall name a further day (not being less than 7 days from the date of service of the notice) on or before which, and the place where, the payment required by the notice is to be made, and shall state that in the event of non-payment in accordance therewith the shares on which the call has been made will be liable to be forfeited.

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25	Forfeiture for non-compliance

	If the requirements of any such notice as aforesaid are not complied with, any share in respect of which such notice has been given may at any time thereafter, before payment of all calls and interest and expenses due in respect thereof has been made, be forfeited by a resolution of the directors to that effect. Such forfeiture shall include all dividends declared in respect of the forfeited share and not actually paid before forfeiture. The directors may accept a surrender of any share liable to be forfeited hereunder.

26	Disposal of forfeited shares

	A share so forfeited or surrendered shall become the property of the company and may be sold, re-allotted or otherwise disposed of either to the person who was before such forfeiture or surrender the holder thereof or entitled thereto or to any other person upon such terms and in such manner as the directors shall think fit, and at any time before a sale, reallotment or disposal the forfeiture or surrender may be cancelled on such terms as the directors think fit. The directors may, if necessary, authorise some person to transfer a forfeited or surrendered share to any such other person as aforesaid.

27	Holder to remain liable despite forfeiture

	A member whose shares have been forfeited or surrendered shall cease to be a member in respect of the shares (and shall, in the case of shares held in certificated form, surrender to the company for cancellation the certificate for such shares) but shall notwithstanding the forfeiture or surrender remain liable to pay to the company all moneys which at the date of forfeiture or surrender were presently payable by him to the company in respect of the shares with interest thereon at such rate as the directors may determine from the date of forfeiture or surrender until payment. The directors may at their absolute discretion enforce payment without any allowance for the value of the shares at the time of forfeiture or surrender or for any consideration received on their disposal or waive payment in whole or in part.

28	Lien on partly-paid shares

	The company shall have a first and paramount lien on every share (not being a fully-paid share) for all moneys (whether presently payable or not) called or payable at a fixed time in respect of such share, and the directors may waive any lien which has arisen and may resolve that any share shall for some limited period be exempt wholly or partially from the provisions of this article.

29	Sale of shares subject to lien

	The company may sell in such manner as the directors think fit any share on which the company has a lien, but no sale shall be made unless some sum in respect of which the lien exists is presently payable nor until the expiration of 14 days after a notice demanding payment of the sum presently payable and giving notice of intention to sell the share in default of payment shall have been given to the relevant member.

30	Proceeds of sale of shares subject to lien

	The net proceeds of such sale after payment of the costs of such sale shall be applied in or towards payment or satisfaction of the amount in respect whereof the lien exists so far as

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	the same is then payable and any residue shall, upon surrender (in the case of shares held in certificated form) to the company for cancellation of the certificate for the shares sold and subject to a like lien for sums not presently payable as existed upon the shares prior to the sale, be paid to the person entitled to the shares at the time of the sale. For the purpose of giving effect to any such sale, the directors may authorise some person to transfer the shares sold to, or in accordance with the directions of, the purchaser.

31	Evidence of forfeiture

	A statutory declaration in writing that the declarant is a director or the secretary and that a share has been duly forfeited or surrendered or sold to satisfy a lien of the company on a date stated in the declaration shall be conclusive evidence of the facts therein stated as against all persons claiming to be entitled to the share. Such declaration shall (subject to the relevant share transfer being made, if the same be required) constitute a good title to the share, and the person to whom the share is sold, re-allotted or disposed of shall not be bound to see to the application of the consideration (if any) nor shall his title to the share be affected by any irregularity or invalidity in the proceedings relating to the forfeiture, surrender, sale, re-allotment or disposal of the share.

Variation of rights

32	Manner of variation of rights

	32.1	Whenever the share capital of the company is divided into different classes of shares, the special rights attached to any class may, subject to the provisions of the statutes, be varied or abrogated either with the consent in writing of the holders of three-quarters in nominal value of the issued shares of the class or with the sanction of a special resolution passed at a separate meeting of the holders of the shares of the class (but not otherwise) and may be so varied or abrogated either whilst the company is a going concern or during or in contemplation of a winding-up.

		The provisions of this article shall apply to the variation or abrogation of the special rights attached to some only of the shares of any class as if each group of shares of the class differently treated formed a separate class the special rights whereof are to be varied.

	32.2	To every such separate meeting all the provisions of these articles relating to general meetings and to the proceedings thereat shall apply with such changes as are appropriate, except that the necessary quorum shall be 2 persons at least holding or representing by proxy at least one-third in nominal value of the issued shares of the class (but so that at any adjourned meeting any holder of shares of the class present in person or by proxy shall be a quorum) and that any holder of shares of the class present in person or by proxy may demand a poll and that every such holder shall on a poll have one vote for every share of the class held by him.

33	Matters not constituting variation of rights

	The special rights attached to any class of shares having preferential rights shall not unless otherwise expressly provided by the terms of issue thereof be deemed to be varied by:

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		33.1	the creation or issue of further shares ranking as regards participation in the profits or assets of the company in some or all respects equally therewith or subsequent thereto but in no respect in priority thereto; or

		33.2	the purchase or redemption by the company of any of its own shares.

Transfer of shares

34	Form of transfer

	34.1	All transfers of shares which are in certificated form may be effected by transfer in writing in any usual or common form or in any other form acceptable to the directors and may be under hand only or in the case of a corporation executed in accordance with the statutes or, as the case may be, the laws of its place of incorporation and its by-laws. The instrument of transfer shall be signed by or on behalf of the transferor and (except in the case of fully-paid shares) by or on behalf of the transferee. The transferor shall remain the holder of the shares concerned until the name of the transferee is entered in the register in respect thereof. All instruments of transfer which are registered may be retained by the company.

	34.2	All transfers of shares which are in uncertificated form shall, unless the CREST regulations otherwise provide, be effected by means of a relevant system.

35	Balance certificate

	Where some only of the shares comprised in a share certificate are transferred the old certificate shall be cancelled and, to the extent that the balance is to be held in certificated form, a new certificate for the balance of such shares issued instead without charge.

36	Right to refuse registration

	36.1	The directors may decline to recognise any instrument of transfer relating to shares in certificated form unless:

		36.1.1	it is in respect of only one class of share;

		36.1.2	it is lodged (duly stamped if required) at the transfer office accompanied by the relevant share certificate(s); and

		36.1.3	when lodged it is accompanied by such other evidence as the directors may reasonably require to show the right of the transferor to make the transfer (and, if the instrument of transfer is executed by some other person on his behalf, the authority of that person to do so).

		In the case of a transfer of shares in certificated form by a recognised clearing house or a nominee of a recognised clearing house or of a recognised investment exchange, the lodgment of share certificates will only be necessary if and to the extent that certificates have been issued in respect of the shares in question.

	36.2	The directors may in their absolute discretion refuse to register any transfer of shares (not being fully-paid shares) provided that, where any such shares are admitted to the official list maintained by the UK Listing Authority, such discretion may not be exercised in such a way as to prevent dealings in the shares of that class from taking place on an open and proper basis.

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	36.3	The directors shall refuse to register the transfer of any share on which the company has a lien. The directors shall also refuse to register the transfer of any limited voting share unless the same:

		36.3.1	is transferred under a scheme established or order made by the Charity Commissioners or by the court in the exercise of jurisdiction in relation to charities provided that the transferee shall have charitable objects;

		36.3.2	is transferred by a company in the course of winding-up to some other institution or institutions having charitable objects and which shall prohibit the distribution of its or their income and property among its or their members to an extent at least as great as is imposed on the transferor by its memorandum of association;

		36.3.3	is transferred by a member of the company to another holder of limited voting shares; or

		36.3.4	devolves upon the crown and the doctrine of cy-près is applied at the direction of the crown in respect thereof.

	36.4	The directors may also refuse to register an allotment or transfer of shares (whether fully-paid or not) in favour of more than 4 persons jointly.

	36.5	If the directors refuse to register an allotment or transfer of shares they shall as soon as practicable and in any event within 2 months after the date on which:

		36.5.1	the letter of allotment or instrument of transfer was lodged with the company (in the case of shares held in certificated form); or

		36.5.2	the operator-instruction was received by the company (in the case of shares held in uncertificated form),

		send to the allottee or transferee notice of the refusal giving reasons for the refusal.

37	No fee on registration

	No fee will be charged by the company in respect of the registration of any transfer or other document relating to or affecting the title to any shares or otherwise for making any entry in the register affecting the title to any shares.

38	Deleted 2009

39	Branch register

	Subject to and to the extent permitted by the statutes, the company, or the directors on behalf of the company, may cause to be kept in any territory a branch register of members resident in such territory, and the directors may make and vary such regulations as they may think fit respecting the keeping of any such register.

40	Further provisions on shares in uncertificated form

	40.1	Subject to the statutes and the rules (as defined in the CREST regulations), and apart from any class of wholly dematerialised security, the directors may determine that any class of shares may be held in uncertificated form and that title to such

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		shares may be transferred by means of a relevant system or that shares of any class should cease to be held and transferred as aforesaid.

	40.2	The provisions of these articles shall not apply to shares of any class which are in uncertificated form to the extent that such articles are inconsistent with:

		40.2.1	the holding of shares of that class in uncertificated form;

		40.2.2	the transfer of title to shares of that class by means of a relevant system; or

		40.2.3	any provision of the CREST regulations.

Transmission of shares

41	Persons entitled on death

	In case of the death of a member, the survivors or survivor where the deceased was a joint holder, and the executors or administrators of the deceased where he was a sole or only surviving holder, shall be the only persons recognised by the company as having any title to his interest in the shares, but nothing in this article shall release the estate of a deceased member (whether sole or joint) from any liability in respect of any share held by him.

42	Election by persons entitled by transmission

	A person becoming entitled to a share in consequence of incapacity of a member may (subject as hereinafter provided) upon supplying to the company such evidence as the directors may reasonably require to show his title to the share either be registered himself as holder of the share upon giving to the company notice to that effect or transfer such share to some other person. All the limitations, restrictions and provisions of these articles relating to the right to transfer and the registration of transfers of shares shall be applicable to any such notice or transfer as aforesaid as if the notice or transfer were a transfer made by the member registered as the holder of any such share.

43	Refusal of registration on transmission

	The directors may at any time give notice requiring any person becoming entitled by transmission to a share to elect either to be registered himself or to transfer the share. If the notice is not complied with within 60 days, and the shares are fully paid up, such person shall be deemed to have elected to be registered himself whereupon he shall be entered in the register accordingly.

44	Rights of persons entitled by transmission

	Save as otherwise provided by or in accordance with these articles, a person becoming entitled to a share in consequence of the incapacity of a member (upon supplying to the company such evidence as the directors may reasonably require to show his title to the share) shall be entitled to the same dividends and other advantages as those to which he would be entitled if he were the registered holder of the share except that he shall not be entitled in respect thereof (except with the authority of the directors) to exercise any right conferred by membership in relation to shareholders’ meetings until he shall have been registered as a member in respect of the share.

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Untraced shareholders


45	Untraced shareholders

	45.1	The company shall be entitled to sell at the best price reasonably obtainable at the time of sale the shares of a member if and provided that:

		45.1.1	during the period of 12 years prior to the date of the publication of the advertisements referred to in article 45.1.2 (or, if published on different dates, the first thereof) at least 3 dividends in respect of the shares have become payable and no dividend in respect of those shares has been claimed;

		45.1.2	the company shall on expiry of such period of 12 years have inserted advertisements in both a national newspaper and a newspaper circulating in the area of his registered address within the United Kingdom, or (if he has no such address) of the address, if any, within the United Kingdom supplied by him to the company for the service of documents giving notice of its intention to sell the shares; and

		45.1.3	during the period of 3 months following the publication of such advertisements the company shall have received no communication from such member.

	45.2	To give effect to any such sale the company may appoint any person to transfer those shares, and such transfer shall be as effective as if it had been carried out by the member and the title of the transferee shall not be affected by any irregularity or invalidity in the proceedings relating thereto.

	45.3	The net proceeds of sale shall belong to the company which shall be obliged to account to the former member for an amount equal to such proceeds and shall enter the name of such former member in the books of the company as a creditor for such amount which shall be a debt of the company. Any net proceeds of sale unclaimed after a period of 12 years from the date of sale shall be forfeited and shall revert to the company.

	45.4	The company may cease to send any cheque, warrant, order or similar financial instrument by post or to employ any other means of payment (including using the facilities of a relevant system) for any dividend, instalment of interest or other amount owing to a member which is normally paid in that manner and also may cease to send or deliver any other documents to such member if:

		45.4.1	on 2 consecutive occasions cheques, warrants, orders or similar financial instruments shall have been returned undelivered during, or shall have remained uncashed at the end of, the period for which the same are valid, or any other means of payment shall have failed or other documents shall have been returned undelivered within 3 months of their being sent; or

		45.4.2	on any occasion a cheque, warrant, order or similar financial instrument shall have been returned undelivered during, or shall have remained uncashed at the end of, the period for which the same is valid or any other means of payment shall have failed or other documents shall have been returned undelivered within 3 months of their being sent, and reasonable

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			enquiries shall have failed to establish any new address or account of the member.

		The company shall recommence sending cheques, warrants, orders or similar financial instruments or employing such other means in respect of dividends, instalments of interest and other amounts which become due and shall also recommence sending or delivering other documents after the member requests such recommencement in writing.

	45.5	The company shall remain liable to a member to account to him for any amounts required to be paid to him but for the provisions of article 45.4. Any amount unclaimed for a period of 12 years from the date on which such amount would have been payable but for article 45.4 shall be forfeited and shall revert to the company.

General meetings

46	Annual general meetings

	An annual general meeting shall be held in each period of 6 months beginning with the day following the company’s accounting reference date, at such place (being in Edinburgh or at such other place in Scotland as the directors shall appoint), date and time as may be determined by the directors.

47	Convening of general meetings

	The directors may whenever they think fit, and shall on requisition in accordance with the statutes, proceed to convene a general meeting.

Notice of general meetings

48	Notice of general meetings

	48.1	An annual general meeting shall be called by notice of at least 21 days.

	48.2	Any other general meeting shall be called by notice of at least 14 days.

	48.3	The period of notice shall in either case be exclusive of the day on which it is served or deemed to be served and of the day on which the meeting is to be held, and shall be given to all members other than such as are not under the provisions of these articles entitled to receive such notices from the company.

	48.4	For the purposes of article 48.3 the company may determine that only those persons entered on the register at the close of business on a day determined by the company, such day being no more than 21 days before the day that notice of the meeting is sent, shall be entitled to receive such a notice.

49	Contents of notice of general meetings

	49.1	Every notice calling a general meeting shall specify the place, date and time of the meeting.

	49.2	There shall appear with reasonable prominence in every such notice a statement that:

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		49.2.1	a member is entitled to appoint a proxy or proxies to exercise all or any of his rights to attend and to speak and vote; and

		49.2.2	a proxy need not be a member of the company.

	49.3	The notice shall specify the general nature of the business to be transacted at the meeting; and if any resolution is to be proposed as a special resolution, the notice shall contain a statement to that effect.

	49.4	In the case of an annual general meeting, the notice shall also specify the meeting as such.

	49.5	For the purposes of determining which persons are entitled to attend or vote at a meeting, and how many votes such persons may cast, the company may specify in the notice of the meeting a time, not more than 48 hours before the time fixed for the meeting, by which a person must be entered on the register in order to have the right to attend or vote at the meeting.

	49.6	If the directors consider that it is impractical, or undesirable, to hold a general meeting on the date or at the time or place stated in the notice of meeting, they may change the place of or postpone the meeting or do both. In such circumstances and if it is practical, the company shall announce the date, time and place of the adjourned meeting by advertisement in at least 2 United Kingdom national newspapers. It shall not be necessary to give notice of the adjourned meeting. The directors shall take all reasonable steps to ensure that a member trying to attend the meeting at the original date, time and place is informed of the new arrangements. If a meeting is adjourned in this way, proxies may be lodged in accordance with the provisions of articles 69 and 70 until 48 hours before the adjourned meeting. The directors may also change the place of or postpone the adjourned meeting, or do both, under this article.

Proceedings at general meetings

50	Chairman

	The chairman of the directors, failing whom a deputy chairman, failing whom any director present and willing to act and, if more than one, chosen by the directors present at the meeting, shall preside as chairman at a general meeting. If no director is present within 5 minutes after the time appointed for holding the meeting and willing to act as chairman, a member may be elected to be the chairman by a resolution of the company passed at the meeting.

51	Security and other arrangements at meetings

	51.1	The chairman of a meeting shall be entitled to take any action he considers appropriate for proper and orderly conduct before and during a general meeting.

	51.2	The directors shall be entitled to ask persons wanting to attend a general meeting to submit to searches or other security arrangements which the directors think are appropriate. Without limitation, the security arrangements may include the prohibition of any article or item (as determined by the directors) being permitted to be taken into the meeting. The directors may, in their discretion, refuse entry to, or remove from, a general meeting any person who does not submit to those searches

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		or comply with those security arrangements. The directors’ powers and discretions under this article are delegated to the chairman of the board, but, if he is not present, to the proposed chairman of the meeting.

52	Meeting in different places

	52.1	Subject to the statutes and these articles, every member may attend a general meeting in person or by proxy.

	52.2	The directors may make arrangements that they, in their discretion, think appropriate to:

		52.2.1	enable attendance at a place where a general meeting (or adjournment) is to be held; or

		52.2.2	regulate the number of people attending that meeting (or adjournment); and

		52.2.3	ensure the safety of people attending at that place,

		and may change those arrangements at any time. The arrangements may include (without limitation) the issue of tickets or the use of a random method of selection.

	52.3	In the case of a general meeting to which these arrangements apply, the directors may, when specifying the place of the meeting direct that the meeting shall be held at a place identified in the notice at which the chairman of the meeting will attend (the “principal meeting place”); and make arrangements for simultaneous attendance and participation (including by way of video link) at other places by members and proxies entitled to attend the meeting but excluded from it under this article or who want to attend at one of the other places. A member or proxy prevented from attending (or not wishing to attend) at the principal meeting place may attend and participate at another place. In the case of an annual general meeting, the principal meeting place shall be in Edinburgh or at such other place in Scotland as the directors shall appoint.

	52.4	The notice of meeting need not give details of any arrangements under this article.

	52.5	In these articles (unless the context requires otherwise), the members shall be treated as meeting in the principal meeting place.

	52.6	The directors’ powers and discretions under this article are delegated to the chairman at a general meeting.

	52.7	The directors shall be entitled to permit such legal and other advisers of the company as they shall think fit to attend and speak at any meeting of the company or any separate meeting of any class of shares in the capital of the company.

53	Quorum

	No business other than the appointment of a chairman shall be transacted at any general meeting unless a quorum is present at the time when the meeting proceeds to business. 3 members present in person or by proxy and entitled to vote shall be a quorum for all purposes.

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54	Lack of quorum

	If within 15 minutes from the time appointed for a general meeting (or such longer interval as the chairman of the meeting may think fit to allow) a quorum is not present, or if during the meeting a quorum ceases to be present, the meeting, if convened on the requisition of members, shall be dissolved. In any other case it shall stand adjourned to such day, time and place as may have been specified for the purpose in the notice convening the meeting or (if not so specified) as the chairman of the meeting may determine.

55	Adjournment

	55.1	The chairman of a general meeting may adjourn the meeting, before or after it has started, if the chairman considers that:

		55.1.1	there is not enough room for the number of members and proxies who want to attend the meeting;

		55.1.2	the behaviour of anyone present prevents, or is likely to prevent, the business of the meeting being carried out in an orderly way; or

		55.1.3	an adjournment is necessary for any other reason, so that the business of the meeting may be properly carried out.

		The chairman may adjourn the meeting for any of these reasons to a date, time and place which the chairman may decide, or indefinitely, without the consent of the meeting to do this.

	55.2	Subject to the preceding article, the chairman of any general meeting at which a quorum is present may with the consent of the meeting (and shall if so directed by the meeting) adjourn the meeting from time to time (or sine die) and from place to place, but no business shall be transacted at any adjourned meeting except business which might lawfully have been transacted at the meeting from which the adjournment took place.

		Where a meeting is adjourned sine die, the time and place for the adjourned meeting shall be fixed by the directors.

56	Notice of adjourned meeting

	When a meeting is adjourned for 30 days or more or sine die, not less than 7 days’ notice of the adjourned meeting shall be given by advertisement in 2 United Kingdom national newspapers.

	Save as provided in these articles, it shall not be necessary to give any notice of an adjournment or of the business to be transacted at an adjourned meeting.

57	Amendments to resolutions

	57.1	The chairman may propose amendments to a special resolution if they are amendments to correct an obvious error in the resolution.

	57.2	No other amendments may be proposed to a special resolution.

	57.3	Amendments to an ordinary resolution which are within the scope of the resolution may be proposed at any time by the chairman but in the case of a member only if

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		written notice of the proposed amendment is delivered to the office at least 3 clear business days (or such lesser period as the chairman in his absolute discretion may determine) before the day fixed for the meeting or adjourned meeting.

	57.4	If an amendment shall be proposed to any resolution under consideration but shall in good faith be ruled out of order by the chairman of the meeting, the proceedings on the substantive resolution shall not be invalidated by any error in such ruling.

Polls


58	Demand for poll

	58.1	At any general meeting a resolution put to the vote of the meeting shall be decided on a show of hands unless a poll is (before a resolution is put to the vote on a show of hands, or on the declaration of the result of the show of hands) demanded by:

		58.1.1	the chairman of the meeting; or

		58.1.2	not less than 5 members present in person or by proxy and entitled to vote; or

		58.1.3	a member or members present in person or by proxy and representing not less than one-tenth of the total voting rights of all the members having the right to vote at the meeting; or

		58.1.4	a member or members present in person or by proxy and holding shares in the company conferring a right to vote at the meeting being shares on which an aggregate sum has been paid up equal to not less than one-tenth of the total sum paid up on all the shares conferring that right.

	58.2	A demand for a poll may be withdrawn, and a demand so withdrawn shall not be taken to have invalidated the result of a show of hands declared before the demand was made. If a poll is demanded before the declaration of the result of a show of hands and the demand is so withdrawn, the meeting shall continue as if the demand had not been made. If a demand for a poll is withdrawn, the chairman of the meeting or other persons entitled to do so may demand a poll.

	58.3	Only the chairman of the meeting may demand a poll on a question of adjournment.

	58.4	No poll shall be demanded on the election of a chairman of a meeting.

59	Procedure on a poll

	A poll shall be taken in such manner (including the use of ballot, electronic voting, voting papers or tickets) as the chairman of the meeting may direct, and the result of the poll shall be deemed to be the resolution of the meeting at which the poll was demanded. The chairman of the meeting may (and if so directed by the meeting shall) appoint scrutineers (who need not be members) and may adjourn the meeting to some place, date and time fixed by him for the purpose of declaring the result of the poll.

60	Voting on a poll

	On a poll votes may be given either personally or by proxy and a person entitled to more than one vote need not use all his votes or cast all the votes he uses in the same way.

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61	Timing of poll

	61.1	A poll demanded by the chairman on a question of adjournment under article 58.3 shall be taken forthwith.

	61.2	A poll demanded on any other question shall be taken either immediately or at such subsequent time (not being more than 30 days from the date of the meeting) and place as the chairman may direct. No notice need be given of a poll not taken immediately.

	61.3	The demand for a poll shall not prevent the continuance of the meeting for the transaction of any business other than the question on which the poll has been demanded.

Votes of members

62	Votes attaching to shares

	Subject to article 49.4 and to any special rights or restrictions as to voting attached by or in accordance with these articles to or the terms of issue of any class of shares, on a show of hands every member who is present in person and every proxy present who has been duly appointed by a member entitled to vote on the resolution shall have one vote and on a poll every member who is present in person or by proxy shall have one vote for every share of which he is the holder provided that the limited voting shares shall entitle the holders thereof to receive notice of and to attend and speak at all general meetings of the company, but shall not entitle the holders to vote, either in person or by proxy, at any general meeting of the company, unless the business of the meeting includes the consideration of a resolution for:

	62.1	the approval of any acquisition or disposal by the company or any of its subsidiaries for which by virtue of the significance of the transaction in relation to the business of the company or any subsidiary of the company or, in relation to the group of companies comprising the company and its subsidiaries, such approval is required in accordance with any requirement at that time imposed on the company, or to which the company is then subject, by virtue of securities of the company being listed on a recognised stock exchange or where such approval is sought by the directors due, in whole or in part, to the significance of the transaction in relation to the said business or to the said group.

		If the directors in their absolute discretion and without assigning any reason in any case determine that a resolution is proposed in the circumstances mentioned in this article 62.1 in the notice calling the meeting of the company at which such resolution is to be proposed there shall appear with reasonable prominence a statement that a holder of limited voting shares shall be entitled to vote in respect of such shares on such resolution, and the appearance of such statement shall conclusively determine the right of any such holder so to vote thereon;

	62.2	the winding-up of the company; or

	62.3	any resolution varying, modifying or abrogating any of the rights or privileges attached to the limited voting shares,

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	provided that the holders of limited voting shares shall only be entitled to vote in respect thereof on such of the resolutions included in the business of the meeting as are referred to above.

63	Votes of joint holders

	In the case of joint holders of a share, the vote of the senior who tenders a vote, whether in person or by proxy, shall be accepted to the exclusion of the votes of the other joint holders, and for this purpose seniority shall be determined by the order in which the names stand in the register in respect of the share.

64	Deleted [October 2008]

65	Restriction on voting in particular circumstances

	65.1	No member shall, unless the directors otherwise determine, be entitled in respect of any share held by him to vote either personally or by proxy at a general meeting or to exercise any other right conferred by membership in relation to general meetings if any call or other sum presently payable by him to the company in respect of that share remains unpaid.

	65.2	If any member, or any other person appearing to be interested in shares (within the meaning of Part 22 of the Companies Act 2006) held by such member, has been duly served with a notice under section 793 of the Companies Act 2006 and is in default for a period of 14 days in supplying to the company the information thereby required, then (unless the directors otherwise determine) in respect of:

		65.2.1	the shares comprising the shareholding account in the register which comprises or includes the shares in relation to which the default occurred (all or the relevant number as appropriate of such shares being the “default shares”, which expression shall include any further shares which are issued in respect of such shares); and

		65.2.2	any other shares held by the member,

		the member shall not (for so long as the default continues) nor shall any transferee to whom any of such shares are transferred (other than pursuant to an approved transfer or pursuant to article 65.3) be entitled to attend or vote either personally or by proxy at a general meeting or to exercise any other right conferred by membership in relation to general meetings.

	65.3	Where the default shares represent 0.25 per cent or more of the issued shares of the class in question (excluding any shares in the company held as treasury shares), the directors may in their absolute discretion by notice (a “direction notice”) to such member direct that:

		65.3.1	any dividend or part thereof or other money which would otherwise be payable in respect of the default shares shall be retained by the company and the member shall not be entitled to elect to receive shares instead of dividend; and/or

		65.3.2	no transfer of any of the shares held by such member shall be registered unless the transfer is an approved transfer or:

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		(i)	the member is not himself in default as regards supplying the information required; and

		(ii)	the transfer is of part only of the member’s holding and, when presented for registration, is accompanied by a certificate by the member in a form satisfactory to the directors to the effect that after due and careful enquiry the member is satisfied that none of the shares the subject of the transfer are default shares,

		provided that, in the case of shares in uncertificated form, the directors may only exercise their discretion not to register a transfer if permitted to do so by the CREST regulations.

		Any direction notice may treat shares of a member in certificated and uncertificated form as separate holdings and either apply only to the former or to the latter or make different provision for the former and the latter.

		Upon the giving of a direction notice, its terms shall apply accordingly.

65.4	The company shall send to each other person appearing to it to be interested in the shares the subject of any direction notice a copy of the notice, but the failure or omission by the company to do so shall not invalidate such notice.

65.5	Save as herein provided, any direction notice shall have effect in accordance with its terms for so long as the default in respect of which the direction notice was issued continues and shall cease to have effect thereafter upon the directors so determining (such determination to be made within a period of one week of the default being duly remedied with written notice thereof being given forthwith to the member).

65.6	Any direction notice shall cease to have effect in relation to any shares which are transferred by such member by means of an approved transfer or in accordance with article 65.3.2.

65.7	For the purposes of this article:

	65.7.1	a person shall be treated as appearing to be interested in any shares if the member holding such shares has been served with a notice under section 793 and either:

		(i)	the member has named such person as being so interested; or

		(ii)	(after taking into account the response of the member to the notice and any other relevant information) the company knows or believes in good faith that the person in question is or may be so interested; and

	65.7.2	a transfer of shares is an “ approved transfer ” if:

		(i)	it is a transfer of shares to an offeror by way or in pursuance of acceptance of a takeover offer (as defined in section 974 of the Companies Act 2006); or

		(ii)	the directors are satisfied that the transfer is made pursuant to a bona fide sale of the whole of the beneficial ownership of the shares to a party unconnected with the member or with any person

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			appearing to be interested in such shares including any such sale made through a recognised investment exchange or through a stock exchange outside the United Kingdom on which the company’s shares are normally traded. For the purposes of this article 65.7.2 any associate (as that term is defined in section 435 of the Insolvency Act 1986) shall be included amongst the persons who are connected with the member or any person appearing to be interested in such shares.

	65.8	The provisions of this article are in addition and without prejudice to the provisions of the Companies Acts.

66	Voting by guardian

	Where a guardian, receiver or other person (by whatever name called) has been appointed by any court claiming jurisdiction to exercise powers with respect to the property or affairs of any member on the ground (however formulated) of mental disorder, the directors may in their absolute discretion, upon or subject to production of such evidence of the appointment as the directors may require, permit such guardian, receiver or other person on behalf of such member to vote in person or by proxy at any general meeting or to exercise any other right conferred by membership in relation to general meetings.

67	Validity and result of vote

	67.1	No objection shall be raised as to the admissibility of any vote except at the meeting or adjourned meeting at which the vote objected to is or may be given or tendered, and every vote not disallowed at such meeting shall be valid for all purposes. Any such objection shall be referred to the chairman of the meeting whose decision shall be final and conclusive.

	67.2	Unless a poll is taken, a declaration by the chairman of the meeting that a resolution has been carried, or carried unanimously, or by a particular majority, or lost, and an entry to that effect in the minute book, shall be conclusive evidence of that fact without proof of the number or proportion of the votes recorded for or against such resolution.

Proxies and corporate representatives

68	Appointment of proxies

	68.1	A member is entitled to appoint a proxy or (subject to article 68A) proxies to exercise all or any of his rights to attend and to speak and vote at a meeting of the company.

	68.2	A proxy need not be a member of the company.

68A	Multiple proxies

	A member may appoint more than one proxy in relation to a meeting provided that each proxy is appointed to exercise the rights attached to a different share or shares held by such member.

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69	Form of proxy

	69.1	An instrument appointing a proxy shall be in writing in any usual or common form or in any other form which the directors may approve and:

		69.1.1	in the case of an individual, shall be signed or otherwise executed in accordance with the provisions of article 69.3 by the appointor or his attorney or authenticated in accordance with article 134; and

		69.1.2	in the case of a corporation, shall be executed:

			(i)	in accordance with the statutes and, as appropriate, its by-laws; or

			(ii)	in the case of a corporation which is not incorporated in the United Kingdom, in accordance with the laws of the place of its incorporation and its by-laws; or

			(iii)	on its behalf by an attorney or an officer of the corporation or authenticated in accordance with article 134.

	69.2	Any signature on, authentication of or other execution on such instrument need not be witnessed. Where an instrument appointing a proxy is executed or authenticated in accordance with article 134 on behalf of the appointor by an attorney, the letter or power of attorney or a duly certified copy thereof must (failing previous registration with the company) be lodged with the instrument of proxy pursuant to article 70, failing which the instrument may be treated as invalid.

	69.3	In addition, the directors may determine that a proxy may be appointed by telephone, fax, electronic means or by means of a website, subject to such terms and conditions relating thereto as they may impose and to the statutes.

70	Deposit of form of proxy

	70.1	The appointment of a proxy (together with any supporting documentation required under article 69) must be received at the address or one of the addresses (if any) specified for that purpose in, or by way of note to, or in any document accompanying, the notice convening the meeting (or if no address is so specified, at the transfer office):

		70.1.1	in the case of a meeting or adjourned meeting, not less than 48 hours before the commencement of the meeting or adjourned meeting to which it relates;

		70.1.2	in the case of a poll taken following the conclusion of a meeting or adjourned meeting, but not more than 48 hours after the poll was demanded, not less than 48 hours before the commencement of the meeting or adjourned meeting at which the poll was demanded; and

		70.1.3	in the case of a poll taken more than 48 hours after it was demanded, not less than 24 hours before the time appointed for the taking of the poll,

		and in default shall not be treated as valid.

	70.2	The directors may at their discretion determine that, in calculating the periods mentioned in article 70.1, no account shall be taken of the whole of or any part of

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		any day that is not a working day (within the meaning of section 1173 of the Companies Act 2006).

	70.3	The instrument shall, unless the contrary is stated thereon, be valid as well for any adjournment of the meeting as for the meeting to which it relates, but shall not be valid for any other meeting. An appointment relating to more than one meeting (including any adjournment thereof) having once been so delivered for the purposes of any meeting shall not require again to be delivered for the purposes of any subsequent meeting to which it relates.

	70.4	Up to, but no more than, 2 separate instruments appointing a proxy may be effective in respect of the same holding of shares entered on the register for the purposes of any one meeting of the company or of any class of members thereof, provided that:

		70.4.1	each instrument shall state the number of shares comprised in such holding to which the instrument relates; and

		70.4.2	the aggregate number of shares comprised in such holding represented by both instruments shall not be greater than the total number of shares comprised in such holding.

	70.5	When two or more instruments of proxy are delivered in respect of the same share for use at the same meeting, such matters shall be taken into account for the purposes of determining the intention of the appointor as the chairman of the meeting shall consider to be appropriate, and his decision as to the validity of any such instrument of proxy shall be final and conclusive.

	70.6	Without limiting the foregoing, in relation to any shares in uncertificated form the directors may permit a proxy to be appointed by electronic means and/or by means of a website in the form of an uncertificated proxy instruction (that is, a properly authenticated dematerialised instruction, and/or other instruction or notification, sent by means of a relevant system to such participant in that system acting on behalf of the company as the directors may prescribe, in such form and subject to such terms and conditions as may from time to time be prescribed by the directors (subject always to the facilities and requirements of the relevant system)); and may permit any supplement to, or amendment or revocation of, any such uncertificated proxy instruction to be made by a further uncertificated proxy instruction. The directors may in addition prescribe the method of determining the time at which any such instruction or notification is to be treated as received by the company. The directors may treat any such instruction or notification purporting or expressed to be sent on behalf of a holder of a share as sufficient evidence of the authority of the person sending the instruction to send it on behalf of that holder.

71	Rights of proxy

	71.1	An instrument appointing a proxy shall be deemed to include the right to exercise all or any of the rights of his appointor, or (where more than one proxy is appointed) all or any of the rights attached to the shares in respect of which he is appointed the proxy to attend, and to speak and vote, at a meeting of the company.

	71.2	Unless his appointment provides otherwise, a proxy may vote or abstain at his discretion on any resolution put to the vote at a shareholders’ meeting.

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	71.3	Delivery of an instrument of proxy shall not preclude a member from attending and voting at the meeting or poll concerned.

72	Termination of proxy’s authority

	72.1	Neither the death or insanity of a member who has appointed a proxy, nor the revocation or termination by a member of the appointment of a proxy (or of the authority under which the appointment was made), shall invalidate the proxy or the exercise of any of the rights of the proxy thereunder, unless notice of such death, insanity, revocation or termination shall have been received by the company in accordance with article 72.2.

	72.2	Any such notice of death, insanity, revocation or termination must be received at the address or one of the addresses (if any) specified for receipt of proxies in, or by way of note to, or in any document accompanying, the notice convening the meeting to which the appointment of the proxy relates (or if no address is so specified, at the transfer office):

		72.2.1	in the case of a meeting or adjourned meeting, not less than one hour before the commencement of the meeting or adjourned meeting to which the proxy appointment relates;

		72.2.2	in the case of a poll taken following the conclusion of a meeting or adjourned meeting, but not more than 48 hours after it was demanded, not less than one hour before the commencement of the meeting or adjourned meeting at which the poll was demanded; or

		72.2.3	in the case of a poll taken more than 48 hours after it was demanded, not less than one hour before the time appointed for the taking of the poll.

73	Corporations acting by representatives

	Subject to the statutes, any corporation which is a member of the company may by resolution of its directors or other governing body authorise a person or persons to act as its representative or representatives at any general meeting.

Directors

74	Number of directors

	Subject as hereinafter provided, the directors shall not be less than 7. The company may by ordinary resolution from time to time vary the minimum number and/or maximum number of directors.

75	Share qualification

	A director shall not be required to hold any shares of the company by way of qualification. A director who is not a member of the company shall nevertheless be entitled to attend and speak at general meetings.

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76	Directors’ fees

	The ordinary remuneration of the directors (which shall be deemed to accrue from day to day) shall be determined by ordinary resolution of the company. Such remuneration shall (unless such resolution otherwise provides) be divisible among the directors as they may agree, or, failing agreement, equally, except that any director who shall hold office for part only of the period in respect of which such remuneration is payable shall be entitled only to rank in such division for a proportion of remuneration related to the period during which he has held office.

77	Other remuneration of directors

	Any director who holds any executive office (including for this purpose the office of chairman or deputy chairman whether or not such office is held in an executive capacity), or who serves on any committee of the directors, or who otherwise performs services which in the opinion of the directors are outside the scope of the ordinary duties of a director, may be paid such remuneration by way of salary, commission or otherwise or may receive such other benefits as the directors may determine.

78	Directors’ expenses, pension and other benefits

	78.1	The directors may repay to any director all such reasonable expenses as he may incur in attending and returning from meetings of the directors or of any committee of the directors or general meetings or otherwise in connection with the business of the company.

	78.2	The directors shall have power to pay and agree to pay gratuities, pensions or other retirement, superannuation, death or disability benefits to (or to any person in respect of) any director or ex-director, and for the purpose of providing any such gratuities, pensions or other benefits to contribute to any scheme or fund or to pay premiums.

79	Appointment and retirement of directors

	79.1	The directors shall, within 2 months after any person shall take office as chairman of or senior executive officer of Lloyds TSB Scotland, appoint any such person who was not a director at the date of taking such office to be a director.

	79.2	The directors may from time to time appoint any other person to be a director, either to fill a casual vacancy or as an additional director.

	79.3	Any director appointed under this article shall hold office only until the annual general meeting following next after his appointment, when he shall retire but shall be eligible for election as a director at that meeting, and shall act as a director throughout the meeting.

80	Appointment of executive directors

	The directors may from time to time appoint one or more of their body to be the holder of any executive office on such terms and for such period as they may (subject to the provisions of the statutes) determine and, without prejudice to the terms of any contract entered into in any particular case, may at any time revoke or vary the terms of any such appointment.

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81	Powers of executive directors

	The directors may entrust to and confer upon any director holding any executive office any of the powers exercisable by them upon such terms and conditions (including the power to sub-delegate) and with such restrictions as they think fit, and either collaterally with or to the exclusion of their own powers, and may from time to time revoke, withdraw, alter or vary all or any of such powers.

Appointment and retirement of directors generally

82	Retirement at annual general meetings

	Each director shall retire at the annual general meeting held in the third calendar year following the year in which he was elected or last re-elected.

83	Re-elect ion of retiring director

	83.1	The company at the meeting at which a director retires under any provision of these articles may by ordinary resolution fill the office being vacated by electing thereto the retiring director or some other person eligible for election.

	83.2	The retirement shall not have effect until the conclusion of the meeting except where a resolution is passed to elect some other person in the place of the retiring director or a resolution for his re-election is put to the meeting and lost. Accordingly a retiring director who is re-elected or deemed to have been re-elected will continue in office without a break.

84	Election of two or more directors

	A resolution for the election of two or more persons as directors by a single resolution shall not be moved at any general meeting unless a resolution that it shall be so moved has first been agreed to by the meeting without any vote being given against it, and any resolution moved in contravention of this provision shall be void.

85	Nomination of director for election

	85.1	No person shall be eligible for election as a director at any general meeting unless he is a director retiring at the meeting pursuant to article 82; or is recommended by the directors for election; or not less than 7 nor more than 42 days (inclusive of the date on which the notice is given) before the date appointed for the meeting there shall have been lodged at the office notice in writing signed or authenticated in accordance with article 134 by some member (other than the person to be proposed) duly qualified to attend and vote at the meeting for which such notice is given of his intention to propose such person for election and also notice in writing signed or authenticated in accordance with article 134 by the person to be proposed of his willingness to be elected.

	85.2	The company shall be under no duty to give to its members notice of an intention to propose a person as director pursuant to a notice given in accordance with this article.

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86	Election or appointment of additional director

	The company may by ordinary resolution elect any person eligible for election to be a director, either to fill a casual vacancy or as an additional director, but the total number of directors shall not thereby exceed the maximum number (if any) fixed by or in accordance with these articles.

87	Vacation of office

	The office of a director shall be vacated in any of the following events:

	87.1	if he shall become prohibited by law from acting as a director;

	87.2	if he shall resign by writing left at the office or by delivery to the chairman or any deputy chairman or the secretary or if he shall in writing offer to resign and the directors shall resolve to accept such offer;

	87.3	if he shall have a bankruptcy order made against him or shall compound with his creditors generally or shall apply to the court for an interim order under section 253 of the Insolvency Act 1986 in connection with a voluntary arrangement under that act or any similar order or process under the laws of any relevant jurisdiction;

	87.4	if an order shall be made by any court claiming jurisdiction on the ground (however formulated) of mental disorder for his detention or for the appointment of a guardian or for the appointment of a receiver or other person (by whatever name called) to exercise powers with respect to his property or affairs;

	87.5	if he shall be absent from meetings of the directors for 6 months without leave and the directors shall resolve that his office be vacated;

	87.6	if a notice in writing is served upon him personally or at the address registered with the company in accordance with the Companies Act 2006 or at his residential address provided to the company, signed by not less than three-quarters of the directors for the time being to the effect that his office as director shall on receipt (or deemed receipt) of such notice be vacated. The signatures need not be on a single document and, for the avoidance of doubt, fax signatures shall be valid for the purposes hereof; or

	87.7	if (having been initially appointed to such office pursuant to article 79.1 by virtue of his taking office as a chairman or senior executive officer as therein referred to) he shall cease, through any cause, to hold the office of chairman of, or a senior executive officer of, Lloyds TSB Scotland.

88	Removal of director

	The company may, in accordance with and subject to the provisions of the statutes by ordinary resolution of which special notice has been given, remove any director from office (notwithstanding any provision of these articles or of any agreement between the company and such director, but without prejudice to any claim he may have for damages for breach of any such agreement).

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Meetings and proceedings of directors

89	Convening of meetings of directors

	Subject to the provisions of these articles, the directors may meet together for the despatch of business, adjourn and otherwise regulate their proceedings as they think fit. At any time any director may, and the secretary at the request of a director shall, summon a meeting of the directors. It shall not be necessary to give notice of a meeting of directors to any director for the time being absent from the United Kingdom. A notice calling the meeting of the directors may be given to a director by telephone or by notice in writing (in the case of a written notice, delivered to him in person or sent to him at his last known address, or such other address, if any, as may for the time being be notified by him or on his behalf to the company for that purpose), and each director shall, on appointment, be taken to have agreed to the giving of notices in any such manner. Any director may waive notice of any meeting and any such waiver may be retroactive.

90	Quorum

	Subject to article 94, the quorum necessary for the transaction of business of the directors may be fixed from time to time by the directors and unless so fixed at any other number shall be 4. A meeting of the directors at which a quorum is present shall be competent to exercise all powers and discretions for the time being exercisable by the directors.

91	Video conference and telephone meetings

	91.1	The directors, and any committee of the directors, may meet by way of a video conference or conference telephone or similar equipment designed to allow everybody to take part in the meeting; or by way of a series of video conferences or telephone calls from the chairman of the meeting. Participation in this way shall be treated as being present at the meeting.

	91.2	A meeting which takes place by a series of video conference calls or telephone calls from the chairman shall be treated as taking place where the chairman is. In other cases, meetings shall be treated as taking place where the largest group of the participants are or, if there is no such group, where the chairman is.

92	Chairman

	92.1	The directors may elect from their number a chairman and a deputy chairman (or 2 or more deputy chairmen) and determine the period for which each is to hold office. If no chairman or deputy chairman shall have been appointed or if at any meeting of the directors no chairman or deputy chairman shall be present within 5 minutes after the time appointed for holding the meeting, the directors present may choose one of their number to be chairman of the meeting.

	92.2	If at any time there is more than one deputy chairman, the right in the absence of the chairman to preside at a meeting of the directors or of the company shall be determined as between the deputy chairmen present (if more than one) by seniority in length of appointment or otherwise as resolved by the directors.

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93	Casting vote

	Questions arising at any meeting of the directors shall be determined by a majority of votes. In the case of an equality of votes, the chairman of the meeting shall have a second or casting vote.

94	Number of directors below minimum

	The continuing directors may act notwithstanding any vacancies, but if and so long as the number of directors is reduced below the minimum number fixed by or in accordance with these articles the continuing directors or director may act for the purpose of filling such vacancies or of summoning general meetings, but not for any other purpose. If there be no directors or director able or willing to act, then any 2 members may summon a general meeting for the purpose of appointing directors.

95	Directors’ written resolutions

	95.1	A directors’ written resolution is adopted when all the directors entitled to vote on such resolution have:

		95.1.1	signed one or more copies of it, or

		95.1.2	otherwise indicated their agreement to it in writing.

	95.2	A directors’ written resolution is not adopted if the number of directors who have signed it is less than the quorum for directors’ meetings.

	95.3	Once a directors’ written resolution has been adopted, it must be treated as if it had been a resolution passed at a directors’ meeting in accordance with the articles.

96	Validity of proceedings

	All acts done by any meeting of directors, or of any committee or sub-committee of the directors, or by any person acting as a member of any such committee or sub-committee, shall as regards all persons dealing in good faith with the company, notwithstanding that there was some defect in the appointment of any director or any of the persons acting as aforesaid, or that any such persons were disqualified or had vacated office, or were not entitled to vote, be as valid as if every such person had been duly appointed and was qualified and had continued to be a director or member of the committee or sub-committee and had been entitled to vote.

Directors’ interests

97	Authorisation of directors’ interests

	97.1	For the purposes of section 175 of the Companies Act 2006, the directors shall have the power to authorise any matter which would or might otherwise constitute or give rise to a breach of the duty of a director under that section to avoid a situation in

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		which he has, or can have, a direct or indirect interest ² that conflicts, or possibly may conflict, with the interests of the company.

	97.2	Authorisation of a matter under this article shall be effective only if:

		97.2.1	the matter in question shall have been proposed in writing for consideration at a meeting of the directors, in accordance with the board’s normal procedures or in such other manner as the directors may determine;

		97.2.2	any requirement as to the quorum at the meeting of the directors at which the matter is considered is met without counting the director in question and any other interested director (together the “ interested directors ”); and

		97.2.3	the matter was agreed to without the interested directors voting or would have been agreed to if the votes of the interested directors had not been counted.

	97.3	Any authorisation of a matter under this article shall extend to any actual or potential conflict of interest which may reasonably be expected to arise out of the matter so authorised.

	97.4	Any authorisation of a matter under this article shall be subject to such conditions or limitations as the directors may determine, whether at the time such authorisation is given or subsequently, and may be terminated by the directors at any time. A director shall comply with any obligations imposed on him by the directors pursuant to any such authorisation.

	97.5	A director shall not, save as otherwise agreed by him, be accountable to the company for any benefit which he (or a person connected with him) derives from any matter authorised by the directors under this article and any contract, transaction or arrangement relating thereto shall not be liable to be avoided on the grounds of any such benefit.

97A	Directors may have interests

	97A.1	Subject to compliance with Article 97A.2, a director, notwithstanding his office, may have an interest of the following kind:

		97A.1.1	where a director (or a person connected with him) is a director or other officer of, or employed by, or otherwise interested (including by the holding of shares) in any relevant company;

		97A.1.2	where a director (or a person connected with him) is a party to, or otherwise interested in, any contract, transaction or arrangement with a relevant company, or in which the company is otherwise interested;

		97A.1.3	where the director (or a person connected with him) acts (or any firm of which he is a partner, employee or member acts) in a professional capacity for any relevant company (other than as auditor) whether or not he or it is remunerated therefor;



²	Neither the duty in s.175(1), nor the authorisation procedure under s.175(5), applies to a conflict of interest arising in relation to a transaction or arrangement with the company. The disclosure and approval provisions of articles 97A and 98 are intended to deal with such conflicts.

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		97A.1.4	an interest which cannot reasonably be regarded as likely to give rise to a conflict of interest;

		97A.1.5	an interest, or a transaction or arrangement giving rise to an interest, of which the director is not aware;

		97A.1.6	any matter authorised under article 97.1; or

		97A.1.7	any other interest authorised by shareholder resolution.

		No authorisation under article 97 shall be necessary in respect of any such interest.

	97A.2	The director shall declare the nature and extent of any interest permitted under article 97A.1, and not falling within Article 97A.3, at a meeting of the directors or in the manner set out in section 184 or 185 of the Companies Act 2006.

	97A.3	No declaration of an interest shall be required by a director in relation to an interest:

		97A.3.1	falling within articles 97A.1.4, 97A.1.5 or 97A.1.6;

		97A.3.2	if, or to the extent that, the other directors are already aware of such interest (and for this purpose the other directors are treated as aware of anything of which they ought reasonably to be aware); or

		97A.3.3	if, or to the extent that, it concerns the terms of his service contract (as defined in section 227 of the Companies Act 2006) that have been or are to be considered by a meeting of the directors, or by a committee of directors appointed for the purpose under these articles.

	97A.4	A director shall not, save as otherwise agreed by him, be accountable to the company for any benefit which he (or a person connected with him) derives from any such contract, transaction or arrangement or from any such office or employment or from any interest in any relevant company or for such remuneration, each as referred to in article 97A.1, and no such contract, transaction or arrangement shall be liable to be avoided on the grounds of any such interest or benefit.

	97A.5	For the purposes of this article, “ relevant company ” shall mean:

		97A.5.1	the company;

		97A.5.2	a subsidiary undertaking of the company;

		97A.5.3	any holding company of the company or a subsidiary undertaking of any such holding company;

		97A.5.4	any body corporate promoted by the company; or

		97A.5.5	any body corporate in which the company is otherwise interested.

98	Restrictions on quorum and voting

	98.1	Save as provided in this article, and whether or not the interest is one which is authorised pursuant to article 97 or permitted under article 97A, a director shall not be entitled to vote on any resolution in respect of any contract, transaction or arrangement, or any other proposal, in which he (or a person connected with him) is

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	interested. Any vote of a director in respect of a matter where he is not entitled to vote shall be disregarded.

98.2	A director shall not be counted in the quorum for a meeting of the directors in relation to any resolution on which he is not entitled to vote.

98.3	Subject to the provisions of the statutes, a director shall be entitled to vote, and be counted in the quorum, in respect of any resolution concerning any contract, transaction or arrangement, or any other proposal:

	98.3.1	in which he has an interest of which he is not aware;

	98.3.2	in which he has an interest which cannot reasonably be regarded as likely to give rise to a conflict of interest;

	98.3.3	in which he has an interest only by virtue of interests in shares, debentures or other securities of the company, or by reason of any other interest in or through the company;

	98.3.4	which involves the giving of any security, guarantee or indemnity to the director or any other person in respect of (i) money lent or obligations incurred by him or by any other person at the request of or for the benefit of the company or any of its subsidiary undertakings; or (ii) a debt or other obligation of the company or any of its subsidiary undertakings for which he himself has assumed responsibility in whole or in part under a guarantee or indemnity or by the giving of security;

	98.3.5	concerning an offer of shares or debentures or other securities of or by the company or any of its subsidiary undertakings (i) in which offer he is or may be entitled to participate as a holder of securities; or (ii) in the underwriting or sub-underwriting of which he is to participate;

	98.3.6	concerning any other body corporate in which he is interested, directly or indirectly and whether as an officer, shareholder, creditor, employee or otherwise, provided that he (together with persons connected with him) is not the holder of, or beneficially interested in, one per cent or more of the issued equity share capital of any class of such body corporate or of the voting rights available to members of the relevant body corporate;

	98.3.7	relating to an arrangement for the benefit of the employees or former employees of the company or any of its subsidiary undertakings which does not award him any privilege or benefit not generally awarded to the employees or former employees to whom such arrangement relates;

	98.3.8	concerning the purchase or maintenance by the company of insurance for any liability for the benefit of directors or for the benefit of persons who include directors;

	98.3.9	concerning the giving of indemnities in favour of directors;

	98.3.10	concerning the funding of expenditure by any director or directors on (i) defending criminal, civil or regulatory proceedings or actions against him or them, (ii) in connection with an application to the court for relief, or (iii) defending him or them in any regulatory investigations;

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		98.3.11	doing anything to enable any director or directors to avoid incurring expenditure as described in article 98.3.10; and

		98.3.12	in respect of which his interest, or the interest of directors generally, has been authorised by ordinary resolution.

	98.4	Where proposals are under consideration concerning the appointment (including fixing or varying the terms of appointment) of two or more directors to offices or employments with the company (or any body corporate in which the company is interested), the proposals may be divided and considered in relation to each director separately. In such case, each of the directors concerned (if not debarred from voting under article 98.3.6) shall be entitled to vote, and be counted in the quorum, in respect of each resolution except that concerning his own appointment or the fixing or variation of the terms thereof.

		If a question arises at any time as to whether any interest of a director prevents him from voting, or being counted in the quorum, under this article, and such question is not resolved by his voluntarily agreeing to abstain from voting, such question shall be referred to the chairman of the meeting and his ruling in relation to any director other than himself shall be final and conclusive, except in a case where the nature or extent of the interest of such director (so far as is known to him) has not been fairly disclosed. If any such question shall arise in respect of the chairman of the meeting, the question shall be decided by resolution of the directors and the resolution shall be conclusive except in a case where the nature or extent of the interest of the chairman of the meeting (so far as it is known to him) has not been fairly disclosed to the directors.

98A	Confidential information

	98A.1	Subject to article 98A.2, if a director, otherwise than by virtue of his position as director, receives information in respect of which he owes a duty of confidentiality to a person other than the company, he shall not be required:

		98A.1.1	to disclose such information to the company or to the directors, or to any director, officer or employee of the company; or

		98A.1.2	otherwise to use or apply such confidential information for the purpose of or in connection with the performance of his duties as a director.

	98A.2	Where such duty of confidentiality arises out of a situation in which the director has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company, article 98A.1 shall apply only if the conflict arises out of a matter which has been authorised under article 97 above or falls within article 97A above.

	98A.3	This article is without prejudice to any equitable principle or rule of law which may excuse or release the director from disclosing information, in circumstances where disclosure may otherwise be required under this article.

99	Directors’ interests – general

	99.1	For the purposes of articles 97 to 99:

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		99.1.1	an interest of a person who is connected with a director shall be treated as an interest of the director; and

		99.1.2	section 252 of the Companies Act 2006 shall determine whether a person is connected with a director.

	99.2	Where a director has an interest which can reasonably be regarded as likely to give rise to a conflict of interest, the director may, and shall if so requested by the directors, take such additional steps as may be necessary or desirable for the purpose of managing such conflict of interest, including compliance with any procedures laid down from time to time by the directors for the purpose of managing conflicts of interest generally and/or any specific procedures approved by the directors for the purpose of or in connection with the situation or matter in question, including without limitation:

		99.2.1	absenting himself from any meetings of the directors at which the relevant situation or matter falls to be considered; and

		99.2.2	not reviewing documents or information made available to the directors generally in relation to such situation or matter and/or arranging for such documents or information to be reviewed by a professional adviser to ascertain the extent to which it might be appropriate for him to have access to such documents or information.

	99.3	The company may by ordinary resolution ratify any contract, transaction or arrangement, or other proposal, not properly authorised by reason of a contravention of any provisions of articles 97 to 99.

Committees of the directors

100	Appointment and constitution of committees

	100.1	The directors may delegate any of their powers or discretions (including without prejudice to the generality of the foregoing all powers and discretions whose exercise involves or may involve the payment of remuneration to or the conferring of any other benefit on all or any of the directors) to committees.

	100.2	Any such committee shall, unless the directors otherwise resolve, have power to sub-delegate to sub-committees or to any person any of the powers or discretions delegated to it. Any such committee or sub-committee shall consist of one or more directors only. Insofar as any such power or discretion is delegated to a committee or sub-committee, any reference in these articles to the exercise by the directors of the power or discretion so delegated shall be read and construed as if it were a reference to the exercise thereof by such committee or sub-committee.

	100.3	Any committee or sub-committee so formed shall in the exercise of the powers so delegated conform to any regulations which may from time to time be imposed by the directors.

101	Proceedings of committee meetings

	The meetings and proceedings of any such committee or sub-committee consisting of 2 or more persons shall be governed, with such changes as are appropriate, by the provisions of

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	these articles regulating the meetings and proceedings of the directors, so far as the same are not superseded by any regulations made by the directors under article 100.

Powers of directors

102	General powers

	The business and affairs of the company shall be managed by the directors, who may exercise all such powers of the company as are not by the statutes or by these articles required to be exercised by the company in general meeting, subject to these articles, to the provisions of the statutes and to such regulations as may be prescribed by special resolution of the company, but no regulation so made by the company shall invalidate any prior act of the directors which would have been valid if such regulation had not been made. The general powers given by this article shall not be limited or restricted by any special authority or power given to the directors by any other article.

103	Local boards

	The directors may establish any local boards or agencies for managing any of the affairs of the company, either in the United Kingdom or elsewhere, and may appoint any persons to be members of such local boards, or any managers or agents, and may fix their remuneration, and may delegate to any local board, manager or agent any of the powers, authorities and discretions vested in the directors, with power to sub-delegate, and may authorise the members of any local boards, or any of them, to fill any vacancies therein, and to act notwithstanding vacancies. Any such appointment or delegation may be made upon such terms and subject to such conditions as the directors may think fit, and the directors may remove any person so appointed, and may annul or vary any such delegation, but no person dealing in good faith and without notice of any such annulment or variation shall be affected thereby.

104	Appointment of attorney

	The directors may from time to time and at any time by power of attorney or otherwise appoint any company, firm or person or any fluctuating body of persons, whether nominated directly or indirectly by the directors, to be the attorney or attorneys of the company for such purposes and with such powers, authorities and discretions (not exceeding those vested in or exercisable by the directors under these articles) and for such period and subject to such conditions as they may think fit, and any such appointment may contain such provisions for the protection and convenience of persons dealing with any such attorney as the directors may think fit. The directors may also authorise any such attorney to sub-delegate all or any of the powers, authorities and discretions vested in him.

105	Signature on cheques etc.

	All cheques, promissory notes, drafts, bills of exchange, and other negotiable or transferable instruments, and all receipts for moneys paid to the company, shall be signed, drawn, accepted, endorsed, or otherwise executed, as the case may be, in such manner as the directors shall from time to time by resolution determine.

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Secretary

106	Secretary

	The secretary shall be appointed by the directors on such terms and for such period as they may think fit. Any secretary so appointed may at any time be removed from office by the directors, but without prejudice to any claim for damages for breach of any contract of service between him and the company. If thought fit two or more persons may be appointed as joint secretaries. In the absence of the secretary or during such times as the position is vacant, a person or persons appointed or acting as deputy secretary or assistant secretary may perform all of the duties required under these articles and the statutes.

The seal

107	The seal

	107.1	The directors shall provide for the safe custody of the seal and any securities seal. The securities seal shall be used only for sealing securities issued by the company and documents creating or evidencing securities so issued.

	107.2	Every instrument to which the seal or the securities seal shall be affixed (other than a certificate for or evidencing shares issued by the company, or debentures or other securities (including options) issued by the company in respect of which the provisions of article 14 shall also apply) shall be signed autographically by:

		107.2.1	one director and the secretary; or

		107.2.2	one director in the presence of a witness; or

		107.2.3	two directors; or

		107.2.4	any person or persons authorised by a resolution of the directors or of a committee duly authorised in that behalf

		in favour of any purchaser or person dealing in good faith with the company, such signatures shall be conclusive evidence of the fact that the seal has been properly affixed.

	107.3	Subject to the statutes, the company may dispense with the use of a seal, either generally or in respect of any particular category of document, at the discretion of the directors. Whether or not use of a seal has been so dispensed with, a document signed in accordance with article 107.2 and expressed (in whatever form of words) to be executed by the company as a deed shall have the same effect as if executed under seal. Any document so executed by the company which makes it clear that it is intended to operate as a deed shall have effect upon delivery as a deed.

	107.4	The company may exercise the powers conferred by the statutes with regard to having an official seal for use abroad and such powers shall be vested in the directors.

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Authentication of documents


108	Authentication of documents


	108.1	Any director or the secretary or any person appointed by the directors for the purpose shall have power to authenticate any document affecting the constitution of the company and any resolution passed at a general meeting or at a meeting of the directors or any committee, and any book, record, document or account relating to the business of the company, and to certify copies thereof or extracts therefrom as true copies or extracts. Where any book, record, document or account is elsewhere than at the office, the local manager or other officer of the company having the custody thereof shall be deemed to be a person appointed by the directors as aforesaid.

	108.2	A document purporting to be a copy of any such resolution, or an extract from the minutes of any such meeting, which is certified as aforesaid shall be conclusive evidence in favour of all persons dealing with the company upon the faith thereof that such resolution has been duly passed or, as the case may be, that any minute so extracted is a true and accurate record of proceedings at a duly constituted meeting.

Reserves


109	Establishment of reserves

	The directors may from time to time set aside out of the profits of the company and carry to reserve such sums as they think proper which, at the discretion of the directors, shall be applicable for any purpose to which the profits of the company may properly be applied, and pending such application may either be employed in the business of the company or be invested. The directors may divide the reserve into such special funds as they think fit and may consolidate into one fund any special funds or any parts of any special funds into which the reserve may have been divided. The directors may also without placing the same to reserve carry forward any profits. In carrying sums to reserve and in applying the same the directors shall comply with the provisions of the statutes.

110	Business bought as from past date

	Subject to the provisions of the statutes, where any asset, business or property is bought by the company as from a past date, the profits and losses thereof as from such date may at the discretion of the directors in whole or in part be carried to revenue account and treated for all purposes as profits or losses of the company. Subject as aforesaid, if any shares or securities are purchased cum dividend or interest, such dividend or interest may at the discretion of the directors be treated as revenue, and it shall not be obligatory to capitalise the same or any part thereof.

Dividends


111	Dividends

	The company may by ordinary resolution declare dividends but no such dividend shall exceed the amount recommended by the directors.

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112	Fixed, interim and other dividends

	If and so far as in the opinion of the directors the profits of the company justify such payments, the directors:

	112.1	may pay the fixed dividends on any class of shares carrying a fixed dividend expressed to be payable on fixed dates on the half-yearly or other dates prescribed for the payment thereof; and

	112.2	may also from time to time pay dividends (interim or otherwise) on shares of any class of such amounts and on such dates and in respect of such periods as they think fit.

	Provided the directors act in good faith, they shall not incur any liability to the holders of any shares for any loss they may suffer by the lawful payment, on any other class of shares having rights ranking after or equally with those shares, of any such fixed, interim or other dividend as aforesaid.

113	Distribution in specie

	The company may upon the recommendation of the directors by ordinary resolution direct payment of a dividend in whole or in part by the distribution of specific assets (and in particular of paid-up shares or debentures of any other company) and the directors shall give effect to such resolution. Where any difficulty arises in regard to such distribution, the directors may settle the same as they think expedient and in particular may issue fractional certificates, may fix the value for distribution of such specific assets or any part thereof, may determine that cash shall be paid to any member upon the footing of the value so fixed in order to adjust the rights of members and may vest any assets in trustees.

114	Ranking of shares for dividend

	114.1	Unless and to the extent that the rights attached to any shares or the terms of issue thereof otherwise provide, all dividends shall (as regards any shares not fully paid throughout the period in respect of which the dividend is paid) be apportioned and paid pro rata according to the amounts paid on the shares during any portion or portions of the period in respect of which the dividend is paid. For the purposes of this article no amount paid on a share in advance of calls shall be treated as paid on the share.

	114.2	The limited voting shares shall not confer any right upon the holders thereof to participate in any distribution of the profits of the company by way of dividend but for the purposes of article 122 and of any other provision contained in these articles, the limited voting shares shall be deemed to confer rights and interests in the profits equally with the holders of ordinary shares according to the amounts paid up on such limited voting shares and ordinary shares respectively, otherwise than in advance of calls.

115	Manner of payment of dividends and other moneys

	115.1	Subject to article 115.2, any dividend or other moneys payable on or in respect of a share shall be paid to the member as at the relevant record date or to such other person as the member may in writing direct. Such dividend or other moneys may be paid:

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		115.1.1	by cheque, warrant, order or similar financial instrument sent by post to and payable to or to the order of the member;

		115.1.2	by inter-bank transfer or other electronic means direct to such account as the member shall in writing (or by means of such other authorisation as the directors may determine) direct;

		115.1.3	using the facilities of a relevant system; or

		115.1.4	by such other method of payment as the member may agree to.

		Every such cheque, warrant or order shall be sent at the risk of the person or persons entitled to the money represented thereby, and payment of a cheque, warrant or order by the banker upon whom it is drawn, and any transfer or payment within article 115.1.2, 115.1.3 or 115.1.4, shall be a good discharge to the company.

	115.2	For the purposes of this article 115, where a share is held by joint holders:

		115.2.1	in the case of instructions to pay a person other than the joint holders, any such instructions shall require the written signature or other authorisation as the directors may determine of all such joint holders; but

		115.2.2	otherwise, all payments shall be made to all such joint holders (any cheque, warrant or order being drawn in favour of all such joint holders and sent to the person first named in the register).

	115.3	Subject to the provisions of these articles and to the rights attaching to any shares, any dividend or other moneys payable on or in respect of a share may be paid in such currency or currencies as the directors may determine, using such exchange rate or rates for currency conversions as the directors may select.

116	Joint holders

	If two or more persons are registered as joint holders of or entitled jointly to any share, any one of them may give effectual receipts for any dividend or other moneys payable or property distributable on or in respect of the share.

117	No interest on dividends

	No dividend or other moneys payable on or in respect of a share shall bear interest as against the company.

118	Retention of dividends

	The directors may:

	118.1	deduct from any dividend or other moneys payable to any member on or in respect of a share all sums of money (if any) presently payable by him to the company on account of calls or otherwise in relation to shares of the company;

	118.2	deduct from any dividend or other moneys payable to any member on or in respect of a share any taxes charges imposts penalties or statutory or regulatory fines or levies imposed on the company by virtue of that member’s status under the securities laws or other laws in any jurisdiction; and

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	118.3	retain the dividends payable upon shares in respect of which any person is under articles 41 to 44 inclusive entitled to become a member, or which any person is under those provisions entitled to transfer, until such person shall become a member in respect of such shares or shall transfer the same.

119	Unclaimed dividends and other moneys

	Any dividend or other moneys unclaimed after a period of 12 years from the date on which such dividend was declared or such other moneys became due for payment shall be forfeited and shall revert to the company.

120	Waiver of dividend

	The waiver in whole or in part (in excess of 0.1p per share) of any dividend on any share by any document (whether or not executed as a deed) shall be effective only if such document is signed or authenticated in accordance with article 134 by the shareholder or, in the case of joint shareholders, all of them and delivered to the company and if or to the extent that the same is accepted as such or acted upon by the company.

121	Share alternative

	121.1	Subject as hereinafter provided, the directors may, in writing, offer to ordinary shareholders the right to receive, instead of dividend (or part thereof), an allotment of new ordinary shares credited as fully paid.

	121.2	The directors shall not make such an offer unless so authorised by an ordinary resolution passed at any general meeting, which authority may extend to dividends declared or paid prior to the fifth following annual general meeting, but no further.

	121.3	The directors may either offer such rights of election in respect of the next dividend (or part thereof) proposed to be paid; or may offer such rights of election in respect of that dividend and all subsequent dividends, until such time as the election is revoked; or may allow shareholders to make an election in either form.

	121.4	The basis of allotment on each occasion shall be determined by the directors so that, as nearly as may be considered convenient, the value of the ordinary shares to be allotted instead of any amount of dividend shall equal such amount. For such purpose, the value of an ordinary share shall be the average of the middle market quotations of an ordinary share on the London stock exchange, as derived from the daily official list, on each of the first 5 business days on which the ordinary shares are quoted “ex” the relevant dividend.

	121.5	If the directors determine to offer such right of election on any occasion, they shall give notice to the ordinary shareholders of such right and shall issue forms of election and shall specify the procedures to be followed in order to exercise such right. There shall be no need to give such notice to a shareholder who has previously made, and has not revoked, an earlier election to receive ordinary shares instead of all future dividends, but the directors shall send him a reminder that he has made such an election, indicating how that election may be revoked in time for the next dividend proposed to be paid.

	121.6	On each occasion the dividend (or that part of the dividend in respect of which a right of election has been accorded) shall not be payable on ordinary shares in

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	respect whereof the share election has been duly exercised and has not been revoked (the “elected ordinary shares”), and instead thereof additional shares shall be allotted to the holders of the elected ordinary shares on the basis of allotment determined as aforesaid. For such purpose, the directors shall capitalise, out of such of the sums standing to the credit of reserves (including any share premium account or capital redemption reserve) or profit and loss account as the directors may determine, a sum equal to the aggregate nominal amount of additional ordinary shares to be allotted on that occasion on such basis and shall apply the same in paying up in full the appropriate number of new ordinary shares for allotment and distribution to and amongst the holders of the elected ordinary shares on such basis.

121.7	The additional ordinary shares so allotted on any occasion shall rank equally in all respects with the fully-paid ordinary shares in issue, on the record date for the relevant dividend, save only as regards participation in the relevant dividend.

121.8	Article 122 shall apply with such changes as are appropriate to any capitalisation made pursuant to this article.

121.9	No fraction of an ordinary share shall be allotted. The directors may make such provision as they think fit for any fractional entitlements including, without limitation, provision whereby, in whole or in part:

	121.9.1	the benefit thereof accrues to the company; and/or

	121.9.2	fractional entitlements are accrued and/or retained, and in either case accumulated, on behalf of any ordinary shareholder.

121.10	The directors may on any occasion determine that rights of election shall not be made available to any ordinary shareholders with registered addresses in any territory where the directors have not been assured to their satisfaction that, in the absence of a registration statement or other special formalities, the circulation of an offer of rights of election would be lawful, or where the directors consider that circulation would be impractical in view of legal, regulatory or practical problems applicable in any such territory, and in such event the provisions aforesaid shall be read and construed subject to such determination.

121.11	In relation to any particular proposed dividend, the directors may in their absolute discretion decide:

	121.11.1	that ordinary shareholders shall not be entitled to make any election in respect thereof and that any election previously made shall not extend to such dividend; or

	121.11.2	at any time prior to the allotment of the ordinary shares which would otherwise be allotted instead thereof, that all elections to take shares instead of such dividend shall be treated as not applying to that dividend,

	and if so the dividend shall be paid in cash as if no elections had been made in respect of it.

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Capitalisation of profits and reserves


122	Capitalisation of profits and reserves

	122.1	The directors may, with the sanction of an ordinary resolution of the company, capitalise any sum standing to the credit of any of the company’s reserve accounts (including any share premium account, capital redemption reserve or other undistributable reserve) or any sum standing to the credit of its profit and loss account.

	122.2	Such capitalisation shall be effected by appropriating such sum to the holders of limited voting shares and ordinary shares on the register at the close of business on the date of the resolution (or such other date as may be specified therein or determined as therein provided) in proportion to their then holdings of limited voting shares and ordinary shares (pro rata to the amount paid up thereon) and applying such sum on their behalf:

		122.2.1	in paying up in full new limited voting shares and ordinary shares respectively (or, subject to any special rights previously conferred on any shares or class of shares for the time being issued, new shares of any other class) for allotment and distribution credited as fully paid up to and amongst them as bonus shares in the proportion aforesaid;

		122.2.2	in or towards paying up amounts for the time being unpaid on any shares held by such holders (otherwise than by application of any sum standing to the credit of share premium account, capital reserve or other undistributable reserve); or

		122.2.3	subject as provided in article 122.2.2, partly in one way and partly in another.

	122.3	The directors may do all acts and things considered necessary or expedient to give effect to any such capitalisation, with full power to the directors to make such provisions as they think fit for any fractional entitlements which would arise on the basis aforesaid (including provisions whereby fractional entitlements are disregarded or the benefit thereof accrues to the company rather than to the members concerned). The directors may authorise any person to enter on behalf of all the members interested into an agreement with the company providing for any such capitalisation and matters incidental thereto, and any agreement made under such authority shall be effective and binding on all concerned.

Accounts


123	Accounting records

	Accounting records sufficient to show and explain the company’s transactions and otherwise complying with the statutes shall be kept at the office, or at such other place as the directors think fit, and shall always be open to inspection by the officers of the company. Subject as aforesaid, no member of the company or other person shall have any right of inspecting any account or book or document of the company except as conferred by statute or ordered by a court or authorised by the directors.

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124	Copies of accounts for members


124.1	Subject as provided in article 124.2 a copy of the company’s annual accounts and report which are to be laid before a general meeting of the company (including every document required by law to be comprised therein or attached or annexed thereto) shall not less than 21 days before the date of the meeting be sent to every member of the company and to every other person who is entitled to receive notices of meetings from the company under the provisions of the statutes or of these articles.

124.2	Article 124.1 shall not require a copy of these documents to be sent to:

	124.2.1	any member to whom a summary financial statement is sent in accordance with the statutes;

	124.2.2	more than one of joint holders; or

	124.2.3	any person of whose address the company is not aware,

	but any member to whom a copy of these documents has not been sent shall be entitled to receive a copy free of charge on application at the office.

Auditors


125	Validity of auditor’s acts

	Subject to the provisions of the statutes, all acts done by any person acting as an auditor shall, as regards all persons dealing in good faith with the company, be valid, notwithstanding that there was some defect in his appointment or that he was at the time of his appointment not qualified for appointment or subsequently became disqualified.

126	Auditor’s right to attend general meetings

	An auditor shall be entitled to attend any general meeting and to receive all notices of and other communications relating to any general meeting which any member is entitled to receive, and to be heard at any general meeting on any part of the business of the meeting which concerns him as auditor.

Communication with members


127	Service of documents and information

	127.1	The company may, subject to and in accordance with the Companies Act 2006 and these articles, send or supply all types of documents or information to members by electronic means, and/or by making such documents or information available on a website.

	127.2	The company communication provisions have effect for the purposes of any provision of the statutes or these articles that authorises or requires documents to be sent or supplied by or to the company.

	127.3	Any document or information (including a share certificate) which is sent or supplied by the company in hard copy form or in electronic form but to be delivered other than by electronic means and/or by means of a website and which is sent by pre-paid

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		post and properly addressed shall be deemed to have been received by the intended recipient at the expiration of:

		127.3.1	24 hours where first class post is employed;

		127.3.2	48 hours where second class post is employed; or

		127.3.3	seven days where any other form of post is employed,

		in each case after the time it was posted, and in proving such receipt it shall be sufficient to show that such document or information was properly addressed, prepaid and posted.

	127.4	Any document or information (other than a share certificate) which is sent or supplied by the company by electronic means shall be deemed to have been received by the intended recipient:

		127.4.1	where the document or information is sent or supplied by fax, at the time it was sent or supplied; or

		127.4.2	where the document or information is sent or supplied by any other electronic means, 48 hours after the time it was sent or supplied,

		and in proving such receipt it shall be sufficient to show that such document or information was properly addressed.

	127.5	Any document or information which is sent or supplied by the company by means of a website shall be deemed to have been received when the material was first made available on the website or, if later, when the recipient received (or is deemed to have received) notice of the fact that the material was available on the website.

	127.6	The accidental failure to send, or the non-receipt by any person entitled to, any document relating to any meeting or other proceeding shall not invalidate the relevant meeting or proceeding.

	127.7	The provisions of this article shall have effect in place of the company communications provisions relating to deemed delivery of documents or information by the company.

128	Article deleted 9 May 2007

129	Service of notices

	Any notice to be given to or by any person pursuant to these articles shall be in writing or made available on the company’s website or other website authorised by the company, except that notice calling the meeting of the directors may be given as provided for in article 89.

130	Joint holders

	130.1	Anything which needs to be agreed or specified by the joint holders of a share shall for all purposes be taken to be agreed or specified by all the joint holders where it has been agreed or specified by the joint holder whose name stands first in the register in respect of the share.

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	130.2	Any document or information which is authorised or required to be sent or supplied to joint holders of a share may be sent or supplied to the joint holder whose name stands first in the register in respect of the share, to the exclusion of the other joint holders.

	130.3	The provisions of this article shall have effect in place of the company communications provisions regarding joint holders of shares.

131	Incapacitated members

	131.1	A person who claims to be entitled to a share in consequence of the death or bankruptcy of a member or otherwise by operation of law shall supply to the company:

		131.1.1	such evidence as the directors may reasonably require to show his title to the share; and

		131.1.2	an address at which notices may be sent or supplied to such person,

		whereupon he shall be entitled to have sent or supplied to him at such address any document to which the said member would have been entitled. Any document so sent or supplied shall for all purposes be deemed to be duly sent or supplied to all persons interested (whether jointly with or as claiming through or under him) in the share.

	131.2	Save as provided by article 131.1, any document or information sent or supplied to the address of any member pursuant to these articles shall, notwithstanding that such member be then dead or bankrupt or in liquidation, and whether or not the company has notice of his death or bankruptcy or liquidation, be deemed to have been duly sent or supplied in respect of any share registered in the name of such member as sole or first-named joint holder.

	131.3	The provisions of this article shall have effect in place of the company communications provisions regarding the death or bankruptcy of a holder of shares in the company.

132	Overseas members

	Subject to the statutes, a member who (having no registered address within the United Kingdom) has not supplied to the company an address within the United Kingdom for the service of documents shall not be entitled to receive documents from the company other than cheques, warrants, orders or similar financial instruments in respect of dividends, instalments of interest and other amounts payable.

133	Suspension of postal services

	133.1	If at any time, by reason of the suspension, restriction or curtailment of postal services within the United Kingdom, the company is unable to distribute the accounts of the company or give notice by post in hard copy form of a general meeting, such notice shall be deemed to have been given to all members entitled to receive such notice in hard copy form if such notice is advertised in at least 2 national newspapers and such notice shall be deemed to have been given on the day when the advertisement appears (or first appears). In any such case, the

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		company may still, where applicable, serve notice by electronic means and/or by making such notice available on its website from the date of such advertisement until the conclusion of the meeting or any adjournment thereof.

	133.2	The company shall at all times between the date of publication of such advertisement and the meeting to which it relates make any relevant documents, available for collection and inspection during normal business hours at the office and the head office of the company and also at such places in Edinburgh and the City of London as shall be stated in such advertisement.

134	Signing or authentication of documents sent by electronic means

	Where these articles require a document to be signed or authenticated by a member or other person then any document sent or supplied in electronic form is sufficiently authenticated in any manner authorised by the company communications provisions or in such other manner approved by the directors. The directors may designate mechanisms for validating any such document, and any such document not so validated by use of such mechanisms shall be deemed not to have been received by the company.

135	Article deleted 9 May 2007

136	Statutory provisions as to notices

	Nothing in any of articles 127 to 135 inclusive shall affect any provision of these articles or the statutes that requires or permits any particular notice or other document to be sent or supplied in any particular manner.

Winding up


137	Directors’ power to petition

	The directors shall have power in the name and on behalf of the company to present a petition to the court for the company to be wound up.

138	Return of capital and winding up

	138.1	On a return of capital, whether in a winding up or a reduction of capital or otherwise:

		138.1.1	the ordinary shares and the limited voting shares shall rank equally in all respects; and

		138.1.2	the preference shares will be entitled to the rights attached to them on issue.

	138.2	If the company shall be wound up (whether the liquidation is voluntary, under supervision, or by the court), the liquidator may, with the authority of a shareholder resolution, divide among the members in specie or kind the whole or any part of the assets of the company and whether or not the assets shall consist of property of one kind or shall consist of properties of different kinds. The liquidator may for such purpose set such value as he deems fair upon any one or more class or classes of property and may determine how such division shall be carried out as between the members or different classes of members. The liquidator may, with the like authority, vest any part of the assets in trustees upon such trusts for the benefit of members

- 53 -


		as the liquidator with the like authority shall think fit, and the liquidation of the company may be closed and the company dissolved, but so that no contributory shall be compelled to accept any shares or other property in respect of which there is a liability.

Destruction of documents


139	Destruction of documents

	Subject to compliance with the rules (as defined in the CREST regulations) applicable to shares of the company in uncertificated form, the company shall be entitled to destroy:

	139.1	all instruments of transfer or other documents which have been registered or on the basis of which registration was made, at any time after the expiry of 6 years from the date of registration thereof;

	139.2	all dividend mandates and notifications of change of address including forms or other documents created after notification by telephone, fax or electronic means and/or by means of a website, at any time after the expiry of 2 years from the date of recording thereof; and

	139.3	all share certificates which have been cancelled, at any time after the expiry of one year from the date of the cancellation thereof.

	139.4	For the purposes of articles 139.1 to 139.3, it shall conclusively be presumed in favour of the company that:

		139.4.1	every entry in the register purporting to have been made on the basis of an instrument of transfer or other document so destroyed was duly and properly made;

		139.4.2	every instrument of transfer so destroyed was a valid and effective instrument duly and properly registered;

		139.4.3	every share certificate so destroyed was a valid and effective certificate duly and properly cancelled; and

		139.4.4	every other document hereinbefore mentioned so destroyed was a valid and effective document in accordance with the recorded particulars thereof in the books or records of the company, provided that:

			(i)	all such provisions shall apply only to the destruction of a document in good faith and without notice of any claim (regardless of the parties thereto) to which the document might be relevant;

			(ii)	nothing herein contained shall be construed as imposing upon the company any liability in respect of the destruction of any such document earlier than as aforesaid or in any other circumstances which would not attach to the company in the absence of this article;

			(iii)	any document referred to above may, subject to the statutes, be destroyed before the end of the relevant period so long as a copy of such document (whether made electronically, by microfilm, by

- 54 -


				digital imaging or by any other means) has been made and is retained until the end of the relevant period; and

			(iv)	references herein to the destruction of any document include references to the disposal thereof in any manner.

Directors’ liabilities


140	Indemnity

	140.1	Subject to the provisions of, and so far as may be permitted by and consistent with, the statutes, any person who is or was at any time a director, officer, employee or trustee of the company or of any associated company or organisation may be indemnified by the company out of its own funds against:

		140.1.1	any liability incurred by or attaching to him in connection with any negligence, default, breach of duty or breach of trust by him in relation to the company or any associated company or organisation; and

		140.1.2	any other liability incurred by or attaching to him in the actual or purported execution and/or discharge of his duties and/or the exercise or purported exercise of his powers and/or otherwise in relation to or in connection with his duties, powers or offices.

	140.2	Where any such person is indemnified against any liability in accordance with article 140.1, such indemnity shall extend to all costs, charges, losses, expenses and liabilities incurred by him in relation thereto.

141	Insurance

	141.1	Without prejudice to article 140 above, the directors shall have power to purchase and maintain insurance for or for the benefit of any person who is or was at any time a director, officer, employee or trustee of the company or of any associated company or organisation, including insurance against any liability incurred by or attaching to him in respect of any act or omission in the actual or purported execution and/or discharge of his duties and/or in the exercise or purported exercise of his powers and/or otherwise in relation to or in connection with his duties, powers or offices in relation to the company or any associated company or organisation, (and all costs, charges, losses, expenses and liabilities incurred by him in relation thereto).

142	Defence expenditure

	142.1	Subject to the provisions of, and so far as may be permitted by and consistent with, the statutes, the company:

		142.1.1	may provide any person who is or was at any time a director, officer, employee or trustee of the company or of any associated company or organisation with funds to meet expenditure incurred or to be incurred by him in defending any criminal or civil proceedings in connection with any negligence, default, breach of duty or breach of trust by him in relation to the company or any associated company or organisation or in connection with any application for relief from liability under the statutes; and

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	142.1.2	may do anything to enable any such a person to avoid incurring such expenditure.

142.2	Subject to the provisions of, and so far as may be permitted by and consistent with, the statutes, the company:

	142.2.1	may provide any person who is or was at any time a director, officer, employee or trustee of the company or of any associated company or organisation with funds to meet expenditure incurred or to be incurred by him in defending himself in an investigation by a regulatory authority or against action proposed to be taken by a regulatory authority in connection with any alleged negligence, default, breach of duty or breach of trust by him in relation to the company or any associated company or organisation; and

	142.2.2	may do anything to enable any such a person to avoid incurring such expenditure.

142.3	For the purpose of articles 140 to 142 an “associated company or organisation” is any company or other body, whether or not incorporated, (i) which is the company’s holding company or (ii) in which the company or its holding company or any of the predecessors of the company or of such holding company has any interest whether direct or indirect or (iii) which is in any way allied to or associated with the company or its holding company or any of the predecessors of the company or of such holding company (including any pension fund or employees’ share scheme in which any employees of the company or of any associated company or organisation are interested and any company acting as trustee for such pension fund or share scheme) or (iv) which is a subsidiary undertaking of any person mentioned in (iii) or (v) to which directors, officers, employees or trustees of the company or of any subsidiary undertaking or any holding company of the company are permitted by the company or any subsidiary undertaking or any holding company of the company to lend their services; and “person” shall include any natural person, partnership, other unincorporated association or body corporate.

Liability of members


143	Liability of members

	The liability of each member is limited to the amount (if any) for the time being unpaid on the shares held by that member.

Provision for employees on cessation of business


144	Provision for employees or ex-employees

	The directors may make provision for the benefit of persons employed or formerly employed by the company or any of its subsidiaries (other than a director, former director or shadow director) in connection with the cessation or transfer to any person of the whole or part of the undertaking of the company or that subsidiary.

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Table of contents of the Lloyds Banking Group plc articles of association


Article		Page

Preliminary		1

1	Table A not to apply	1

2	Interpretation	1

Share capital		5

3	Limited voting shares and preference shares	5

4	Deleted 2009	8

5	Fractions arising on consolidation or subdivision	8

6	Deleted 2009	8

7	Reduction of capital	8

Shares		8

8	Shares and special rights	8

9	Deleted 2009	9

10	Commissions on issue of shares	9

11	Renunciation of allotment	9

12	Trust etc. interests not recognised	9

Share certificates		9

13	Issue of share certificates	9

14	Form of share certificate	10

15	Joint holders	10

16	Replacement of share certificates	10

17	Share warrants to bearer	10

Calls on shares		12

18	Power to make calls	12

/ /


19	Liability for calls	12

20	Interest on overdue amounts	13

21	Other sums due on shares	13

22	Power to differentiate between holders	13

23	Payment of calls in advance	13

Forfeiture and lien		13

24	Notice on failure to pay a call	13

25	Forfeiture for non-compliance	14

26	Disposal of forfeited shares	14

27	Holder to remain liable despite forfeiture	14

28	Lien on partly-paid shares	14

29	Sale of shares subject to lien	14

30	Proceeds of sale of shares subject to lien	14

31	Evidence of forfeiture	15

Variation of rights		15

32	Manner of variation of rights	15

33	Matters not constituting variation of rights	15

Transfer of shares		16

34	Form of transfer	16

35	Balance certificate	16

36	Right to refuse registration	16

37	No fee on registration	17

38	Deleted 2009	17

39	Branch register	17

40	Further provisions on shares in uncertificated form	17

/ /


Transmission of shares		18

41	Persons entitled on death	18

42	Election by persons entitled by transmission	18

43	Refusal of registration on transmission	18

44	Rights of persons entitled by transmission	18

Untraced shareholders		19

45	Untraced shareholders	19

General meetings		20

46	Annual general meetings	20

47	Convening of general meetings	20

Notice of general meetings		20

48	Notice of general meetings	20

49	Contents of notice of general meetings	20

Proceedings at general meetings		21

50	Chairman	21

51	Security and other arrangements at meetings	21

52	Meeting in different places	22

53	Quorum	22

54	Lack of quorum	23

55	Adjournment	23

56	Notice of adjourned meeting	23

57	Amendments to resolutions	23

Polls		24

58	Demand for poll	24

59	Procedure on a poll	24

/ /


60	Voting on a poll	24

61	Timing of poll	25

Votes of members		25

62	Votes attaching to shares	25

63	Votes of joint holders	26

64	Deleted [October 2008]	26

65	Restriction on voting in particular circumstances	26

66	Voting by guardian	28

67	Validity and result of vote	28

Proxies and corporate representatives		28

68	Appointment of proxies	28

68A	Multiple proxies	28

69	Form of proxy	29

70	Deposit of form of proxy	29

71	Rights of proxy	30

72	Termination of proxy’s authority	31

73	Corporations acting by representatives	31

Directors		31

74	Number of directors	31

75	Share qualification	31

76	Directors’ fees	32

77	Other remuneration of directors	32

78	Directors’ expenses, pension and other benefits	32

79	Appointment and retirement of directors	32

80	Appointment of executive directors	32

/ /


81	Powers of executive directors	33

Appointment and retirement of directors generally		33

82	Retirement at annual general meetings	33

83	Re-election of retiring director	33

84	Election of two or more directors	33

85	Nomination of director for election	33

86	Election or appointment of additional director	34

87	Vacation of office	34

88	Removal of director	34

Meetings and proceedings of directors		35

89	Convening of meetings of directors	35

90	Quorum	35

91	Video conference and telephone meetings	35

92	Chairman	35

93	Casting vote	36

94	Number of directors below minimum	36

95	Directors’ written resolutions	36

96	Validity of proceedings	36

Directors’ interests		36

97	Authorisation of directors’ interests	36

97A	Directors may have interests	37

98	Restrictions on quorum and voting	38

98A	Confidential information	40

99	Directors’ interests – general	40

Committees of the directors		41

/ /


100	Appointment and constitution of committees	41

101	Proceedings of committee meetings	41

Powers of directors		42

102	General powers	42

103	Local boards	42

104	Appointment of attorney	42

105	Signature on cheques etc.	42

Secretary		43

106	Secretary	43

The seal		43

107	The seal	43

Authentication of documents		44

108	Authentication of documents	44

Reserves		44

109	Establishment of reserves	44

110	Business bought as from past date	44

Dividends		44

111	Dividends	44

112	Fixed, interim and other dividends	45

113	Distribution in specie	45

114	Ranking of shares for dividend	45

115	Manner of payment of dividends and other moneys	45

116	Joint holders	46

117	No interest on dividends	46

118	Retention of dividends	46

/ /


119	Unclaimed dividends and other moneys	47

120	Waiver of dividend	47

121	Share alternative	47

Capitalisation of profits and reserves		49

122	Capitalisation of profits and reserves	49

Accounts		49

123	Accounting records	49

124	Copies of accounts for members	50

Auditors		50

125	Validity of auditor’s acts	50

126	Auditor’s right to attend general meetings	50

Communication with members		50

127	Service of documents and information	50

128	Article deleted 9 May 2007	51

129	Service of notices	51

130	Joint holders	51

131	Incapacitated members	52

132	Overseas members	52

133	Suspension of postal services	52

134	Signing or authentication of documents sent by electronic means	53

135	Article deleted 9 May 2007	53

136	Statutory provisions as to notices	53

Winding up		53

137	Directors’ power to petition	53

138	Return of capital and winding up	53

/ /


Destruction of documents		54

139	Destruction of documents	54

Directors’ liabilities		55

140	Indemnity	55

141	Insurance	55

142	Defence expenditure	55

Liability of members		56

143	Liability of members	56

Provision for employees on cessation of business		56

144	Provision for employees or ex-employees	56

/ /

COMPANY NUMBER: 95000

LLOYDS BANKING GROUP plc

At the annual general meeting of the members of the company held at the Scottish Exhibition & Conference Centre, Glasgow G3 8YW, on 5th June 2009, the following resolutions, as set out in the notice of meeting, were passed.

ORDINARY RESOLUTION 7


7.	“That the authorised share capital of the company be increased from £5,675,477,055, €40,000,000, US$40,000,000 and ¥1,250,000,000 to £7,043,396,347, €40,000,000, US$40,000,000 and ¥1,250,000,000.

ORDINARY RESOLUTION 8

8.	“That the directors be generally and unconditionally authorised pursuant to and in accordance with section 80 of the Companies Act 1985 to exercise all the powers of the company to allot relevant securities (as defined in section 80(2) of the Companies Act 1985):

	(i)	up to a nominal amount of (I) £1,368,679,269 ordinary shares and (II) £52,035,254, US$38,875,000, €39,875,000 and ¥1,250,000,000 preference shares;

	(ii)	subject to the passing of resolution 7 above, comprising equity securities (as defined in the Companies Act 1985) up to a further nominal amount of £1,368,679,269 in connection with an offer by way of a rights issue;

	such authorities to apply in substitution for all previous authorities pursuant to section 80 of the Companies Act 1985 and to expire at the end of the next annual general meeting or on 4 September 2010, whichever is the earlier but, in each case, so that the company may make offers and enter into agreements during the relevant period which would, or might, require relevant securities to be allotted after the authority ends.”

	For the purposes of this resolution “rights issue” means an offer to:

	(a)	ordinary shareholders in proportion (as nearly as may be practicable) to their existing holdings; and

	(b)	people who are holders of other equity securities if this is required by the rights of those securities or, if the directors consider it necessary, as permitted by the rights of those securities, to subscribe further securities by means of the issue of a renounceable letter (or other negotiable document) which may be traded for a period before payment for the securities is due, but subject in both cases to such exclusions or other arrangements as the directors may deem necessary or expedient in relation to treasury shares, fractional entitlements, record dates, legal, regulatory or practical problems in, or under the laws of, any territory.

SPECIAL RESOLUTION 9


9.	“That subject to the passing of resolution 8 above, the directors be empowered to allot equity securities (as defined in Section 94(2) of the Companies Act 1985) wholly for cash:

	(i)	pursuant to the authority given by paragraph (i) of resolution 8 above or where the allotment constitutes an allotment of equity securities by virtue of section 94(3A) of the Companies Act 1985 in each case:

		(I)	in connection with a pre-emptive offer; and

		(II)	otherwise than in connection with a pre-emptive offer, up to an aggregate nominal amount of £205,301,890; and

	(ii)	pursuant to the authority given by paragraph (ii) of resolution 8 above in connection with a rights issue, as if section 89(1) of the Companies Act 1985 did not apply to any such allotment;

	such power to expire at the end of the next annual general meeting or on 4 September 2010, whichever is the earlier but so that the company may make offers and enter into agreements during this period which would, or might, require equity securities to be allotted after the power ends and the Board may allot equity securities under any such offer or agreement as if the power had not ended.”


	For the purposes of this resolution:

	(a)	“rights issue” has the same meaning as in resolution 8 above;

	(b)	“pre-emptive offer” means an offer of equity securities open for acceptance for a period fixed by the directors to (a) holders (other than the company) on the register on a record date fixed by the directors of ordinary shares in proportion to their respective holdings and (b) other persons so entitled by virtue of the rights attaching to any other equity securities held by them, but subject in both cases to such exclusions or other arrangements as the directors may deem necessary or expedient in relation to treasury shares, fractional entitlements, record dates, legal, regulatory or practical problems in, or under the laws of, any territory;

	(c)	references to an allotment of equity securities shall include a sale of treasury shares; and

	(d)	the nominal amount of any securities shall be taken to be, in the case of rights to subscribe for or convert any securities into shares of the company, the nominal amount of such shares which may be allotted pursuant to such rights.

SPECIAL RESOLUTION 10


10.	“That the company’s general and unconditional authority, conferred by resolution passed at the annual general meeting of the company in 2008, to make market purchases, within the meaning of section 163 of the Companies Act 1985, of ordinary shares of 25p each in the capital of the company be further renewed and extended from the conclusion of this meeting, and where such shares are held in treasury, the company may use them for the purposes of its employees’ share schemes, provided that:

	(a)	the maximum aggregate number of ordinary shares authorised to be purchased be 1,642,415,123;

	(b)	the minimum price which may be paid for each ordinary share be 25p;

	(c)	the maximum price, inclusive of expenses, which may be paid for each ordinary share be an amount equal to 105% of the average of the middle market quotations as derived from the stock exchange daily official list for the five business days immediately preceding the day on which the ordinary share is purchased;

	(d)	the renewed and extended authority shall expire at the conclusion of the annual general meeting in 2010 or on 4 December 2010, whichever is the earlier, unless that authority be further renewed before then; and

	(e)	the company may make a contract to purchase its ordinary shares under the renewed and extended authority before its expiry which would or might be executed wholly or partly after the expiry, and may make a purchase of its ordinary shares under that contract.”

SPECIAL RESOLUTION 11


11.	“That the company’s general and unconditional authority, conferred by resolution passed at the general meeting on 19 November 2008, to make market purchases, within the meaning of section 163 of the Companies Act 1985, of (i) the £1,000,000,000 Fixed to Floating Callable Non-Cumulative Preference Shares issued by the company to HM Treasury and (ii) the preference shares issued by the company in exchange for the £3,000,000,000 Fixed to Floating Callable Non-Cumulative Preference Shares issued by HBOS plc to HM Treasury (the “Preference Shares”) be further renewed and extended from the conclusion of this meeting provided that:

	(a)	the maximum aggregate number of Preference Shares authorised to be purchased be 4,000,000;

	(b)	the minimum price which may be paid for each Preference Share be 25p (exclusive of expenses);

	(c)	the maximum price which may be paid for each Preference Share be an amount equal to 120% of the liquidation preference of the Preference Shares;

	(d)	the renewed and extended authority shall expire at the conclusion of the annual general meeting in 2010 or on 4 December 2010, whichever is the earlier, unless that authority be further renewed before then; and


	(e)	the company may make a contract to purchase its Preference Shares under the renewed and extended authority before its expiry which would or might be executed wholly or partly after the expiry, and may make a purchase of its Preference Shares under that contract.”

SPECIAL RESOLUTION 12


12.	“That, with effect from 1 October 2009:

	(a)	the articles of association be amended by deleting all the provisions of the company’s memorandum of association which, by virtue of section 28 of the Companies Act 2006, are to be treated as part of the articles of association of the company; and

	(b)	the articles of association contained in the document produced to the meeting and signed by the chairman for the purposes of identification be approved and adopted as the new articles of association of the company in substitution for, and to the exclusion of, the existing articles of association.”

SPECIAL RESOLUTION 13


13.	“That a general meeting other than an annual general meeting may be called on not less than 14 clear days’ notice.”

SPECIAL RESOLUTION 14

14.	“a)	That the company and those companies which are subsidiaries of the company at any time during the period for which this resolution has effect be authorised for the purposes of Part 14 of the Companies Act 2006 during the period from the date of the passing of this resolution to the period ending on 4 June 2013:

		i)	to make political donations to political parties, and/or independent election candidates;

		ii)	to make political donations to political organisations other than political parties; and

		iii)	to incur political expenditure,

		up to an aggregate amount of £100,000 in any year, and the amount authorised under each of paragraphs (i) to (iii) above shall also be limited to such amount;

	b)	all existing authorisations and approvals relating to political donations or expenditure under Part 10A of the Companies Act 1985 and Part 14 of the Companies Act 2006 are hereby revoked without prejudice to any donation made or expenditure incurred prior to the date hereof pursuant to such authorisation or approval; and

	c)	words and expressions defined for the purpose of the Companies Act 2006 shall have the same meaning in this resolution.”

H F Baines
Company Secretary

15th June, 2009

COMPANY NUMBER: 95000

LLOYDS BANKING GROUP plc

At the general meeting of the members of the company held at the Scottish Exhibition & Conference Centre, Glasgow, G3 8YW, on 5th June, 2009, the following resolutions were passed:

ORDINARY RESOLUTION 1


“(A)	That the authorised share capital of the Company be increased from an aggregate of £7,043,396,347, €40,000,000, US$40,000,000 and ¥1,250,000,000 to £9,645,530,097, €40,000,000, US$40,000,000 and ¥1,250,000,000 (if resolution 7 in the notice of the Annual General Meeting of the Company dated 17 April 2009 is passed) or from an aggregate of £5,675,477,055, US$40,000,000, €40,000,000 and ¥1,250,000,000 to £8,277,610,805, US$40,000,000, €40,000,000 and ¥1,250,000,000 (if resolution 7 in the notice of the Annual General Meeting of the Company dated 17 April 2009 is not passed) by the creation of 10,408,535,000 new ordinary shares of 25 pence each in the capital of the Company, such shares forming one class with the then existing ordinary shares and having attached thereto the respective rights and privileges and being subject to the limitations and restrictions set out in the Articles of Association of the Company (the “Articles”); and

(B)	That in addition and without prejudice to the authority conferred on the Directors by Article 9.2 of the Articles and any other subsisting authority conferred on the Directors pursuant to Section 80 of the Companies Act 1985 (the “Act”) the Directors be generally and unconditionally authorised pursuant to and in accordance with Section 80 of the Act to exercise all the powers of the Company to allot relevant securities (as defined in Section 80(2) of the Act) up to an aggregate nominal amount of £2,602,133,750, provided that:

	(i)	such authority shall be limited to the allotment of relevant securities pursuant to or in connection with the placing and compensatory open offer described in the circular dated 20 May 2009 (the “Circular”) of which this notice forms part (the “Placing and Compensatory Open Offer”) made for the purposes of financing the redemption of the HMT Preference Shares (as defined in the Circular);

	(ii)	such authority shall expire at the end of the next annual general meeting of the Company or on 4 September 2010, whichever is the earlier; and

	(iii)	by such authority and power the Company may make offers or enter into agreements during the relevant period which would, or might, require securities to be allotted after the authority ends.”

ORDINARY RESOLUTION 2


“That, conditional on the completion of the Placing and Compensatory Open Offer:

(A)	the authorised share capital of the Company be increased from an aggregate of £9,645,530,097, €40,000,000, US$40,000,000 and ¥1,250,000,000 to £11,550,262,389, €40,000,000, US$40,000,000 and ¥1,250,000,000 (if resolution 7 in the notice of the Annual General Meeting of the Company dated 17 April 2009 is passed) by the creation of 7,618,929,168 new ordinary shares of 25 pence each in the capital of the Company or from an aggregate of £8,277,610,805, €40,000,000, US$40,000,000 and ¥1,250,000,000 to £11,550,262,389, €40,000,000, US$40,000,000 and ¥1,250,000,000 (if resolution 7 in the notice of the Annual General Meeting of the Company dated 17 April 2009 is not passed by the creation of 13,090,606,336 new ordinary shares of 25 pence each in the capital of the Company, such shares forming one class with the then existing ordinary shares and having attached thereto the respective rights and privileges and being subject to the limitations and restrictions set out in the Articles; and

(B)	the directors be generally and unconditionally authorised pursuant to and in accordance with Section 80 of the Act to exercise all the powers of the company to allot relevant securities (as defined in Section 80(2) of the Act):

	(i)	up to a nominal amount of (I) £2,270,052,477 in ordinary shares and (II) £52,035,254, US$38,875,000, €39,875,000 and ¥1,250,000,000 in preference shares,


		(ii)	subject to the passing of resolution 2(A) above, up to a further nominal amount of £2,270,052,477 comprising equity securities (as defined in the Act) in connection with an offer by way of a rights issue,

		such authorities to apply in substitution for all previous authorities pursuant to Section 80 of the Act and to expire at the end of the next annual general meeting of the Company or on 4 September 2010, whichever is the earlier but, in each case, so that the Company may make offers and enter into agreements during the relevant period which would, or might, require relevant securities to be allotted after the authority ends.

		For the purposes of this resolution, ‘rights issue’ means an offer to:

		(a)	ordinary shareholders in proportion (as nearly as may be practicable) to their existing holdings; and

		(b)	people who are holders of other equity securities if this is required by the rights of those securities or, if the directors consider it necessary, as permitted by the rights of those securities, to subscribe further securities by means of the issue of a renounceable letter (or other negotiable document) which may be traded for a period before payment for the securities is due, but subject in both cases to such exclusions or other arrangements as the directors may deem necessary or expedient in relation to treasury shares, fractional entitlements, record dates, legal, regulatory or practical problems in, or under the laws of, any territory.”

SPECIAL RESOLUTION 5

“That, subject to and conditional upon Resolution 1 being passed, the Directors be and are hereby generally empowered pursuant to Section 95 of the Act to allot equity securities (as defined in Section 94(2) of the Act) wholly for cash pursuant to the authority given by Resolution 1 above as if Section 89(1) of the Act did not apply to any such allotment provided that:


	(A)	such power shall be limited to the allotment of equity securities pursuant to the Placing and Compensatory Open Offer up to an aggregate nominal amount of £2,602,133,750;

	(B)	such power shall expire at the end of the next annual general meeting of the Company or on 4 September 2010, whichever is the earlier; and

	(C)	by such power the Company may make offers or enter into agreements during this period which would, or might, require equity securities to be allotted after the power ends and the Board may allot equity securities under any such offer or agreement as if the power had not ended.”

SPECIAL RESOLUTION 6

“That subject to the passing of Resolution 2 above, and conditional upon the completion of the Placing and Compensatory Open Offer, the directors be empowered to allot equity securities (as defined in Section 94(2) of the Act) wholly for cash:


(A)	pursuant to the authority given by paragraph (B)(i) of Resolution 2 above or where the allotment constitutes an allotment of equity securities by virtue of Section 94(3A) of the Act in each case:

	(i)	in connection with a pre-emptive offer; and

	(ii)	otherwise than in connection with a pre-emptive offer, up to an aggregate nominal amount of £340,507,871; and

(B)	pursuant to the authority given by paragraph (B)(ii) of Resolution 2 above in connection with a rights issue, as if Section 89(1) of the Act did not apply to any such allotment,

such power to expire at the end of the next annual general meeting or on 4 September 2010, whichever is the earlier but so that the Company may make offers and enter into agreements during this period which would, or might, require equity securities to be allotted after the power ends and the Board may allot equity securities under any such offer or agreement as if the power had not ended.

For the purposes of this resolution:

(a)	‘rights issue’ has the same meaning as in Resolution 2 above;

(b)	‘pre-emptive offer’ means an offer of equity securities open for acceptance for a period fixed by the directors to (a) holders (other than the company) on the register on a record date fixed by


		the directors of ordinary shares in proportion to their respective holdings and (b) other persons so entitled by virtue of the rights attaching to any other equity securities held by them, but subject in both cases to such exclusions or other arrangements as the directors may deem necessary or expedient in relation to treasury shares, fractional entitlements, record dates, legal, regulatory or practical problems in, or under the laws of, any territory;

	(c)	references to an allotment of equity securities shall include a sale of treasury shares; and

	(d)	the nominal amount of any securities shall be taken to be, in the case of rights to subscribe for or convert any securities into shares of the company, the nominal amount of such shares which may be allotted pursuant to such rights.”

H. F. Baines
Company Secretary

15th June, 2009

COMPANY NUMBER: 95000

LLOYDS BANKING GROUP PLC

At the general meeting of the members of Lloyds Banking Group plc, held at Hall 12, The Atrium, National Exhibition Centre, Birmingham B40 1NT on 26 November 2009

“The following resolutions were passed as ordinary resolutions:


1	That, conditional on the passing of Resolutions 2, 4, 6, 7, 8 and 9 and 11:

	(a)	each of the ordinary shares of 25 pence each in the capital of the Company in issue at the close of business on the date of this meeting (or such other time and date as the Directors (or a duly authorised committee of the Directors) may determine) be sub-divided into one ordinary share of 10 pence in the capital of the Company, having the same rights, being subject to the restrictions and ranking pari passu in all respects with the existing ordinary shares of 25 pence each in the capital of the Company (save as to nominal value), and one deferred share, having the rights and being subject to the restrictions set out in Resolution 6 below; and

	(b)	each of the limited voting shares of 25 pence each in the capital of the Company in issue at the close of business on the date of this meeting (or such other time and date as the Directors (or a duly authorised committee of the Directors) may determine) be sub-divided into one limited voting share of 10 pence in the capital of the Company, having the same rights, being subject to the restrictions and ranking pari passu in all respects with the existing limited voting shares of 25 pence each in the capital of the Company (save as to nominal value), and one deferred share, having the rights and being subject to the restrictions set out in Resolution 6 below.

2	That, conditional on the passing of Resolutions 1, 4, 6, 7, 8, 9 and 11, the Directors be generally and unconditionally authorised pursuant to and in accordance with section 551 of the Companies Act 2006 (the “2006 Act”) to exercise all the powers of the Company to allot shares or grant rights to subscribe for shares:

	(a)	up to a nominal amount of £9 billion in connection with the issue of new ordinary shares to Qualifying Shareholders pursuant to the Rights Issue; and

	(b)	up to a nominal amount of £10 billion in relation to the issue of Enhanced Capital Notes in connection with the Exchange Offers, the related underwriting agreements and otherwise, and up to a nominal amount of £1.5 billion in relation to the issue of new ordinary shares in connection with the Exchange Offers,

	(each as defined in the circular issued by the Company dated 3 November 2009 (the “Circular”)),

	such authority to apply in addition to all previous authorities pursuant to section 80 of the Companies Act 1985 and to expire on 25 November 2010 but so that the Company may make offers and enter into agreements during the relevant period which would, or might, require shares to be allotted or rights to subscribe for or to convert any security into shares to be granted after the authority ends.

3	That in addition to and without prejudice to the authority conferred on the Directors pursuant to Resolution 2 above, and conditional on the completion of the Rights Issue, the Directors be generally and unconditionally authorised pursuant to and in accordance with


	section 551 of the 2006 Act to exercise all the powers of the Company to allot shares or grant rights to subscribe for or to convert any security into shares:

	(a)	up to a nominal amount of (I) £3,908,086,780.50 in ordinary shares and (II) £100,000,000, US$40,000,000, €40,000,000 and ¥1,250,000,000 in preference shares;

	(b)	comprising equity securities (as defined in section 560(1) of the 2006 Act) up to a further nominal amount of £3,908,086,780.50 in connection with an offer by way of a rights issue;

	provided that such authority shall be limited to apply to shares up to a nominal amount of up to:

	(i)	one third of the issued ordinary share capital (including limited voting shares) of the Company immediately following the completion of the Rights Issue (the “Actual Enlarged Share Capital”); and

	(ii)	a further one third of the Actual Enlarged Share Capital in connection with an offer by way of a rights issue,

	such authorities to apply in substitution for all previous authorities pursuant to section 80 of the Companies Act 1985 and to expire at the end of the next annual general meeting of the Company in 2010 but, in each case, so that the Company may make offers and enter into agreements during the relevant period which would, or might, require shares to be allotted or rights to subscribe for or to convert any security into shares to be granted after the authority ends.

	For the purposes of this Resolution, “rights issue” means an offer to:

	(I)	ordinary shareholders in proportion (as nearly as may be practicable) to their existing holdings; and

	(II)	people who are holders of other securities if this is required by the rights of those securities or, if the Directors consider it necessary, as permitted by the rights of those securities,

	to subscribe further securities by means of the issue of a renounceable letter (or other negotiable document) which may be traded for a period before payment for the securities is due, but subject in both cases to such exclusions or other arrangements as the Directors may deem necessary or expedient in relation to treasury shares, fractional entitlements, record dates or legal, regulatory or practical problems in, or under the laws of, any territory.

4	That, conditional on the passing of Resolutions 1, 2, 6, 7, 8, 9 and 11, the HMT Transactions (as defined in the Circular) being related party transactions for the purposes of the Listing Rules of the United Kingdom Listing Authority, be and are hereby approved.

5	That, pursuant to article 122 of the articles of association of the Company (the “Articles”), £493,420.75 out of the sums standing to the credit of any of the Company’s share premium account, capital redemption reserve or other undistributable reserve, be immediately capitalised for the purposes of paying up 1,973,683 new limited voting shares of 25 pence each in the capital of the Company, and that the Board be authorised to apply such amount in paying up the new limited voting shares and to take all such other steps as it may deem necessary, expedient or appropriate to implement such capitalisation and issue such new limited voting shares to the holders of limited voting shares on the register of the Company


	on 26 November 2009, pro rata to their existing holdings of limiting voting shares, in accordance with Article 122.2 of the Articles, such authority to expire on 25 November 2010.”

“The following resolutions were passed as special resolutions:

6	That, conditional on the passing of Resolutions 1, 2, 4, 7, 8, 9 and 11, the Articles of Association of the Company be amended by:

	(a)	inserting the following definitions into Article 2 as follows:


	‘“deferred shares”	the deferred shares of 15p each of the company described in article 3;’ to be inserted after the definition of “deed of covenant”;

	‘“limited voting shares”	the limited voting shares of 10p each of the company;’ to be inserted in place of the current definition of limited voting shares, which shall be deleted in its entirety; and

	‘“ordinary shares”	the ordinary shares of 10p each of the company;’ to be inserted in place of the current definition of ordinary shares, which shall be deleted in its entirety;


	(b)	deleting the caption ‘Limited voting shares and preference shares’ to article 3, and inserting the caption ‘Limited voting shares, preference shares and deferred shares’ in its place;

	(c)	inserting of a new article 3.3 as follows:

	‘3.3 The deferred shares shall confer upon the holder such rights, and shall be subject to the restrictions, as follows:

	3.3.1 notwithstanding any other provision of these articles, a deferred share:


		(i)	does not entitle its holder to receive any dividend or distribution declared, made or paid or any return of capital (save as provided in article 3.3.1(ii)) and does not entitle its holder to any further or other right of participation in the assets of the company;

		(ii)	entitles its holder to participate on a return of assets on a winding up of the company, such entitlement to be limited to the repayment of the amount paid up or credited as paid up on such share and shall be paid only after the holders of any and all ordinary shares and limited voting shares then in issue shall have received (a) payment in respect of such amount as is paid up or credited as paid up on those ordinary shares and/or limited voting shares held by them at that time plus (b) the payment in cash or in specie of £10,000,000 on each such ordinary share and/or limited voting share;

		(iii)	does not entitle its holder to receive a share certificate in respect of his or her shareholding, save as required by law;

		(iv)	does not entitle its holder to receive notice of, nor attend, speak or vote at, any general meeting of the company; and


		(v)	shall not be transferable at any time other than with the prior written consent of the directors;


	3.3.2 the company shall have the irrevocable authority to authorise and instruct the secretary (or any other person appointed for the purpose by the board) as agent for the holders of deferred shares to surrender the deferred shares to the company for no consideration and to execute on behalf of such holders such documents as are necessary in connection with such surrender without obtaining the sanction of the holder or holders thereof, and pending such surrender to retain the certificates, to the extent issued, for such deferred shares;

	3.3.3 any request by the company to surrender the deferred shares may be made by the directors depositing at the registered office of the Company a notice addressed to such person as the directors shall have nominated on behalf of the holders of the deferred shares;

	3.3.4 the company shall have the irrevocable authority to appoint a single holder or any other person on behalf of all holders of deferred shares to exercise any vote to which holders of deferred shares may be entitled in any circumstances or for any other matter connected to the deferred shares;

	3.3.5 the rights attached to the deferred shares shall not be deemed to be varied or abrogated by the creation or issue of any new shares ranking in priority to or pari passu with or subsequent to such shares, any amendment or variation of the rights of any other class of shares of the company, the company reducing its share capital or the surrender, or purchase of any share, whether a deferred share or otherwise; and

	3.3.6 the company shall have the irrevocable authority to cancel any deferred share without making any payment to the holder and such cancellation shall not be deemed to be a variation or abrogation of the rights attaching to such deferred share.’

7	That, conditional on the passing of Resolutions 1, 2, 4, 6, 8, 9 and 11 the Company be and is hereby unconditionally and generally authorised for the purpose of section 701 of the 2006 Act to make market purchases (as defined in section 693 of the 2006 Act) of the following issuances of securities:

	(a)	£299,987,729 9.25 per cent. Non-Cumulative Irredeemable Preference Shares;

	(b)	£99,999,942 9.75 per cent. Non-Cumulative Irredeemable Preference Shares;

	(c)	£186,190,532 6.475 per cent. Non-Cumulative Preference Shares;

	(d)	£745,431,000 6.0884 per cent. Non-Cumulative Fixed to Floating Rate Preference Shares;

	(e)	£334,951,000 6.3673 per cent. Non-Cumulative Fixed to Floating Rate Preference Shares;

	(f)	U.S.$750,000,000 6.413 per cent. Non-Cumulative Fixed to Floating Rate Preference Shares;

	(g)	U.S.$750,000,000 5.92 per cent. Non-Cumulative Fixed to Floating Rate Preference Shares;

	(h)	U.S.$750,000,000 6.657 per cent. Non-Cumulative Fixed to Floating Rate Preference Shares;


	(i)	U.S.$1,000,000,000 6.267 per cent. Fixed to Floating Rate Non-Cumulative Callable Dollar Preference Shares;

	(j)	U.S.$1,250,000,000 7.875 per cent. Non-Cumulative Preference Shares;

	(k)	€500,000,000 7.875 per cent. Non-Cumulative Preference Shares; and

	(l)	£600,000,000 Non-Cumulative Fixed to Floating Rate Callable Preference Shares,

	(together, the “Preference Shares”), in accordance with, amongst other things, the terms of the Exchange Offers provided that:

	(i)	the maximum number of Preference Shares which may be purchased is all such Preference Shares in issue;

	(ii)	the minimum price which may be paid for each Preference Share is the nominal value of the relevant Preference Share;

	(iii)	the maximum price which may be paid for a share is an amount equal to 120 per cent. of the liquidation preference of the relevant Preference Share;

	(iv)	this authority shall expire on 25 November 2010, unless this authority be further renewed before then; and

	(v)	the Company may make a contract to purchase the Preference Shares under this authority before its expiry which would or might be executed wholly or partly after the expiry, and may make a purchase of the Preference Shares under that contract.

8	That, conditional on the passing of Resolutions 1, 2, 4, 6, 7, 9 and 11, that the terms of a proposed contract between (1) the Company and (2) Equiniti Limited, providing for the purchase by the Company of certain existing Preference Shares held by Equiniti Limited on behalf of holders of such securities be and are hereby approved and authorised for the purposes of section 694 of the Companies Act 2006 and otherwise but so that such approval and authority shall expire on 25 May 2011.

9	That, conditional on the passing of Resolutions 1, 2, 4, 6, 7, 8 and 11, that the terms of a proposed contract between (1) the Company and (2) BNY Corporate Trustee Services Limited, providing for the purchase by the Company of certain existing Preference Shares held by BNY Corporate Trustee Services Limited on behalf of holders of such securities be and are hereby approved and authorised for the purposes of section 694 of the Companies Act 2006 and otherwise but so that such approval and authority shall expire on 25 May 2011.

10	That the terms of a proposed contract between (1) the Company, (2) Allen and Overy Service Company Limited, and (3) Fleetside Legal Representative Services Limited providing for the purchase by the Company of certain 6.3673 per cent. Non-Cumulative Fixed to Floating Rate Preference Shares in the capital of the Company (a draft of which has been produced to this meeting) be and are hereby approved and authorised for the purposes of section 694 of the Companies Act 2006 and otherwise but so that such approval and authority shall expire on 25 May 2011.

11	That, conditional on the passing of Resolutions 1, 2, 4, 6, 7, 8 and 9 above, and without prejudice to any existing authority, the Directors be empowered to allot equity securities (as defined in section 560(1) of the 2006 Act) wholly for cash, pursuant to the authority given by Resolution 2 above:


	(a)	up to a nominal amount of £9 billion in connection with the issue of new ordinary shares pursuant to the Rights Issue; and

	(b)	up to a nominal amount of £10 billion in connection with the issue of Enhanced Capital Notes pursuant to the Exchange Offers and otherwise, and up to a nominal amount of £1.5 billion in relation to the issue of new ordinary shares in connection with the Exchange Offers,

	as if section 561(1) of the 2006 Act did not apply to any such allotment, such power to expire on 25 November 2010 but so that the Company may make offers and enter into agreements during this period which would, or might, require equity securities to be allotted after the power ends.

12	That conditional on the completion of the Rights Issue and the passing of Resolution 3, the Directors be empowered to allot equity securities (as defined in section 560(1) of the 2006 Act) wholly for cash:

	(a)	pursuant to the authority given by paragraph (a) of Resolution 3 above or where the allotment constitutes an allotment of equity securities by virtue of section 560(2)(b) of the 2006 Act in each case:


	(i)	in connection with a pre-emptive offer; and

	(ii)	otherwise than in connection with a pre-emptive offer, up to an aggregate nominal amount of £586,213,017, provided that such authority shall be limited to apply to shares up to an aggregate nominal amount constituting no more than five per cent. of the Actual Enlarged Share Capital; and


	(b)	pursuant to the authority given by paragraph (b) of Resolution 3 above in connection with a rights issue,

	as if section 561(1) of the 2006 Act did not apply to any such allotment;

	such power to expire at the end of the next annual general meeting of the Company in 2010, but so that the Company may make offers and enter into agreements during this period which would, or might, require equity securities to be allotted after the power ends.

	For the purposes of this Resolution:

	(a)	“rights issue” has the same meaning as in Resolution 3 above;

	(b)	“pre-emptive offer” means an offer of equity securities open for acceptance for a period fixed by the Directors to (a) holders (other than the Company) on the register on a record date fixed by the Directors of ordinary shares in proportion to their respective holdings and (b) other persons so entitled by virtue of the rights attaching to any other securities held by them, but subject in both cases to such exclusions or other arrangements as the Directors may deem necessary or expedient in relation to treasury shares, fractional entitlements, record dates or legal, regulatory or practical problems in, or under the laws of, any territory;

	(c)	references to an allotment of equity securities shall include a sale of treasury shares; and

	(d)	the nominal amount of any securities shall be taken to be, in the case of rights to subscribe for or convert any securities into shares of the Company, the nominal amount of such shares which may be allotted pursuant to such rights.”

H.F. Baines
Company Secretary & General Counsel

26 November 2009

Exhibit 4(a)(v)

Conformed copy

THIS AGREEMENT is effective (as between the Company and HM Treasury only) as of 7 March 2009 and amended and restated by the parties hereto as of, and effective from, 20 March 2009 and 18 May 2009 among:


(1)	LLOYDS BANKING GROUP PLC , a company incorporated in Scotland with registered number 095000 and whose registered office is at Henry Duncan House, 120 George St, Edinburgh, Scotland EH2 4LH (the “ Company ”);

(2)	CITIGROUP GLOBAL MARKETS U.K. EQUITY LIMITED , a company incorporated in England and Wales with registered number 2019774 and whose registered office is at Citigroup Centre, Canada Square, Canary Wharf, London, E14 5LB (“ CGMEL ”);

(3)	UBS LIMITED , a company incorporated in England and Wales with registered number 2035362 whose registered office is at 1 Finsbury Avenue, London EC2M 2PP (“ UBS ”);

(4)	J.P. MORGAN CAZENOVE LIMITED , a company incorporated in England and Wales with registered number 04153386 and whose registered office is 20 Moorgate, London EC2R 6DA (“ JPMC ”); and

(5)	THE COMMISSIONERS OF HER MAJESTY’S TREASURY of 1 Horse Guards Road, London SW1A 2HQ (“ HM Treasury ”).

WHEREAS:


(A)	The Company and HM Treasury have agreed, subject, inter alia, to the passing of the Resolutions as set out herein that the Preference Shares are to be redeemed as provided in this Agreement. The amount payable on redemption is to be funded in part by the issue of the New Shares.

(B)	The Company proposes to invite Qualifying Shareholders to apply to subscribe for New Shares at the Issue Price by way of an open offer and otherwise on the terms and subject to the conditions to be set out in the Prospectus and the Application Form.

(C)	On the terms and subject to the provisions of this Agreement (a) each of the Joint Bookrunners is willing (severally and not jointly or jointly and severally) as agent of the Company to use reasonable endeavours to procure subscriber(s) for the Non-Accepted Shares (or, at their discretion, for as many as can be so procured) if an amount which is not less than the Minimum Rump Placing Amount can be obtained, and (b) if and to the extent that the Joint Bookrunners are unable to procure subscriber(s) for Non-Accepted Shares as described in (a) above, HM Treasury is willing to subscribe for (or procure that its nominee subscribes for) such Non-Accepted Shares itself.

(D)	Applications will be made to the FSA and the London Stock Exchange for the admission of the Accepted Shares and the Non-Accepted Shares to the Official List and to trading on the London Stock Exchange’s main market for listed securities.

(E)	Pursuant to the placing and open offer agreement among the Company and HM Treasury entered into on 7 March 2009 (the “ Original Placing Agreement ”), the Company has agreed, inter alia, to appoint joint sponsors and joint bookrunners in connection with the Open Offer.


(F)	As at, and effective from, 20 March 2009, the parties hereto entered into an agreement (the “Amended and Restated Placing Agreement” ) which amended and restated the Original Placing Agreement.

(G)	The Joint Sponsors shall act as Joint Sponsors in connection with the applications for Accepted Shares Admission and Non-Accepted Shares Admission and the Joint Bookrunners shall act as joint bookrunners and joint placing agents in connection with the Open Offer, all on the terms and subject to the conditions set out in this Agreement.

NOW THEREFORE IT IS AGREED as follows:



1.	INTERPRETATION

1.1	In this Agreement (including the Recitals):

	“Acceptance”	means application and payment validly made (or, where the context so requires, treated as validly made) in accordance with the procedures to be set out in the Prospectus and (where appropriate) the Application Form;

	“Accepted Shares”	has the meaning given in clause 7.1(A);

	“Accounts”	means the audited consolidated accounts of the Group for the three years ended 31 December 2006, 2007 and 2008 (including, without limitation, the related directors’ and auditors’ reports, the consolidated income statement, the consolidated balance sheet, the consolidated cashflow statement, the consolidated statement of changes in equity and all related notes);

	“Accounts Date”	means 31 December 2008;

	“Accepted Shares Admission”	means the admission of the Accepted Shares to the Official List becoming effective in accordance with paragraph 3.2.7G of the Listing Rules and admission to trading on the London Stock Exchange’s main market for listed securities becoming effective in accordance with paragraph 2.1 of the Admission and Disclosure Standards;


	“Admission and Disclosure Standards”		means the Admission and Disclosure Standards of the London Stock Exchange, as amended from time to time;

	“ADSs”		means American depositary shares issued pursuant to the Deposit Agreement, each representing the right to receive four Ordinary Shares, and reference to Ordinary Shares or New Shares shall be deemed to include any such Ordinary Shares or New Shares represented by ADSs;

	“Adverse Interest”		means any option, lien, mortgage, charge, equity, trust, any other right or interest of any third party and any other encumbrance of any kind;

	“Affiliate”		means, unless otherwise specified herein, “affiliate” as defined in Rule 405 under the Securities Act or, as the context may require, Rule 501(b) under Regulation D of the Securities Act;

	“Application Form”		means the application form (or, where applicable, form of direction), in a form acceptable to HM Treasury and to the Joint Sponsors and the Joint Bookrunners, acting reasonably, to be despatched to Qualifying Shareholders for use in connection with the Open Offer;

	“APS”		means the asset protection scheme to be established by HM Treasury;

	“Auditors”		means PricewaterhouseCoopers LLP and, with respect to any historical financial information of the HBOS Group, KPMG Audit plc;

	“Board”		means the Board of Directors of the Company or a duly authorised committee thereof;

	“Business Day”		means any day (other than a Saturday or Sunday) on which clearing banks are open for a full range of banking transactions in London;

	“CA 1985”		means the Companies Act 1985;

	“CA 2006”		means the Companies Act 2006;

	“Capital Resources Requirement”		has the meaning given in the FSA Rules;


“Chairmanship Announcement”	means the press announcement issued by the Company on 17 May 2009 giving details relating to the chairmanship of the Company;

“CGMEL Indemnified Person”	means:

	(a)	CGMEL and any subsidiary, branch or affiliate of CGMEL;

	(b)	a person who is, on or at any time after the date of this Agreement, a director, officer, partner or employee of an undertaking specified in sub paragraph (a) above; and

	(c)	CGMEL , their selling agents and each person, if any, who controls CGMEL within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act and CGMEL’s respective affiliates, subsidiaries, branches, affiliates, associates and holding companies and the subsidiaries of such subsidiaries, branches, affiliates, associates and holding companies and each of such person’s respective directors, officers and employees;

	and “ CGMEL Indemnified Person ” shall be construed accordingly;

“Circular”	means the circular, in a form acceptable to HM Treasury to be sent to the Qualifying Shareholders (other than the Prohibited Shareholders) giving summary details of the Open Offer and the redemption of the Preference Shares and containing notice of the GM;

“Claims”	means any and all claims, actions, liabilities, demands, proceedings, investigations, judgments or awards whatsoever (and in each case whether or not successful, compromised or settled and whether joint or several) threatened, asserted, established or instituted against any Indemnified Person and “ Claim ” shall be construed accordingly;

“Class B Shares”	means the B shares in the Company which are proposed to be issued in connection with the APS;


	“Closing Date”		means the last date for Acceptance under the terms of the Open Offer;

	“Companies Acts”		means the CA 1985 and/or the CA 2006 as the context requires;

	“CREST”		means the relevant system (as defined in the Regulations) in respect of which Euroclear is the Operator (as defined in the Regulations);

	“Dealing Day”		means a day on which dealings in securities may take place on, and with the authority of, the London Stock Exchange;

	“Deposit Agreement”		means the deposit agreement dated 27 November 2001 made between the Company, The Bank of New York, as depositary, and the owners and holders of ADSs issued thereunder (as amended and restated);

	“Directors”		means the directors of the Company from time to time;

	“Draft Circular”		means the draft of the Circular provided to the Joint Bookrunners and HM Treasury immediately prior to the release of the Second Press Announcement and dated 18 May 2009, in the agreed form;

	“Draft Prospectus”		means the draft of the Prospectus provided to the Joint Bookrunners and HM Treasury immediately prior to the release of the Second Press Announcement and dated 18 May 2009, in the agreed form;

	“DTRs”		means the Disclosure and Transparency Rules, as amended from time to time, made by the FSA pursuant to Part VI of FSMA;


“Due Diligence Meetings”	means:

	(a)	in the case of HM Treasury (including, for the avoidance of doubt, in the context of any qualification of the Warranties), the due diligence meetings held on dates between 11 February 2009 and 20 March 2009 between representatives of the Group and HM Treasury (including their respective legal counsel, accountants and financial advisors); and

	(b)	in the case of the Joint Sponsors and the Joint Bookrunners (including, for the avoidance of doubt, in the context of any qualification of the Warranties), the Telephone Note prepared by Linklaters LLP and dated 26 February 2009 (the “ 26 February Note ”), the Telephone Note prepared by Linklaters LLP and dated 6 March 2009 and the Appendix thereto (the “ 6 March Note ”), the document entitled “Lark - Note of call with E&Y on 25 February 2009 on sanctions” (the “ Sanctions Note ”) and the memorandum from Nicola Myatt to the Company’s Audit Committee dated 13 February 2009 (the “ Audit Committee Memo ” and, together with the 26 February Note, the 6 March Note and the Sanctions Note, the “ Due Diligence Materials ”), in each case in the form agreed between Linklaters LLP (on behalf of the Company) and Freshfields Bruckhaus Deringer LLP (on behalf of the Joint Sponsors and the Joint Bookrunners). For the avoidance of doubt, the term Due Diligence Meetings for the purposes of this paragraph (b) does not include any agreement, contract, document, note, script, report, e-mail, information, matter, disclosure, meeting, conversation or discussion referred to but not included in any of the Due Diligence Materials;

“EEA”	means the European Economic Area;

“Effective Date”	means 7 March 2009;


	“Enablement Letter”		means a letter, in a form acceptable to HM Treasury and to the Joint Sponsors and to the Joint Bookrunners, acting reasonably, from the Company to Euroclear confirming that the conditions for admission of the Accepted Shares and the Non-Accepted Shares to CREST are satisfied;

	“Engagement Letters”		means the engagement letters agreed or to be agreed between the Company and each of the Joint Sponsors relating to the Open Offer, and the engagement letter between the Company and the Joint Bookrunners;

	“Euroclear”		means Euroclear UK & Ireland Limited;

	“Exchange Act”		means the United States Securities Exchange Act of 1934;

	“FCPA”		means the US Foreign Corrupt Practices Act of 1977, including the rules and regulations thereunder;

	“Form of Proxy”		means the form of proxy, in a form acceptable to HM Treasury and to the Joint Sponsors and the Joint Bookrunners, acting reasonably, to be sent to Qualifying Shareholders (other than Prohibited Shareholders) in connection with the GM;

	“FSA”		means the Financial Services Authority acting in its capacity as the competent authority for the purposes of Part VI of the FSMA;

	“FSA Rules”		means the rules, as amended from time to time, made by the FSA under the FSMA;

	“FSMA”		means the Financial Services and Markets Act 2000 including any regulations made pursuant thereto;

	“GM”		means the general meeting of the Company to be convened at which the Resolutions are to be proposed, or any adjournment of it;

	“GM Date”		means the date on which the GM is held, being no later than 30 June 2009, or such later date as HM Treasury may require (but not later than 31 December 2009);


“Group”	means the Company and its subsidiary undertakings from time to time and “ Group Company ” means any of them (and for the avoidance of doubt, references in this Agreement to the “Group”, “Group Companies” and “members of the Group” include, without limitation, the HBOS Group);

“ HBOS ”	means HBOS plc, a company incorporated in Scotland with registered number SC218813 and whose registered office is at The Mound, Edinburgh EH1 1YZ;

“HBOS Accounts”	means the audited consolidated accounts of the HBOS Group for the three years ended 31 December 2006, 2007 and 2008 (including, without limitation, the related directors’ and auditors’ reports, the consolidated income statement, the consolidated balance sheet, the consolidated cashflow statement, the consolidated statement of recognised income and expense and all related notes);

“HBOS Accounts Date”	means 31 December 2008;

“HBOS Group”	means HBOS and its subsidiaries and subsidiary undertakings;

“HMT Indemnified Persons”	means:

	(a)	The Commissioners of Her Majesty’s Treasury;

	(b)	the Treasury;

	(c)	the Treasury Solicitor;

	(d)	any entity to which HM Treasury novates its rights and obligations under this Agreement pursuant to clause 18; and

	(e)	any person who is, on or at any time after the date of this Agreement, a director, officer, official, agent or employee of or under any person specified in paragraph (a), (b), (c) or (d) above;

	and “ HMT Indemnified Person ” shall be construed accordingly;


	“IFRS”		means International Financial Reporting Standards as adopted by the European Union;

	“Indemnified Persons”		means each and any HMT Indemnified Person, each and any CGMEL Indemnified Person, each and any UBS Indemnified Person and each and any JPMC Indemnified Person and “ Indemnified Person ” shall be construed accordingly;

	“Intellectual Property Rights”		means patents, trade marks, service marks, logos, get-up, trade names, rights in designs, copyright (including rights in computer software), internet domain names, moral rights, utility models, rights in know how, rights in databases and other intellectual property rights, in each case whether registered or unregistered and including applications for the grant of any such rights and all rights or forms of protection having equivalent or similar effect anywhere in the world;

	“Investment Company Act”		means the United States Investment Company Act of 1940;

	“Issue Documents”		means the Press Announcement, the Second Press Announcement, the Chairmanship Announcement, the Application Form, the Circular, the Form of Proxy, the Prospectus, any Supplementary Prospectus, the Presentation, any interim management statement published after the Effective Date and before Accepted Shares Admission or, if later, Non-Accepted Shares Admission and any other document published or issued after the Effective Date by or on behalf of the Company in connection with the Open Offer, the placing of the Non-Accepted Shares pursuant to clause 3.5 or clause 4.1 or the redemption of the Preference Shares;

	“Issue Price”		means the price of 38.43 pence per New Share;

	“Joint Bookrunners”		means CGMEL, UBS and JPMC;

	“Joint Sponsors”		means JPMC and UBS;


“JPMC Indemnified Person”	means:

	(a)	JPMC and any subsidiary, branch or affiliate of JPMC;

	(b)	a person who is, on or at any time after the date of this Agreement, a director, officer, partner or employee of an undertaking specified in sub-paragraph (a) above; and

	(c)	JPMC, their selling agents and each person, if any, who controls JPMC within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act and JPMC’s respective affiliates, subsidiaries, branches, affiliates, associates and holding companies together with JPMorgan Chase & Co and Cazenove Group Limited and the subsidiaries of such subsidiaries, branches, affiliates, associates and holding companies and each of such person’s respective directors, officers and employees;

	and “ JPMC Indemnified Person ” shall be construed accordingly;

“Listing Rule Resolution”	means the resolution, in a form acceptable to HM Treasury, required under Chapter 11 of the Listing Rules in connection with the Open Offer and the redemption of the Preference Shares to be proposed at the GM;

“Listing Rules”	means the Listing Rules made by the FSA pursuant to section 73A of the FSMA, as amended from time to time;

“London Stock Exchange”	means London Stock Exchange Group plc;


	“Losses”		means any and all loss, damage, cost, liability, demand, charge or expense (including legal fees), in each case whether joint or several, which any Indemnified Person may suffer or incur (including, but not limited to, all Losses suffered or incurred in investigating, preparing for or disputing or defending or settling any Claim and/or in establishing its right to be indemnified pursuant to clause 12 and/or in seeking advice regarding any Claim or in any way related to or in connection with the indemnity contained in clause 12) and “ Loss ” shall be construed accordingly;

	“Material Adverse Effect”		means an event has occurred or is reasonably likely to occur which has resulted in or may result in a material adverse change in or affecting the condition (financial, operational, legal or otherwise), profitability, prospects, solvency, business affairs or operations of the Group taken as a whole, whether or not arising in the ordinary course of business;

	“Minimum Rump Placing Amount”		means that amount that is equal to the sum of (a) the Issue Price multiplied by the number of Non-Accepted Shares for which subscriber(s) are procured by the Joint Bookrunners pursuant to clause 3.5, and (b) the expenses of procurement (including any applicable brokerage, transaction levies, trading fees, currency conversion costs, commissions and amounts in respect of VAT thereon which are not recoverable);

	“New Shares”		means 10,408,535,000 new Ordinary Shares;

	“Non-Accepted Shares”		has the meaning given in clause 7.1(B);

	“Non-Accepting Shareholders”		means those Qualifying Shareholders that are not Open Offer Acceptors and “Non-Accepting Shareholder” shall be construed accordingly;


	“Non-Accepted Shares Admission”		means the admission of the Non-Accepted Shares to the Official List becoming effective in accordance with paragraph 3.2.7G of the Listing Rules and admission to trading on the London Stock Exchange’s main market for listed securities becoming effective in accordance with paragraph 2.1 of the Admission and Disclosure Standards, which is expected to occur, at a time and date agreed by the parties, that is no later than 8.00 a.m. on the date that is three Dealing Days after the Time of Sale;

	“Notifying Sponsor”		has the meaning given in clause 14.4;

	“OECD Convention”		means the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions;

	“Official List”		means the Official List maintained by the FSA in its capacity as UK Listing Authority;

	“Open Offer”		means the conditional invitation by the Company to Qualifying Shareholders to apply to subscribe for New Shares on the basis to be referred to in the Prospectus and, as relevant, the Application Form;

	“Open Offer Acceptors”		means those Qualifying Shareholders that have validly applied (or are treated as having validly applied) to subscribe for New Shares under the Open Offer;

	“Open Offer Date”		means the date on which the Application Form is issued;

	“Open Offer Documents”		means the Prospectus, any Supplementary Prospectus and the Application Form;

	“Open Offer Entitlement”		an entitlement to apply to subscribe for New Shares allocated to a Qualifying Shareholder pursuant to the Open Offer;

	“Ordinary Shareholders”		means holders of Ordinary Shares;

	“Ordinary Shares”		means ordinary shares of 25 pence each in the capital of the Company;

	“Overall Financial Resources Rule”		has the meaning given in the FSA Rules;


	“Panel”		means the Panel on Takeovers and Mergers;

	“Participating Security”		has the meaning given to it in the Regulations (and “ Participating Securities ” shall be construed accordingly);

	“Placing Schedule”		has the meaning given to it in clause 3.7;

	“Posting Date”		means the date on which the Company publishes the Prospectus and despatches the Circular to Qualifying Shareholders (other than Prohibited Shareholders);

	“Preference Share Dividend”		means the dividend accrued on the Preference Shares from and including 15 January 2009 to but excluding the relevant date of redemption;

	“Preference Shares”		means the 4,000,000 preference shares of £0.25 each in the Company owned by HM Treasury;

	“Presentation”		means any presentation, in the form to be agreed, used by the Company during presentations to institutional investors in connection with the Open Offer (including, for the avoidance of doubt, in connection with the Joint Bookrunners’ endeavours, if any, to procure subscriber(s) for Non-Accepted Shares pursuant to clauses 3.5 and 4.1) and any other publicity materials relating to the Open Offer prepared by or at the request of the Company;

	“Press Announcement”		means the press announcement issued by the Company dated the Effective Date giving details of, inter alia, the Open Offer and the redemption of the Preference Shares;


	“Previous Announcements”		means all documents issued (including circulars, annual reports and prospectuses) and announcements (other than the Press Announcement) made by or on behalf of the Company or any member of the Group through a Regulatory Information Service or by way of a public regulatory filing in the three year period immediately prior to the Effective Date of this Agreement which, for the avoidance of doubt, shall include the prospectus issued by HBOS on 18 November 2008, the supplementary prospectus published by HBOS on 18 December 2008, the supplementary prospectus published by the Company on 18 December 2008 and the Previous Prospectus;

	“Previous Prospectus”		means the prospectus issued by the Company in respect of Ordinary Shares on 18 November 2008;

	“Profit Forecast Report”		means the profit forecast report to be prepared by PricewaterhouseCoopers LLP, in the form to be agreed, relating to the forecast loss before tax, before the recognition of negative goodwill, for the Group for the period ending 31 December 2009 set out in Part XVII of the Prospectus;

	“Prohibited Shareholders”		means holders of Ordinary Shares with registered addresses in any jurisdiction(s) in which the Open Offer cannot lawfully be made, as may be agreed by the Company and the Joint Sponsors and CGMEL;

	“Prospectus”		means the document (including the information incorporated by reference therein) comprising a prospectus for the purposes of the Prospectus Rules to be published by the Company in relation to the Open Offer, in the form to be agreed;

	“Prospectus Directive”		means Directive 2003/71/EC;

	“Prospectus Rules”		has the meaning given in Section 73A(4) of FSMA;

	“Qualifying CREST Shareholders”		means Qualifying Shareholders whose Ordinary Shares on the register of members of the Company at the close of business on the Record Date are in uncertificated form;

	“Qualifying Non-CREST Shareholders”		means Qualifying Shareholders whose Ordinary Shares are held in certificated form;


	“Qualifying Shareholders”		means holders of Ordinary Shares whose names are on the register of members of the Company as at the close of business on the Record Date;

	“QIB Purchasers”		has the meaning given in clause 6.8(C)(i);

	“QIBs”		has the meaning given to it in clause 6.2;

	“Receiving Agent”		means the receiving agent to be appointed pursuant to clause 3.10;

	“Receiving Agent Agreement”		means an agreement among the Company and the Receiving Agent relating to the Open Offer, in the form to be agreed;

	“Record Date”		means the record date for the Open Offer, being 13 May 2009 (or such other date as the Company, HM Treasury, and the Joint Bookrunners shall agree, all acting reasonably);

	“Registrars”		means Equiniti Limited;

	“Regulations”		means the Uncertificated Securities Regulations 2001;

	“Regulation D”		means Regulation D under the Securities Act;

	“Regulation S”		means Regulation S under the Securities Act;

	“Regulatory Information Service”		has the meaning given in the Listing Rules;

	“Relevant Cost”		has the meaning given in clause 9.10;

	“Relevant Member State”		has the meaning given in clause 6.6;

	“Relevant Time”		has the meaning given in clause 6.1(C) (iii);

	“Reports”		means the reports and letters prepared by the Auditors in connection with the Open Offer;

	“Residual Shares”		has the meaning given to it in clause 7.3;

	“Resolutions”		means the Share Capital Resolutions, the Whitewash Resolution and the Listing Rule Resolution;

	“SDRT”		means stamp duty reserve tax;


“Second Press Announcement”	means the press announcement issued by the Company on 18 May 2009 giving further details of the Open Offer and the redemption of the Preference Shares;

“Securities Act”	means the United States Securities Act of 1933;

“Share Capital Resolutions”	means the resolutions, in a form acceptable to HM Treasury, acting reasonably:

	(a)	to increase the authorised share capital of the Company to allow for the creation and issue of the New Shares;

	(b)	to authorise the Directors to allot under Section 80 of CA 1985 such number of Ordinary Shares as equals or exceeds the number of New Shares; and

	(c)	to authorise the Directors pursuant to Section 95 of CA 1985 to allot such number of Ordinary Shares as equals or exceeds the number of New Shares as if Section 89(1) of CA 1985 did not apply to any such allotment,

	to be proposed at the GM;

“Solicitors to the Joint Sponsors and Joint Bookrunners”	means Freshfields Bruckhaus Deringer LLP;

“Specified Event”	means an event occurring or matter arising on or after the Effective Date, which:

	(a)	if it had occurred or arisen before or at the Effective Date; or

	(b)	if it had been known by the Directors before or at the Effective Date,

	would have rendered any of the Warranties (whether under the Original Placing Agreement, the Amended and Restated Placing Agreement or this Agreement) untrue, inaccurate or misleading in any respect;


	“Stamp Tax”			means any stamp, documentary, registration or capital duty or tax (including, without limitation, stamp duty, SDRT and any other similar duty or similar tax) and any fines, penalties and/or interest relating thereto;

	“Supplementary Prospectus”			means any prospectus supplementary to the Prospectus published by the Company pursuant to section 87G of FSMA;

	“Tax” or “Taxation”			means all forms of taxation and statutory, governmental, state, provincial, local governmental or municipal impositions, duties, contributions and levies (including, for the avoidance of doubt, Stamp Tax), in each case in the nature of taxation, duty, contribution or levy, whether of the United Kingdom or elsewhere in the world whenever imposed and whether chargeable directly or primarily against or attributable directly or primarily to a Group Company or any other person and all penalties, charges, costs and interest relating thereto;

	“Tax Authority”			means any government, state, municipal, local, federal or other fiscal, revenue, customs or excise authority, body or official anywhere in the world having the power to impose, collect or administer any Tax or exercising a fiscal, revenue, customs or excise function with respect to Tax (including, without limitation, H.M. Revenue and Customs);

	“The New York Stock Exchange”			means The New York Stock Exchange, Inc.;

	“Time of Sale”			means a time falling within the period commencing at 7.00 a.m. on the first Dealing Day following the Closing Date and ending on the second Dealing Day after the Company has publicly announced the number of Accepted Shares, as is notified to the Company and HM Treasury by the Joint Bookrunners as the time of sale with respect to any subscriber(s) for Non-Accepted Shares procured by the Joint Bookrunners, pursuant to clauses 3.5 and 4.1;

	“Time of Sale Documents”			means the documents specified as being delivered at, or with respect to, the Time of Sale in Part IV of Schedule 2;


“Treasury Solicitor”	has the same meaning as in the Treasury Solicitor Act 1876;

“UBS Indemnified Persons”	means:

	(a)	UBS and any subsidiary, branch or affiliate of UBS;

	(b)	a person who is, on or at any time after the date of this Agreement, a director, officer, partner or employee of an undertaking specified in sub paragraph (a) above; and

	(c)	UBS, their selling agents and each person, if any, who controls UBS within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act and UBS’s respective affiliates, subsidiaries, branches, affiliates, associates and holding companies and the subsidiaries of such subsidiaries, branches, affiliates, associates and holding companies and each of such person’s respective directors, officers and employees;

	and “ UBS Indemnified Person ” shall be construed accordingly;

“UK Listing Authority”	means the Financial Services Authority acting in its capacity as the competent authority for the purposes of Part VI of the FSMA and in the exercise of its functions in respect of the admission of securities to the Official List otherwise than in accordance with Part VI of the FSMA;

“United States”	means the United States of America, its territories and possessions, any state of the United States and the District of Columbia;

“US Shareholders”	means Ordinary Shareholders who are within the United States or are holding Ordinary Shares on behalf of, or for the account or benefit of, persons within the United States for whom they are acting without investment discretion (but only with respect to any such holdings);

“VAT”	means:


	(a)	any tax imposed in conformity with the council directive of 28 November 2006 on the common system of value added tax (EC Directive 2006/112) (including, in relation to the United Kingdom, value added tax imposed by the VATA and legislation and/or any regulations supplemental thereto); and

	(b)	any other tax of a similar nature (whether imposed in a member state of the European Union in substitution for or in addition to the tax referred to in sub-paragraph (a) or imposed elsewhere);

“VATA”	means the Value Added Tax Act 1994;

“Verification Materials”	means verification materials in a form acceptable to HM Treasury and to the Joint Sponsors and to CGMEL, acting reasonably, evidencing the verification process supporting the accuracy of certain information contained in the Issue Documents, including the verification questions and the answers thereto, signed by each of the persons named therein as being responsible for such answers;

“Warranties”	means the representations, warranties and undertakings contained in Schedule 3;

“Whitewash Resolution”	means the resolution in a form acceptable to HM Treasury, acting reasonably, pursuant to which Ordinary Shareholders are to waive any obligation of HM Treasury to make an offer under Rule 9 of the City Code on Takeovers and Mergers in relation to the matters contemplated by the Agreement;

“Wholly-Owned Entity”	has the meaning given in clause 18.1; and

“Working Capital Report”	means the working capital review report to be prepared by PricewaterhouseCoopers LLP, in the form to be agreed, relating to the Group, to be dated the date of the Prospectus.


1.2	Any reference to a document being “ in the agreed form ” or “ form to be agreed ” means in the form of the draft or proof thereof signed or initialled for the purpose of identification by Linklaters LLP (on behalf of the Company), Slaughter and May (on behalf of HM Treasury) and Freshfields Bruckhaus Deringer LLP (on behalf of the Joint


	Sponsors and/or the Joint Bookrunners) or (in the case of documents to be agreed) in such form as may be satisfactory to HM Treasury and the Joint Bookrunners, the Joint Sponsors and the Joint Bookrunners (acting reasonably), and initialled, for the purposes of identification only, by such firms on behalf of their clients. No such initialling shall imply approval of all or any part of its contents by or on behalf of the person initialling it or any of the parties to this Agreement.

1.3	The Interpretation Act 1978 shall apply to this Agreement in the same way as it applies to an enactment.

1.4	References to a statutory provision include any subordinate legislation made from time to time under that provision.

1.5	References to a statutory provision include that provision as from time to time modified, supplemented or re-enacted so far as such modification or re-enactment applies or is capable of applying to any transactions entered into in accordance with this Agreement.

1.6	In this Agreement, a reference to a “subsidiary undertaking” or “parent undertaking” is to be construed in accordance with section 1162 (and Schedule 7) of the CA 2006 and a “subsidiary” or “holding company” is to be construed in accordance with section 1159 of the CA 2006.

1.7	Expressions defined or used in the Regulations shall have the same meaning in this Agreement (except where the context otherwise requires).

1.8	References to this Agreement include its Schedules and references in this Agreement to clauses, sub-clauses and Schedules are to clauses and sub-clauses of, and Schedules to, this Agreement.

1.9	The obligations of the Joint Sponsors and the Joint Bookrunners under this Agreement shall be several and not joint or joint and several. No provision of this Agreement shall impose any liability on any of the Joint Sponsors or the Joint Bookrunners for, nor shall the rights or remedies of any of the Joint Sponsors or the Joint Bookrunners be adversely affected by, any act or omission by any other Joint Sponsor or any other Joint Bookrunner or for any breach by the other Joint Sponsor of the provisions of this Agreement. The obligations owed by the Company to the Joint Sponsors and the Joint Bookrunners are owed to them as separate and independent obligations, and each Joint Sponsor and each Joint Bookrunner shall have the right to protect and enforce its rights hereunder without joining any other Joint Sponsor or the Joint Bookrunners in any proceedings.

1.10	Headings shall be ignored in construing this Agreement.

1.11	References to time of day are to London time unless otherwise stated.

1.12	When construing any provision relating to VAT, any reference in this Agreement to any person shall (where appropriate) be deemed, at any time when such person is a member of a group of companies for VAT purposes, to include a reference to the representative member of such group at such time.


1.13	Any reference to any indemnity, covenant to pay or payment (a “ Payment Obligation ”) being given or made on an “after-Tax basis” or expressed to be calculated on an “after-Tax basis” means that, in calculating the amount payable pursuant to such Payment Obligation (the “ Payment ”), there shall be taken into account (if and to the extent that the same has not already been taken into account in the calculation of the Payment):

	(A)	any Tax suffered by the person entitled to receive the Payment to the extent that it arises as a result of the matter giving rise to the Payment Obligation or as a result of receiving, or being entitled to receive, the Payment; and

	(B)	any relief, exemption, allowance or credit which is available to set against any Tax otherwise payable or against any income, profits or gains for Tax purposes, and any right to any refund or reimbursement of any Tax, which in each case is available to the person entitled to receive the Payment if and to the extent that the same arises as a result of the matter giving rise to the Payment Obligation or as a result of receiving, or being entitled to receive, the Payment,

	such that the person entitled to receive the Payment is in the same economic position after Tax that it would have been in if the matter giving rise to the Payment Obligation had not occurred.

1.14	Each reference in this Agreement to the Joint Sponsors, the Joint Bookrunners or any of them by any description or in any capacity includes a reference to it in each other capacity in which it may act pursuant to this Agreement or otherwise with the agreement of the Company in connection with the Open Offer and/or the publication of the Circular and/or Accepted Shares Admission and/or Non-Accepted Shares Admission.

1.15	Any reference to the Joint Sponsors, the Joint Bookrunners or to HM Treasury approving or agreeing the form of an Issue Document, shall be a reference to such approval or agreement being given solely for the purposes of this Agreement.

1.16	A reference to “ certificated ” or “ certificated form ” in relation to a share or other security is a reference to a share or other security title to which is recorded on the relevant register of the share or other security as being held in certificated form.

1.17	A reference to “ uncertificated ” or “ uncertificated form ” in relation to a share or other security is a reference to a share or other security title to which is recorded on the relevant register of the share or other security as being held in uncertificated form, and title to which, by virtue of the Regulations, may be transferred by means of CREST.

1.18	Words and expressions defined in the Companies Acts shall bear the same meaning.

2.	CONDITIONS

2.1	The obligations of HM Treasury and of the Joint Sponsors and the Joint Bookrunners under this Agreement (save for the obligations under clauses 3.4, 3.5 and 3.6 and such other obligations hereunder which fall due for performance before Accepted Shares Admission) are conditional on:


	(A)	the release of the Press Announcement via a Regulatory Information Service by 8.00 a.m. on the Effective Date;

	(B)	there having occurred, as at Accepted Shares Admission, no material default or breach by the Company of the terms of this Agreement;

	(C)	the New Shares being validly created under applicable law and forming part of the Company’s authorised but unissued share capital;

	(D)	the Directors being duly authorised under applicable law to allot and issue the New Shares in accordance with the terms of this Agreement;

	(E)	the Company having obtained such approvals, authorisations, permits and consents as may be required by any government, state or other regulatory body and all necessary filings having been made and all necessary waiting periods having expired, in each case in any part of the world and as a consequence of the actions contemplated by this Agreement;

	(F)	HM Treasury having obtained such approvals, authorisations, permits and consents as may be required by any governmental, state or other regulatory body in any part of the world and all necessary filings having been made and all necessary waiting periods having expired, in each case as a consequence of the issue of New Shares and/or redemption of the Preference Shares contemplated by this Agreement;

	(G)	each Warranty in Part I of Schedule 3 of this Agreement being true and accurate in all material respects and not misleading in any material respect as at the Effective Date and when given under clause 11.1 with respect to HM Treasury and when given under clause 11.1A in respect of the Joint Bookrunners and remaining true and accurate in all material respects and not misleading in any material respect on the Posting Date, at such time as a Supplementary Prospectus shall be issued in accordance with this Agreement before Accepted Shares Admission and immediately prior to Accepted Shares Admission by reference to the facts and circumstances then existing;

	(H)	each Warranty in Part II of Schedule 3 of this Agreement being true and accurate in all material respects and not misleading in any material respect on the Posting Date and remaining true and accurate in all material respects and not misleading in any material respect, at such time as a Supplementary Prospectus shall be issued in accordance with this Agreement before Accepted Shares Admission and immediately prior to Accepted Shares Admission by reference to the facts and circumstances then existing;

	(I)	there being, in the opinion of HM Treasury (acting in good faith), no Material Adverse Effect;

	(J)	there being no contracts or arrangements to which the Company or any member of the Group are party which would become capable of being terminated by a party thereto (other than a member of the Group) or would permit such a party to exercise a right against a member of the Group or may


	otherwise give rise to material adverse consequences for the Group as a whole, in each case as a result of the issue of New Shares and/or redemption of the Preference Shares contemplated by this Agreement, in each case where this or any other consequences thereof would be, or would be reasonably likely to be, material in the context of the business of the Group or the Open Offer, redemption of the Preference Shares or any subscription for New Shares by HM Treasury, Qualifying Shareholders or subscriber(s) procured by the Joint Bookrunners pursuant to clause 3.5 or clause 4.1, Accepted Shares Admission, Non-Accepted Shares Admission or post-Accepted Shares or Non-Accepted Shares Admission dealings in the Ordinary Shares;

(K)	the delivery to HM Treasury and to the Joint Sponsors and CGMEL, as applicable:

	(i)	simultaneously with the execution of this Agreement, of the documents listed in Part I of Schedule 2;

	(ii)	prior to despatch of the Circular, of the documents listed in Part II of Schedule 2;

	(iii)	prior to the publication of the Prospectus, of the documents listed in Part III of Schedule 2;

	(iv)	at the date of each Supplementary Prospectus issued prior to Accepted Shares Admission, the documents (or “bring downs” from such documents) listed in Part III of Schedule 2 (as applicable) requested by the Joint Sponsors, CGMEL and by HM Treasury in respect of such Supplementary Prospectus and dated as of such date;

	(v)	immediately prior to Accepted Shares Admission, of the documents listed in Part IV of Schedule 2,

	in each case to the extent not already delivered and provided that HM Treasury shall not be entitled to rely on this condition in the case of non-delivery of any document which is not material, in the respective judgments of HM Treasury and the Joint Sponsors and CGMEL, in the context of the Open Offer or the applications for Accepted Shares Admission and Non-Accepted Shares Admission or the redemption of the Preference Shares;

(L)	the GM being duly convened and held no later than the GM Date;

(M)	subject to applicable law, (including directors’ fiduciary duties), the Directors recommending (without qualification and maintaining such recommendation) that the Company’s shareholders vote in favour of the Resolutions;

(N)	subject to applicable law, the Directors voting all Ordinary Shares held by them in favour of the Resolutions;

(O)	the Company’s shareholders passing the Resolutions (without amendment) at the GM;


	(P)	the Prospectus and, to the extent necessary, the Circular, being approved by the FSA in accordance with the Prospectus Rules, the Listing Rules and FSMA;

	(Q)	the Company having reached agreement with the FSA as to the redemption of the Preference Shares on or before the date of Accepted Shares Admission;

	(R)	the Circular being approved by the Panel in relation to the Whitewash Resolution;

	(S)	subject to satisfaction of the condition set out in clause 2.1(P), the Prospectus being made available to Qualifying Shareholders (other than Prohibited Shareholders) with, as relevant, an Application Form, in accordance with clause 3 and in accordance with the Prospectus Rules;

	(T)	subject to satisfaction of the conditions set out in clauses 2.1(P) and 2.1(R), the posting to Qualifying Shareholders of the Company (other than Prohibited Shareholders) of the Circular and the Form of Proxy;

	(U)	the Company having applied for Accepted Shares Admission and admission of the Accepted Shares to CREST as Participating Securities and all of the conditions to such admissions having been satisfied, in each case, on or before Accepted Shares Admission;

	(V)	the Company allotting, subject only to Accepted Shares Admission, the Accepted Shares to Open Offer Acceptors in accordance with clauses 3 and 5;

	(W)	the Directors having waived all change of control provisions set out in their respective service contracts which would otherwise be or have been triggered as a result of the redemption of the Preference Shares and/or the issue of New Shares contemplated by this Agreement;

	(X)	no event referred to in Section 87G of the FSMA arising between the time of publication of the Prospectus and the time of Accepted Shares Admission and no Supplementary Prospectus being published by or on behalf of the Company before Accepted Shares Admission which, in any of the foregoing cases, HM Treasury or the Joint Sponsors or CGMEL consider in their respective sole judgment acting in good faith to be (singly or in the aggregate) material in the context of the business of the Group, the Open Offer, the redemption of the Preference Shares, any subscription for New Shares by HM Treasury, Ordinary Shareholders or subscriber(s) procured by the Joint Bookrunners pursuant to clause 3.5 or clause 4.1, Accepted Shares Admission, Non-Accepted Shares Admission or post-Accepted Shares Admission or Non-Accepted Shares Admission dealings in the Ordinary Shares;

	(Y)	Accepted Shares Admission occurring at or before 8.00 a.m. on 7 July 2009 (or such later time or date as HM Treasury may agree);

	(Z)	the Prospectus and the Circular containing and not omitting disclosure of any fact, matter or circumstance material in the context of the Group or the Open Offer, any subscription for New Shares by HM Treasury, Ordinary Shareholders


		or subscriber(s) procured by the Joint Bookrunners pursuant to clause 3.5 or clause 4.1, the redemption of the Preference Shares or Accepted Shares Admission, Non-Accepted Shares Admission or post-Accepted Shares Admission or Non-Accepted Shares Admission dealings in the Ordinary Shares and the Circular containing all such disclosures as are required by the Listing Rules;

	(AA)	HM Treasury, having consulted with the Company, being satisfied, as at Accepted Shares Admission, that the arrangements contemplated by this Agreement continue to be proportionate and appropriate for the maintenance of the financial stability of the Company, each in the context of the general economic and market conditions then prevailing; and

	(BB)	the Company not having indicated an intention not to participate in the APS.


2.2	Subject to the fiduciary duties of the Directors, the Company shall use all reasonable endeavours to procure the fulfilment of the conditions set out in clause 2.1 and, where applicable, by the times and dates stated therein (or such later times and/or dates as HM Treasury may agree) and shall notify HM Treasury forthwith in the event that the Company or any of the Directors becomes aware that any of the conditions set out in clause 2.1 has become or might reasonably be expected to become incapable of fulfilment by the time and/or date stated in such condition (or such later time and/or date as HM Treasury may agree) or at all. In addition, the Company shall provide HM Treasury with such information as it may reasonably require to enable it to ascertain whether the condition in clause 2.1(J) has been satisfied.

2.3	Each Joint Sponsor shall use its reasonable endeavours to provide to the Company such assistance as the Company shall reasonably request in connection with the procedural steps required for the performance of the obligations of the Company set out in clauses 2.1(P), (U), and (Y).

2.4	Subject to clause 2.7, HM Treasury shall be entitled, in its absolute discretion and upon such terms as it shall think fit, to waive fulfilment of all or any of the conditions set out in clause 2.1 (other than clauses 2.1(C) and 2.1(E), 2.1(O) (save in relation to the Whitewash Resolution), 2.1(P) and 2.1(Y)) or to extend the time provided for fulfilment of any of the conditions set out in clause 2.1 in respect of all or any part of the performance thereof.

2.5	The Company shall be entitled to waive fulfilment of the condition set out in clause 2.1(E).

2.6	If the condition set out in clause 2.1(E) is not satisfied at the time at which all other conditions set out in clause 2.1 are satisfied or, to the extent permitted, waived, the parties shall treat such condition as waived (and the Company shall be treated as having waived such condition) if the relevant matter in respect of which the condition has not been satisfied is not likely to lead to material consequences for the Company or the Directors and is not material in the judgment of HM Treasury, the Joint Sponsors or the Joint Bookrunners in the context of the Open Offer, the subscription of Non-Accepted Shares by subscribers procured by the Joint Bookrunners pursuant to clauses 3.5 and 4.1, the redemption of the Preference Shares, Accepted Shares


	Admission, Non-Accepted Shares Admission or post-Accepted Shares Admission or Non-Accepted Shares Admission dealings in the Ordinary Shares and, in all cases, for the avoidance of doubt, taking account of the financial circumstances of the Company.

2.7	If:

	(A)	any of the conditions set out in clause 2.1 (other than clause 2.1(AA)) is not fulfilled or, if capable of waiver pursuant to clause 2.4 or clause 2.5, waived, or treated as waived pursuant to clause 2.6, by the time and/or date specified therein (or such later time and/or date as HM Treasury may agree); and

	(B)	HM Treasury does not consider it to be necessary that the arrangements contemplated by this Agreement proceed to completion in order to maintain the financial stability of the United Kingdom,

	or

	(C)	the condition set out in clause 2.1(AA) is not fulfilled as at Accepted Shares Admission,

	then on notice from HM Treasury to the Joint Sponsors and the Company, the Joint Sponsors shall, on behalf of the Company, withdraw any application made to the FSA and/or the London Stock Exchange in connection with Accepted Shares Admission and Non-Accepted Shares Admission, this Agreement shall cease and determine and no party to this Agreement shall have any claim against any other party to this Agreement for costs, damages, compensation or otherwise except as provided in clause 2.9.

2.8	Without prejudice to the rights of HM Treasury, the Joint Sponsors and CGMEL under clause 13, if any of the conditions set out in clause 2.1 are not fulfilled or, if capable of waiver pursuant to clause 2.4 or clause 2.5, waived, or treated as waived pursuant to clause 2.6, by the date and/or time specified herein (or such later time as HM Treasury may agree) and if HM Treasury does consider it necessary that the arrangements contemplated by this Agreement proceed to completion in order to maintain the financial stability of the United Kingdom, HM Treasury shall treat as waived any outstanding conditions in clause 2.1 (other than any condition referred to as not being waivable by HM Treasury).

2.9	Where this Agreement has terminated pursuant to clause 2.7:

	(A)	such termination shall be without prejudice to any accrued rights or obligations under this Agreement;

	(B)	the Company shall pay any commissions, fees and expenses as are payable in such circumstance under and in accordance with clauses 9.1 and 9.2; and

	(C)	the provisions of this clause 2.9 and clauses 1, 9, 10.3, 10.4, 10.12, 11, 12, 13, 14, 16, 17, 18, 19 and 20 shall remain in full force and effect.

2.10	HM Treasury and the Company shall use all reasonable endeavours to procure that, by no later than Accepted Shares Admission, all approvals, authorisations and consents as


	may be required from any government, state or other regulatory body shall have been obtained in order that the conditions set out in clauses 2.1(E) and 2.1(F) may be satisfied. The Company and HM Treasury shall co-operate with each other (at the cost of the Company) in order that the conditions set out in clauses 2.1(E) and 2.1(F) may be satisfied, which co-operation shall include the Company:

	(A)	promptly providing to HM Treasury and to HM Treasury’s lawyers and other advisers where appropriate, any necessary information and documents reasonably required for the purpose of obtaining such approvals, authorisations, permits and consents and making such necessary filings;

	(B)	promptly notifying HM Treasury or HM Treasury’s lawyers and other advisers where appropriate, of any material communications received in the course of obtaining such approvals, authorisations, permits and consents and making such necessary filings; and

	(C)	generally supporting HM Treasury in obtaining such approvals, authorisations, permits and consents and making such necessary filings.

2.11	Upon Accepted Shares Admission, each of the conditions set out in clause 2.1 shall, to the extent not fulfilled, be deemed to have been fulfilled or waived.

3.	THE OPEN OFFER AND APPOINTMENTS

3.1	The Company hereby:

	(A)	appoints (i) each of UBS and JPMC as joint sponsors in connection with the applications for Accepted Shares Admission and Non-Accepted Shares Admission and, if and to the extent that a sponsor is required by the Listing Rules to be appointed in respect of or to provide guidance in connection with the Circular, the publication of the Circular, and (ii) each of CGMEL, UBS and JPMC as joint bookrunners and joint placing agents in connection with the Open Offer and each of CGMEL, UBS and JPMC accepts such appointments;

	(B)	agrees that such appointments shall confer on each of the Joint Sponsors and each of the Joint Bookrunners all powers, authorities and discretions on behalf of the Company which are necessary for or incidental to the performance of its function as joint sponsor, joint bookrunner and/or joint placing agent, as the case may be, to the Open Offer (including the power to appoint sub-agents or to delegate the exercise of any of its powers, authorities or discretions to such persons as it may think fit); and

	(C)	agrees to ratify and approve all documents, acts and things which each of the Joint Sponsors and Joint Bookrunners shall lawfully do in the exercise of such appointments, powers, authorities and discretions.

3.2	This Agreement amends and restates the Amended and Restated Placing Agreement. For the avoidance of doubt, this Agreement does not affect any accrued rights (a) of the Company or HM Treasury under the Original Placing Agreement and/or the Amended


	and Restated Placing Agreement, and (b) of the Joint Sponsors and/or the Joint Bookrunners under the Amended and Restated Placing Agreement.

3.3	The Company hereby agrees, subject always to clause 6.1, to invite Qualifying Shareholders who are not Prohibited Shareholders by means of the Prospectus and, as relevant, the Application Form to apply to subscribe for the New Shares at the Issue Price and otherwise on the terms and conditions set out therein. The Company shall procure that, under the terms of the Open Offer, Qualifying Shareholders who are not Prohibited Shareholders shall be entitled to subscribe for their pre-emptive entitlements.

3.4	As soon as practicable after 12.00 p.m. on the Closing Date and by not later than 5.00 p.m. on 8 June 2009, the Company will (or will procure that the Receiving Agent will) notify the Joint Bookrunners and HM Treasury in writing of the number of Non-Accepted Shares.

3.5	On the terms and subject to the provisions of this Agreement and on the basis of the information in the Issue Documents and in reliance on the representations, warranties and undertakings of the Company set out in this Agreement, each of the Joint Bookrunners hereby agrees severally (and not jointly or jointly and severally) as agent of the Company to use reasonable endeavours to procure subscriber(s) for any Non-Accepted Shares by no later than 4.30 p.m. on the second Dealing Day after the date on which the Company publicly announces the number of Accepted Shares (or, at their discretion, for as many as can be so procured) if an amount which is not less than the Minimum Rump Placing Amount can be obtained from such subscriber(s). Any subscriber(s) so procured by the Joint Bookrunners shall subscribe the Non-Accepted Shares at the Issue Price and any amount in excess of the Issue Price shall be paid by the subscriber(s) and received by the Joint Bookrunners on the basis that the same shall be applied in meeting the Joint Bookrunners’ expenses of procuring such acquisition (including any applicable brokerage, transaction levies, trading fees, currency conversion costs, commissions and amounts in respect of VAT thereon which are not recoverable) and, other than in relation to New Shares representing the aggregate of fractional entitlements for which subscribers are procured pursuant to clause 4.1, that, subject to clause 5.4(C), any balance remaining shall be received as agent for (and on trust for) and payable to Non-Accepting Shareholders ( pro rata to the number of New Shares each such Non-Accepting Shareholder did not validly apply to subscribe for (or was treated as having not validly applied to subscribe for)) in accordance with clause 5.4(C). The Joint Bookrunners shall not be obliged to endeavour to procure such subscriber(s) and may, at any time on or after the date on which the Company publicly announces the number of Accepted Shares, cease or decline to endeavour to procure any such subscriber(s) if, in their reasonable opinion (and following consultation with the Company), it is unlikely that any such subscriber(s) can be so procured by such time and on the terms referred to above, or if the procurement of subscriber(s) would give rise to a breach of law, whereupon the Joint Bookrunners shall not be under any obligation to endeavour to procure any such subscriber(s) pursuant to this clause 3.5. The parties hereto acknowledge and understand that, if having used such reasonable endeavours, the Joint Bookrunners are unable to procure subscriber(s) for such Non-Accepted Shares, or exercise their right as described in this clause 3.5 to cease or decline to endeavour to procure any such subscriber(s) for any such Non-Accepted Shares, or if any subscriber(s) who are so procured fail to meet their payment obligations, for all or any of the Non-Accepted


	Shares, the Joint Bookrunners shall not themselves be obliged to subscribe for such Non-Accepted Shares which shall be Residual Shares to be taken up solely by HM Treasury in accordance with clause 7.3.

3.6	The Joint Bookrunners agree to consult regularly with HM Treasury and the Company whilst performing the procedure set out in clause 3.5 and clause 4.1 in relation to the status of their endeavours to procure subscriber(s) for the Non-Accepted Shares and to provide updates as to the identity of subscriber(s) for the Non-Accepted Shares and the number of Non-Accepted Shares for which such subscriber(s) have been procured on at least a daily basis. Subject to compliance with this clause 3 and with the restrictions in clause 6, each of the Joint Bookrunners shall have discretion to procure subscriber(s) for Non-Accepted Shares in the manner and otherwise as it thinks fit in compliance with applicable laws as are customarily complied with by banks of international reputation.

3.6A	Except with the consent of HM Treasury and other than in the ordinary course of business not connected to the Open Offer or the procuring of subscribers as contemplated by this Agreement, the Company undertakes not to (directly or indirectly) agree or pay or offer any fee, commission or other form of consideration to the subscriber(s) of Non-Accepted Shares procured pursuant to clause 3.5 or clause 4.1 (or for the purposes of procuring them). For the avoidance of doubt and subject to the preceding sentence, this clause 3.6A does not apply to any fee, commission or other form of consideration agreed with or paid to or offered by a Joint Bookrunner to any subscriber of Non-Accepted Shares procured by it pursuant to clause 3.5 or clause 4.1 (or for the purposes of procuring them).

	In addition, the Joint Bookrunners shall, not less than two Business Days in advance of the Closing Date, inform HM Treasury and the Company as to the basis on which they propose to conduct the procedures in clause 3.5 or clause 4.1 (and shall consult with HM Treasury and the Company as far as practical before departing materially from such basis.

3.7	The Joint Bookrunners will procure that a schedule is delivered to the Company (or the Registrar on behalf of the Company) and to HM Treasury no later than 4.30 p.m. on the second Dealing Day following the date on which the Company publicly announces the number of Accepted Shares following completion of the procedure set out in clause 3.5 showing the names of the subscriber(s) procured by the Joint Bookrunners pursuant to clause 3.5 or clause 4.1 and allocated Non-Accepted Shares (and the number of New Shares comprised in such allocations) and shall specify whether such shares are to be issued in certificated or uncertificated form together with details of (and the number of New Shares comprised in) the proposed number of Residual Shares to be subscribed for by HM Treasury (or its nominee) pursuant to clause 7.3 (the “ Placing Schedule ”). HM Treasury, the Company and the Joint Bookrunners will consult each other in respect of, and agree a final version of, the Placing Schedule promptly after, and in any event within two hours of, its receipt pursuant to this clause 3.7.

3.8	Without prejudice to the Joint Sponsors’ obligations under Chapter 8 of the Listing Rules, the Company acknowledges and agrees that none of the Joint Sponsors nor the Joint Bookrunners nor HM Treasury is responsible for and has not authorised and will not authorise the contents of any Issue Document and that none of the Joint Sponsors nor the Joint Bookrunners nor HM Treasury shall be responsible for verifying the


	accuracy, completeness or fairness of any information in any of the Issue Documents (or any supplement or amendment to any of the foregoing).

3.9	The Company consents to each Joint Sponsor or CGMEL disclosing to the FSA at any time before or after Accepted Shares Admission or Non-Accepted Shares Admission, any information that such Joint Sponsor is required to disclose to satisfy its obligations as a sponsor under the Listing Rules and/or the DTRs provided that, where legally permitted and practicable, such Joint Sponsor or CGMEL notifies the Company prior to making, and consults as to the timing and manner of, such disclosure.

3.10	The Company undertakes that it will appoint a receiving agent to act as registrar and receiving agent in connection with the Open Offer on terms acceptable to HM Treasury and in particular that:

	(A)	until Accepted Shares Admission, all proceeds of subscriptions for New Shares received from Qualifying Shareholders pursuant to the Open Offer will be held for the benefit of the relevant Qualifying Shareholders (including, if relevant, HM Treasury) under the Open Offer, in proportion to the amounts they have each paid;

	(B)	on and after Accepted Shares Admission and up to Non-Accepted Shares Admission, to the extent that such amounts are to be used to subscribe for the New Shares (which, for the avoidance of doubt, will not include any amounts received from subscriber(s) procured by the Joint Bookrunners pursuant to clause 3.5 which are in excess of the Minimum Rump Placing Amount which will, subject to clause 5.4(C), at all times be held as agent for and on trust for Non-Accepting Shareholders pro rata to the number of New Shares each such Non-Accepting Shareholder did not validly apply to subscribe for (or was treated as having not validly applied to subscribe for)), such amounts will be held as agent for and for the benefit of the Company, such amount to be used solely for the purpose of redeeming the Preference Shares in accordance with the terms of this Agreement; and

	(C)	immediately upon redemption of the Preference Shares and until completion of the transfer of such amount to HM Treasury, such amount will be held on trust for the benefit of HM Treasury,

	and that the Receiving Agent will be admitted as registrar and receiving agent in respect of CREST. The Company shall not unreasonably refuse consent to executing such documents and doing such things as HM Treasury may reasonably require to ensure that amounts received by the Receiving Agent in connection with the Open Offer (other than any amounts received from subscriber(s) procured by the Joint Bookrunners pursuant to clause 3.5 which are in excess of the Minimum Rump Placing Amount which will, subject to clause 5.4(C), at all times be held as agent for and on trust for Non-Accepting Shareholders pro rata to the number of New Shares each such Non-Accepting Shareholder did not validly apply to subscribe for (was treated as not having validly applied to subscribe for)) are applied to redeem the Preference Shares in accordance with the terms of this Agreement.


3.11	The Company shall give all such assistance and provide all such information as each of the Joint Sponsors and the Joint Bookrunners may reasonably require for the making and implementation of the Open Offer, including Accepted Shares Admission and Non-Accepted Shares Admission, and will do (or procure to be done) all such things and execute (or procure to be executed) all such documents as may be reasonably necessary or desirable to be done or executed by the Company or by its officers, employees or agents in connection therewith.

3.12	The Company undertakes to HM Treasury to do all such acts and things as may be required and as HM Treasury may require in connection with, and in order to achieve, Non-Accepted Shares Admission, and in order for any Residual Shares which are to be subscribed by HM Treasury pursuant to clause 7.3 to be duly authorised, validly issued and (upon final allotment) admitted to listing on the Official List and to trading on the London Stock Exchange’s main market for listed securities, including, without limitation, appointing sponsors, executing documents, paying fees, giving undertakings, submitting all application forms and documents, engaging with relevant regulatory authorities, publishing any supplementary prospectus, giving instructions to third parties, passing board resolutions, obtaining and maintaining authorities to allot shares and delivery of documents pursuant to clause 3.26.

3.13	The Company undertakes that it shall release the Press Announcement to a Regulatory Information Service at, or as soon as practicable after, 7.00 a.m. on the Effective Date and the Second Press Announcement to a Regulatory Information Service at, or as soon as practicable after, 10.00 a.m. on 18 May 2009.

3.14	The Company undertakes to:

	(A)	make an application:

		(i)	(within the meaning of and for the purposes of the Prospectus Rules) to the FSA for the approval of the Prospectus and, to the extent required under the Listing Rules, the Circular; and

		(ii)	to the Panel for the approval of the Circular in relation to the Whitewash Resolution; and

	(B)	apply to the FSA and to the London Stock Exchange for Accepted Shares Admission and Non-Accepted Shares Admission and further undertakes to provide such information, supply and/or execute such documents, pay such fees, give such undertakings and do all such acts and things as may be required (a) by the UK Listing Authority and the London Stock Exchange for the purposes of obtaining formal approval of the Circular and the Prospectus, any Supplementary Prospectus and obtaining Accepted Shares Admission and Non-Accepted Shares Admission, and (b) to comply with the Listing Rules, the Prospectus Rules, the Admission and Disclosure Standards, FSMA and the Companies Acts, and (c) by the UK Listing Authority for the passporting of the Prospectus into any Relevant Member State in which New Shares will be offered to the public (within the meaning set out in clause 5.6) for the purposes of the Prospectus Directive, and (d) by Euroclear for the purposes of obtaining permission for the admission of the New Shares as Participating Securities in


		CREST and (e) by the FSA and the London Stock Exchange, in each case to obtain the grant of Accepted Shares Admission and Non-Accepted Shares Admission. Subject to the fiduciary duties of the Directors, the Company will use all reasonable endeavours to obtain the grant of Accepted Shares Admission (subject only to the allotment of the relevant New Shares) by no later than 8.00 a.m. on 7 July 2009 (or such later time or date as HM Treasury may require in writing) and, without prejudice to clause 3.12, Non-Accepted Shares Admission (subject only to the allotment of the relevant New Shares) by no later than 8.00 a.m. on the date that is three Dealing Days after the Time of Sale (or such earlier or later date as HM Treasury and the Joint Bookrunners may agree in writing).

3.15	The Company undertakes that it shall not include any reference to HM Treasury or the Joint Sponsors or CGMEL in any of the Issue Documents without the prior written consent of HM Treasury or the Joint Sponsors or CGMEL, as applicable.

3.16	Subject to obtaining the approval of the Circular by the FSA (if and to the extent required under the Listing Rules) and the Panel in relation to the Whitewash Resolution, the Company shall procure that:

	(A)	the Circular and the Forms of Proxy are posted to Qualifying Shareholders (other than Prohibited Shareholders) on the Posting Date; and

	(B)	if required, a copy of the Circular is filed with the FSA pursuant to the Listing Rules and, if required, with the Panel.

3.17	Subject to obtaining the approval of the Prospectus by the FSA and such other regulators as may be appropriate the Company shall procure that:

	(A)	the Prospectus is made available to Qualifying Shareholders (other than Prohibited Shareholders) in accordance with the Prospectus Rules subject to clause 6;

	(B)	a copy of the Prospectus is filed with the FSA pursuant to the Prospectus Rules;

	(C)	copies of the Prospectus, together with any other required documents, are made available to the public by or on behalf of the Company in accordance with the Prospectus Rules;

	(D)	Application Forms are posted to, amongst others, all Qualifying Non-CREST Shareholders (other than Prohibited Shareholders); and

	(E)	the Open Offer Entitlements of Qualifying CREST Shareholders (other than Prohibited Shareholders) are credited to their respective stock accounts on the first Dealing Day after the Ordinary Shares go ‘ex’ the entitlement to apply under the Open Offer.

3.18	As soon as practicable after the Posting Date, the Company shall procure delivery to Euroclear of security application forms in a form acceptable to HM Treasury and to the Joint Sponsors and the Joint Bookrunners, acting reasonably, in respect of the Open


	Offer Entitlements and the New Shares and the Company undertakes to use reasonable endeavours to obtain permission for the admission of each of the Open Offer Entitlements and the New Shares as a Participating Security in CREST.

3.19	On the Posting Date, prior to the despatch of the Circular and the Application Form, the Company shall deliver, or procure there are delivered:

	(A)	if and to the extent that a sponsor is required by the Listing Rules to be appointed in respect of or to provide guidance in connection with the Circular, to the Joint Sponsors; and

	(B)	to HM Treasury,

	those documents listed in Part II of Schedule 2.

3.20	On the Posting Date, prior to publication of the Prospectus and on the date on which any Supplementary Prospectus is published, prior to the publication of such Supplementary Prospectus, the Company shall deliver or procure there are delivered to the Joint Sponsors, CGMEL and to HM Treasury those documents listed in Part III of Schedule 2.

3.21	At or with respect to the date of the Time of Sale, the Company shall deliver or procure there are delivered to the Joint Sponsors, CGMEL and to HM Treasury the documents listed in Part IV of Schedule 2.

3.22	The Company authorises the Joint Sponsors and CGMEL to date the Enablement Letter and deliver it to Euroclear.

3.23	Subject always to the fiduciary duties of the Directors, the Company shall procure that the GM is duly convened and held no later than 30 June 2009 or such later date as HM Treasury may require in writing (but in any case not later than 31 December 2009) and that the Resolutions are proposed at it.

3.24	Subject to clause 3.25, neither the Open Offer, nor any of its terms and conditions shall be varied, extended, amended or withdrawn without the prior written consent of HM Treasury, except as required by any applicable law or regulation.

3.25	If at any time between the Posting Date and Accepted Shares Admission or, if later, Non-Accepted Shares Admission: (i) any event shall have occurred as a result of which the Prospectus, as amended or supplemented from time to time, would include an untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made when such document is delivered, not misleading, or if for any other reason, including compliance with Section 87G of FSMA, it shall be necessary to amend or supplement the Prospectus, the Company will (without prejudice to the rights of HM Treasury, the Joint Sponsors and CGMEL under this Agreement) promptly:

	(A)	notify HM Treasury, the Joint Sponsors and CGMEL of the relevant circumstances;


	(B)	consult with HM Treasury, the Joint Sponsors and CGMEL in considering any requirement to publish a Supplementary Prospectus;

	(C)	consult with HM Treasury, the Joint Sponsors and CGMEL as to the contents of any Supplementary Prospectus and comply with all reasonable requirements of in relation thereto; and

	(D)	publish such Supplementary Prospectus in such manner as may be required by the Prospectus Rules.

3.26	Immediately prior to Accepted Shares Admission, the Company shall deliver or procure that there are delivered to the Joint Sponsors, CGMEL and to HM Treasury those documents listed in Part IV of Schedule 2.

3.27	Immediately prior to Non-Accepted Shares Admission, the Company shall deliver or procure that there are delivered to the Joint Sponsors, CGMEL and to HM Treasury those documents listed in Part IV of Schedule 2.

3.28	The Company shall procure (to the extent that it lies in its power to do so) to be communicated or delivered to the Joint Sponsors and the Joint Bookrunners all such information and documents (signed by the appropriate person where so required) as the Joint Sponsors and the Joint Bookrunners may reasonably require to enable them to discharge their obligations hereunder and pursuant to or in connection with obtaining Accepted Shares Admission and Non-Accepted Shares Admission, the Open Offer or as may be required to comply with the requirements of the FSMA, the FSA or the London Stock Exchange.

3.29	The Company confirms to the Joint Sponsors, CGMEL and to HM Treasury that a meeting or meetings of the Board has been held (and/or, in the case of (C), (D), (E) and (F) below, undertakes to hold such a meeting) which has (or will have, as the case may be):

	(A)	authorised the Company to enter into and perform its obligations under this Agreement;

	(B)	approved the form and release of the Press Announcement;

	(C)	approved the form of the Circular, Prospectus, and Form of Proxy and authorised and approved the publication of the Circular, Prospectus, the Form of Proxy, each of the other Issue Documents and all other documents connected with the Open Offer, the redemption of the Preference Shares and Accepted Shares Admission and Non-Accepted Shares Admission, as appropriate;

	(D)	approved the making of the Open Offer and the redemption of the Preference Shares;

	(E)	approved the making of the applications for Accepted Shares Admission and Non-Accepted Shares Admission; and


	(F)	authorised (or authorise, as the case may be) all necessary steps to be taken by the Company in connection with each of the above matters.

3.30	The Company irrevocably authorises each of the Joint Sponsors and each of the Joint Bookrunners to give to the Registrars and/or Euroclear any instructions consistent with this Agreement and/or the Issue Documents that it reasonably considers to be necessary for, or incidental to, the performance of its functions as joint sponsor or joint bookrunner or placing agent (as the case may be).

3.31	The Company acknowledges that the Joint Sponsors’ responsibilities as sponsors pursuant to the Listing Rules are owed solely to the FSA and that agreeing to act as sponsor does not of itself extend any duties or obligations to any one else, including the Company.

4.	FRACTIONAL ENTITLEMENTS

4.1	No later than 5.00 p.m. on 8 June 2009, the Company shall inform each of the Joint Bookrunners and HM Treasury of the number of New Shares representing the aggregate of fractional entitlements and the New Shares representing the aggregate of such fractional entitlements shall for the purposes of this Agreement, unless otherwise stated, be treated as Non-Accepted Shares. Each of the Joint Bookrunners hereby agrees severally (and not jointly or jointly and severally) as agent of the Company to use reasonable endeavours to procure subscriber(s) for any such shares by no later than 4.30 p.m. on the second Dealing Day after the date on which the Company publicly announces the number of Accepted Shares (or, at their discretion, for as many as can be so procured) if an amount which is not less than the Minimum Rump Placing Amount can be obtained from such subscriber(s). Any subscriber(s) so procured by the Joint Bookrunners shall subscribe such shares at the Issue Price and any amount in excess of the Issue Price shall be paid by the subscriber(s) and received by the Joint Bookrunners on the basis that the same shall be applied in meeting, as so permitted pursuant to this Agreement, the Joint Bookrunners’ expenses of procuring such acquisition (including any applicable brokerage, transaction levies, trading fees, currency conversion costs, commissions and amounts in respect of VAT thereon which are not recoverable). The Joint Bookrunners shall not be obliged to endeavour to procure such subscriber(s) and may, at any time on or after the date on which the Company publicly announces the number of Accepted Shares, cease or decline to endeavour to procure any such subscriber(s) if, in their reasonable opinion (and following consultation with the Company), it is unlikely that any such subscriber(s) can be so procured by such time and on the terms referred to above, or if the procurement of subscriber(s) would give rise to a breach of law, whereupon the Joint Bookrunners shall not be under any obligation to endeavour to procure any such subscriber(s) pursuant to this clause 4.1. The parties hereto acknowledge and understand that, if having used such reasonable endeavours, the Joint Bookrunners are unable to procure subscriber(s) for such shares, or exercise their right as described in this clause 4.1 to cease or decline to endeavour to procure any such subscriber(s) for any such shares, or if any subscriber(s) who are so procured fail to meet their payment obligations, for all or any of the shares, the Joint Bookrunners shall not themselves be obliged to subscribe for such shares which shall be Residual Shares to be taken up solely by HM Treasury in accordance with clause 7.3.


4.2	No later than Non-Accepted Shares Admission, and subject to compliance by the Company with the provisions of clauses 5.1 and 5.2, subject to clause 4.1, each Joint Bookrunner shall pay or procure payment to the Company (or to the Receiving Agent on behalf of the Company) of the net proceeds of the placing of the New Shares representing fractional entitlements, such amount to be used for the purpose of redeeming the Preference Shares in accordance with the terms of this Agreement. For the avoidance of doubt, each of the Joint Bookrunners will be under no obligation to pay or procure payment to the Company or to the Receiving Agent of an amount in excess of the amount received by them from subscriber(s) procured by them pursuant to clause 4.1.

5.	ALLOTMENT OF THE NEW SHARES, CONSIDERATION AND REGISTRATION

5.1	The Company shall, prior to Accepted Shares Admission, pursuant to a resolution of the Board, allot, conditional only on Accepted Shares Admission, the Accepted Shares to the Open Offer Acceptors in each case in accordance with the terms of the Open Offer Documents.

5.2	The Company shall, in relation to Non-Accepted Shares, as soon as reasonably practicable following agreement of the Placing Schedule pursuant to clause 3.7 and in any event prior to Non-Accepted Shares Admission:

	(A)	as regards the Non-Accepted Shares which are required by subscriber(s) procured by the Joint Bookrunners pursuant to clause 3.5 and clause 4.1 to be certificated shares, pursuant to a resolution of the Board, allot, conditional only upon Non-Accepted Shares Admission, such Non-Accepted Shares as certificated shares, subject to the terms of the Issue Documents, to the subscriber(s) of such Non-Accepted Shares in the proportions set out in the Placing Schedule; and

	(B)	as regards the Non-Accepted Shares which are required by subscriber(s) procured by the Joint Bookrunners pursuant to clause 3.5 and clause 4.1 to be uncertificated shares, pursuant to a resolution of the Board, allot, conditional only upon Non-Accepted Shares Admission, such Non-Accepted Shares as uncertificated shares, subject to the terms of the Issue Documents:

		(i)	in the case of subscriber(s) procured by CGMEL pursuant to clause 3.5 or clause 4.1, to such CREST account of such entity as will be notified by CGMEL to the Company no later than the Business Day prior to Non-Accepted Shares Admission, such person to hold such Non-Accepted Shares as nominee for such subscriber(s);

		(ii)	in the case of subscriber(s) procured by UBS pursuant to clause 3.5 or clause 4.1, to such CREST account of such entity as will be notified by UBS to the Company no later than the Business Day prior to Non-Accepted Shares Admission, such person to hold such Non-Accepted Shares as nominee for such subscriber(s); and

		(iii)	in the case of subscriber(s) procured by JPMC pursuant to clause 3.5 or clause 4.1, to such CREST account of such entity as will be notified


			by JPMC to the Company no later than the Business Day prior to Non-Accepted Shares Admission, such person to hold such Non-Accepted Shares as nominee for such subscriber(s).

5.3	No later than Non-Accepted Shares Admission, and subject to compliance by the Company with the provisions of clauses 5.1 and 5.2, subject to clause 3.5, each Joint Bookrunner shall:

	(A)	pay or procure payment to the Company (or to the Receiving Agent on behalf of the Company), of an amount equal to the product of (i) the number of Non-Accepted Shares subscribed for by (and for which payment in full has been received by it from) subscriber(s) procured by it pursuant to clause 3.5, and (ii) the Issue Price; and

	(B)	subject to clause 5.4(C), pay or procure payment to the Receiving Agent as agent for and on behalf of the relevant Non-Accepting Shareholders, of an amount equal to the aggregate amount it has received from subscriber(s) procured by it pursuant to clause 3.5, less the sum of (i) the amount calculated pursuant to clause 5.3(A), and (ii) the expenses of procurement (including any applicable brokerage, transaction levies, trading fees, currency conversion costs, commissions and amounts in respect of VAT thereon which are not recoverable).

	For the avoidance of doubt, each of the Joint Bookrunners will be under no obligation to pay or procure payment to the Company or to the Receiving Agent of an amount in excess of the amount received by them from subscriber(s) procured by them pursuant to clause 3.5 or clause 4.1. If any subscriber(s) who are so procured fail to meet their payment obligations, for all or any of the Non-Accepted Shares, the Joint Bookrunners shall not themselves by obliged to subscribe for such Non-Accepted Shares which shall be Residual Shares to be taken up solely by HM Treasury in accordance with clause 7.3.

5.4	Following payment of the monies to the Company (or to the Receiving Agent on behalf of the Company) in accordance with clause 5.3, the Company shall:

	(A)	procure that the Receiving Agent will, immediately upon Non-Accepted Shares Admission, effect the registration, without registration fee, of the persons referred to in clauses 5.1 and 5.2 above as the holders of the relevant New Shares and shall procure that such New Shares are credited to any relevant accounts as specified in CREST (without charging any administration fee);

	(B)	procure that the Receiving Agent will, immediately upon Non-Accepted Shares Admission, effect the registration, without registration fee, of the persons referred to in clause 5.2(A) in the register of members and to issue definitive certificates; and

	(C)	procure that the Receiving Agent makes payment of the amount received by the Receiving Agent pursuant to clause 5.3(B) to the Non-Accepting Shareholders pro rata to the number of New Shares each such Non-accepting Shareholder did not validly apply to subscribe for (or was treated as having not validly applied to subscribe


		for) as soon as practicable after receipt (save that individual amounts of less than £3.00 will not be so paid but will be paid to the Company for onward transmission to charity and will at all times be held for and on behalf of the Company). Subject to the terms and conditions of the Open Offer set out in the Prospectus, if a Non-Accepting Shareholder’s holding of Ordinary Shares on the register of members of the Company at the close of business on the Record Date is in certificated form, such payment will be made to the person whose name and address appears on page one of the Application Form. Subject to the terms and conditions of the Open Offer set out in the Prospectus, if a Non-Accepting Shareholder’s holding of Ordinary Shares on the register of members of the Company at the close of business on the Record Date is in uncertificated form, such payment will be made to the person registered as the holder of those Ordinary Shares on the date the Ordinary Shares go “ex” the entitlement to apply under the Open Offer; and

	(D)	procure that the Receiving Agent will, immediately upon Non-Accepted Shares Admission, effect the registration, without registration fee, of HM Treasury (or its nominee) as the holder of the Residual Shares in the register of members, in accordance with clause 7.3, and issue a definitive certificate.

5.5	The New Shares will, as from the date when they are issued, rank pari passu in all respects with, and be identical to, the Ordinary Shares then in issue and will rank in full for all dividends and other distributions declared, made or paid on the Ordinary Shares after such date of issue. The New Shares shall be allotted and issued free from all Adverse Interests.

6.	OVERSEAS SHAREHOLDERS

6.1	The Company shall procure that no Application Forms and no copies of the Prospectus (or any Supplementary Prospectus) shall be posted to Prohibited Shareholders and that no Open Offer Entitlements are credited to stock accounts in CREST of Prohibited Shareholders unless they have supplied the Company with an address in the United Kingdom for the giving of notices to them.

6.2	The Application Forms, together with the Prospectus and any Supplementary Prospectus shall specify, to the reasonable satisfaction of the Joint Sponsors and the Joint Bookrunners, such procedures as to ensure that no New Shares are credited to the account or for the benefit of any person located in the United States unless they have established to the reasonable satisfaction of the Company that, in the case of US Shareholders, they are qualified institutional buyers (“ QIBs ”) as defined in Rule 144A under the Securities Act or accredited investors as defined in Rule 501 under the Securities Act, or in the case of Prohibited Shareholders, they may take up their entitlements to the New Shares in accordance with an applicable exemption from local securities laws.

6.3	The Company shall not without the written consent of the Joint Sponsors and the Joint Bookrunners, not to be unreasonably withheld, make ADSs available to the holders of ADSs representing the Ordinary Shares with respect to any Ordinary Shares underlying such holder’s ADSs.


6.4	Each of the Joint Sponsors and the Joint Bookrunners (severally and not jointly or jointly and severally) and the Company acknowledges and agrees that offers and sales of New Shares will be made as described in the Prospectus and in accordance with the terms of this Agreement. The rights of Prohibited Shareholders and US Shareholders to participate in the Open Offer shall be limited as set out in the Prospectus and in this Agreement.

6.5	It is agreed and understood that the New Shares do not meet the eligibility requirements of Rule 144A under the Securities Act.

6.6	Each of the Company and the Joint Sponsors and the Joint Bookrunners (severally and not jointly or jointly and severally) confirms and agrees that, except in relation to each Member State of the EEA which has implemented the Prospectus Directive (each a “ Relevant Member State ”), none of the New Shares have been or will be offered to the public for the purposes of the Prospectus Directive in that Relevant Member State prior to the publication of a prospectus in relation to the New Shares which has been approved by the competent authority in that Relevant Member State or, where appropriate, approved in another Relevant Member State and notified to the competent authority in that Relevant Member State, all in accordance with the Prospectus Directive, except:

	(A)	to legal entities which are authorised or regulated to operate in the financial markets or, if not so authorised or regulated, whose corporate purpose is solely to invest in securities;

	(B)	to any legal entity which has two or more of:

		(i)	an average of at least 250 employees during the last financial year;

		(ii)	a total balance sheet of more than €43,000,000; and

		(iii)	an annual net turnover of more than €50,000,000, as shown in its last annual or consolidated accounts; or

	(C)	in any other circumstances which do not require the publication by the Company of a prospectus pursuant to Article 3 of the Prospectus Directive,

	provided that no such offer of any New Shares shall result in a requirement for the publication of a prospectus pursuant to Article 3 of the Prospectus Directive or any measure implementing the Prospectus Directive in the Relevant Member State.

	For the purposes of this provision, the expression an “ offer of New Shares to the public ” in relation to any New Shares in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and the New Shares to be offered so as to enable an investor to decide to purchase or subscribe for the New Shares, as the same may be varied in that Member State by any measure implementing the Prospectus Directive in that Member State.

6.7	Each of the Company, HM Treasury and the Joint Sponsors and the Joint Bookrunners (severally and not jointly or jointly and severally) acknowledges and agrees that the


	New Shares and the Open Offer Entitlements have not been and will not be registered under the Securities Act and may not be offered or sold except in accordance with Rule 903 of Regulation S, to QIBs or to certain pre-identified US employees of the Company who are accredited investors (as defined in Rule 501 under the Securities Act) only if such employees have executed and delivered to the Company an investor letter in a form reasonably satisfactory to the Joint Sponsors, the Joint Bookrunners and HM Treasury, in each case pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act.

6.8	Each of the Company, HM Treasury and the Joint Sponsors and the Joint Bookrunners (severally and not jointly or jointly and severally) represents, warrants and agrees that it:

	(A)	has not engaged and will not engage in any directed selling efforts (within the meaning of Regulation S) in the United States with respect to the New Shares;

	(B)	has not offered or sold and will not offer or sell New Shares in the United States by means of any form of general solicitation or general advertising within the meaning of Rule 502(c) under the Securities Act or in a manner involving a public offering within the meaning of Section 4(2) of the Securities Act;

	(C)	has only solicited and will only solicit subscriptions of and has only offered or sold and will only offer or sell the New Shares:

		(i)	to persons that it reasonably believes are QIBs pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act, (“ QIB Purchasers ”) and, in the case of the Company and HM Treasury only, only if such QIB Purchasers have executed and delivered an investor letter in the form of Schedule 5 to this Agreement;

		(ii)	to certain pre-identified US employees of the Company who are accredited investors (as defined in Rule 501 under the Securities Act) only if such employees have executed and delivered to the Company an investor letter in a form reasonably satisfactory to the Joint Sponsors and the Joint Bookrunners in accordance with an applicable exemption from local securities laws;

		(iii)	in reliance upon and in compliance with Regulation S; or

		(iv)	to Prohibited Shareholders in accordance with an applicable exemption from local securities laws and in reliance upon and in compliance with Regulation S; and

	(D)	has complied and will comply with all applicable provisions of FSMA and all other applicable securities laws with respect to anything done by it in relation to any New Shares in, from or otherwise involving the United Kingdom.

6.9	The Company acknowledges and agrees that it has not, directly or indirectly:

	(A)	made nor will it make offers or sales of any security;


	(B)	solicited nor will it solicit offers or sales of any security;

	(C)	otherwise negotiated nor will it negotiate in respect of any security;

	(D)	taken nor will it take any other action,

	in any of the foregoing cases under circumstances that would require registration of the New Shares under the Securities Act.

6.10	For so long as any New Shares are “restricted securities” within the meaning of Rule 144(a)(3) under the Securities Act, the Company will during any period in which it is neither subject to Section 13 or 15(d) of the Exchange Act nor exempt from reporting pursuant to Rule 12g3-2(b) thereunder, provide to any holder or beneficial owner of such restricted securities or to any prospective purchaser of such restricted securities designated by such holder or beneficial owner, upon the request of such holder, beneficial owner or prospective purchaser, the information required to be provided by Rule 144A(d)(4) under the Securities Act; this undertaking is also for the benefit of the holders and beneficial owners from time to time of such restricted securities and prospective purchasers designated by such holders or beneficial owners from time to time.

6.11	The Company shall ensure that each of its Affiliates and each person acting on behalf of the Company or its Affiliates (other than the Joint Sponsors or Joint Bookrunners and their respective Affiliates and persons acting on behalf of any of the Joint Sponsors or Joint Bookrunners and their respective Affiliates) has complied and will comply with clauses 6.6, 6.7, 6.8 and 6.9.

6.12	Each of the Joint Sponsors and the Joint Bookrunners shall ensure that each of its Affiliates and each person acting on its behalf or on behalf of its Affiliates has complied and will comply with clauses 6.6, 6.7, and 6.8.

7.	HM TREASURY SUBSCRIPTION

7.1	For the purposes of this clause 7:

	(A)	“ Accepted Shares ” shall mean any New Shares in respect of which an Acceptance has been made before 12.00 p.m. on the Closing Date;

	(B)	“ Non-Accepted Shares ” shall mean any New Shares which are not Accepted Shares together with any New Shares which are treated as Non-Accepted Shares pursuant to clause 7.1(C) and any New Shares representing the aggregate of fractional entitlements; and

	(C)	the Company shall, with the consent of HM Treasury, be entitled to treat as Non-Accepted Shares:

		(i)	any New Shares comprised in an Acceptance which has been validly rejected by the Company, with the consent of HM Treasury, not later than 2.00 p.m. on the Closing Date in accordance with the terms of the Open Offer, by reason of insufficient evidence as to identity having been


			received by that time in accordance with the procedures maintained by the Registrars under the Money Laundering Regulations 2007;

		(ii)	any New Shares comprised in an Acceptance which has been validly withdrawn pursuant to the rights of investors to withdraw acceptances in accordance with Section 87Q of FSMA;

		(iii)	any New Shares comprised in an Acceptance in respect of which cleared payment has not been received by 5:00 pm on the Closing Date (the “ Relevant Time ”); and

		(iv)	any New Shares comprised in any other Acceptance which the Company, with the consent of HM Treasury, has elected not later than 9.00 p.m. on 7 June 2009 to treat as invalid, in accordance with the terms of the Open Offer.

7.2	Without prejudice to clause 9, if there are no Non-Accepted Shares, the obligations of HM Treasury and the Joint Bookrunners with regards to Non-Accepted Shares under this clause 7 and clause 3.5 will cease.

7.3	If, following Accepted Shares Admission and compliance by the Company with clause 3.12 and subject to Non-Accepted Shares Admission occurring, having used reasonable endeavours, the Joint Bookrunners are unable to procure subscriber(s) for all or any Non-Accepted Shares at an amount which is not less than the Minimum Rump Placing Amount or if the Joint Bookrunners exercise their right as set out in clause 3.5 and clause 4.1 to cease or decline to endeavour to procure any such subscriber(s) for such Non-Accepted Shares or if any subscriber(s) who are so procured fail to meet their payment obligations for all or any Non-Accepted Shares (any such Non-Accepted Shares being together “Residual Shares” ), HM Treasury shall itself (or shall procure that its nominee shall) subscribe for such Residual Shares at the Issue Price and on the terms, subject to the conditions and on the basis of the information contained in the Issue Documents and in reliance on the Warranties given under clause 11. For the avoidance of doubt, HM Treasury shall not be required to subscribe for Residual Shares at a price above the Issue price notwithstanding that a subscriber who fails to meet their payment obligations had agreed to pay a premium to the Issue Price. If HM Treasury is required to subscribe for any Residual Shares pursuant to this clause 7.3, on Non-Accepted Shares Admission HM Treasury will hold the subscription monies for such Residual Shares for the benefit of the Company and the Company hereby irrevocably and unconditionally authorises HM Treasury on behalf of the Company to apply such subscription monies in redemption, pro tanto , of the Preference Shares on the date of Non-Accepted Shares Admission. Such application shall constitute a complete discharge of HM Treasury’s obligations to make payment in respect of the Residual Shares. If, following the Relevant Time, payment is dishonoured in respect of any Acceptances previously made, the relevant New Shares shall be dealt with in accordance with the terms of the Open Offer and shall not be Residual Shares.

7.4	HM Treasury (or its nominee) shall be deemed, without being required to complete an Application Form, to subscribe for its take-up of its pro rata entitlement of New Shares at the Issue Price pursuant to the terms of the Open Offer (the “HMT Open Offer Shares” ). On Accepted Shares Admission HM Treasury will hold the subscription


	monies for such HMT Open Offer Shares for the benefit of the Company and the Company hereby irrevocably and unconditionally authorises HM Treasury on behalf of the Company to apply such subscription monies in redemption, pro tanto, of the Preference Shares on the date of Accepted Shares Admission. Such application shall constitute a complete discharge of HM Treasury’s obligations to make payment in respect of the HMT Open Offer Shares.

7.5	If HM Treasury (or its nominee) subscribes for New Shares pursuant to this clause 7, it has, in addition to any other rights and remedies it may have, the rights and remedies of a person subscribing for New Shares on the basis of the Issue Documents.

7.6	The Company agrees that it shall on the date of Accepted Shares Admission or, if later, Non-Accepted Shares Admission:

	(A)	amend the terms of the registration rights agreement entered into with HM Treasury on 12 January 2009 (the “ US Registration Rights Agreement ”) to include as “Registrable Securities” (as defined in the US Registration Rights Agreement) any New Shares subscribed for hereunder, any Class B Shares and other securities held by the Treasury in the Company from time to time, and any securities of any description issued by HM Treasury from time to time and which are exchangeable for, convertible into, give rights over or are referable to such New Shares or other securities; and

	(B)	enter into a resale rights agreement (the “ Resale Rights Agreement ”) with HM Treasury, in the form and substance reasonably satisfactory to HM Treasury, in order to enable the Ordinary Shares, Class B Shares and other securities held by HM Treasury in the Company from time to time, and any securities of any description issued by HM Treasury from time to time and which are exchangeable for, convertible into, give rights over or are referable to such ordinary shares or other securities, to be sold in such jurisdictions and in such manner as HM Treasury may determine, including, without limitation, the provision of assistance with due diligence, marketing and such documentation (including without limitation any offering memorandum, whether or not a prospectus) as HM Treasury may reasonably require.

7.7	HM Treasury and the Company agree that neither the Company nor any member of its Group shall be required under the Resale Rights Agreement:

	(A)	to obtain a listing for any securities on any exchange or in any market in which it does not already have a listing where the Company and HM Treasury, both acting reasonably, decide that obtaining such listing would be unduly onerous having regard to the additional listing obligations to which the Company or the relevant member of its Group would be subject as a result of or in connection with obtaining such listing; or

	(B)	to provide any assistance to HM Treasury prior to 22 July 2009 in relation to the preparation of any prospectus, listing particulars, offering memorandum or other marketing materials if such work would require (in the view of the Company and HM Treasury, both acting reasonably) onerous financial, accounting or audit


		work in order to ensure that the requested materials comply with relevant securities laws.

7.8	Without prejudice to the obligations of each of the Joint Bookrunners pursuant to clause 3.5, the Company confirms to the Joint Bookrunners that any information which any of the Joint Bookrunners may obtain as to whether or not subscriber(s) have been procured to take up any Non-Accepted Shares or, if any such subscriber(s) have been so procured, as to the identities of any such persons, is not information obtained by the Joint Bookrunners as financial advisers to the Company. Accordingly (and notwithstanding any relationship which Joint Bookrunners may have with the Company as financial adviser), the Joint Bookrunners shall be under no obligation to disclose to the Company any of such information.

7.9	Without prejudice to the condition in clause 2.1(X), in the event that a Supplementary Prospectus is issued by the Company two or fewer Business Days prior to the Closing Date (or such later date as may be agreed between the parties) all references to the Closing Date in this Agreement (other than in this clause 7.9) shall be deemed to be the date which is three Business Days after the date of issue of the Supplementary Prospectus and all dates in this Agreement referenced to the Closing Date (excluding, without limitation, the date specified in clause 2.1(Y) (or such later date as HM Treasury may agree)) shall also be extended mutatis mutandis and the obligations of the parties under this Agreement shall, to the extent applicable, be required to be performed by the relevant party by reference to such extended dates.

7.10	Each party shall execute such documents (including, without limitation, any agreement varying the terms of this Agreement) and do such acts and things as may be required for the purpose of giving full effect to the extension of the timetable for the Open Offer as contemplated by clause 7.9 above.

8.	CAPACITY

8.1	Any transaction carried out by the Joint Bookrunners pursuant to clause 3.5 will constitute a transaction carried out in the capacity of agent at the request of the Company and not in respect of the Joint Bookrunners’ own account.

8.2	Notwithstanding that the Joint Bookrunners may act as the Company’s agent in connection with the Open Offer, the Joint Bookrunners and any of their respective Affiliates and/or their agents may:

	(A)	receive and keep for their own benefit any commissions, fees, brokerage or other benefits paid to or received by them in connection with the Open Offer and shall not be liable to account to the Company for any such commissions, fees, brokerage or other benefits; and

	(B)	acting as investors for their own account, take-up their entitlements to, or subscribe for or purchase, New Shares in the Open Offer and, in that capacity, may retain, purchase, sell or offer to sell for their own account(s) such New Shares and any securities of the Company or related investments issued otherwise than in connection with the Open Offer.


8.3	The Joint Bookrunners will not be responsible for any loss or damage to any person arising from any insufficiency or alleged insufficiency of the amount obtained from, the Open Offer or from the timing of any such transaction.

8.4	The Company acknowledges and agrees that HM Treasury and the Joint Sponsors and the Joint Bookrunners are acting solely pursuant to a contractual relationship with the Company on an arm’s length basis with respect to the Open Offer and the redemption of the Preference Shares (including in connection with determining the terms of the Open Offer) and not, in relation to the Open Offer or the redemption of the Preference Shares, as financial advisers (except in the cases of the Joint Bookrunners and Joint Sponsors, solely on and subject to the strict terms of the Engagement Letters) or fiduciaries to the Company or any other person. Additionally, the Company acknowledges that neither HM Treasury nor the Joint Sponsors nor Joint Bookrunners are advising the Company or any other person as to any legal, tax, investment, accounting or regulatory matters in any jurisdiction. The Company shall consult with its own advisors concerning such matters and shall be responsible for making its own independent investigation and appraisal of the transactions contemplated hereby and neither HM Treasury nor the Joint Sponsors nor the Joint Bookrunners shall have any responsibility or liability to the Company with respect thereto. The Company further acknowledges and agrees that any review by HM Treasury and/or the Joint Sponsors and/or the Joint Bookrunners (or their respective advisers and agents) of the Company, the Open Offer, the redemption of the Preference Shares, the Issue Documents and other matters relating thereto will be performed solely for the benefit of HM Treasury and/or the Joint Sponsors and/or the Joint Bookrunners, as relevant, and shall not be on behalf of the Company or any other person. This is without prejudice to any obligations of the Joint Sponsors under the FSA Rules, including any obligations to make recommendations to the Company concerning the allocation of the Open Offer under the Engagement Letters.

9.	FEES, COMMISSIONS, EXPENSES AND VAT

9.1	Subject to clause 9.2, in consideration of HM Treasury and the Joint Sponsors and Joint Bookrunners agreeing to provide their services under this Agreement, the Company shall pay:

	(A)	to HM Treasury a commission of 0.5 per cent. of the aggregate value of the New Shares at the Issue Price per New Share;

	(B)	subject to Non-Accepted Shares Admission occurring, to HM Treasury a further commission of 1 per cent. of the aggregate value of the New Shares subscribed for by subscriber(s) procured by the Joint Bookrunners pursuant to clause 3.5 or clause 4.1 at the Issue Price per New Share or by HM Treasury (or its nominee); and

	(C)	each of HM Treasury’s and the Joint Sponsors’ and the Joint Bookrunners’ legal and other costs and expenses (properly incurred in the case of the Joint Sponsors and the Joint Bookrunners and excluding, for the avoidance of doubt, the expenses of procuring subscriber(s) pursuant to clause 3.5 and clause 4.1 (including any applicable brokerage, transaction levies, trading fees, currency conversion costs, commissions and amounts in respect of VAT thereon which are not recoverable)) and the costs and expenses of HM Treasury’s financial


		advisers, in each case incurred for the purpose of or in connection with the Open Offer, the redemption of the Preference Shares or any arrangements referred to in, or contemplated by, this Agreement.

9.2	With respect to the fees, commissions and expenses payable pursuant to clause 9.1 above:

	(A)	the commissions referred to in clause 9.1(A) shall be payable on the earlier of Accepted Shares Admission and the second Business Day after the day on which this Agreement is terminated;

	(B)	the commissions referred to in clause 9.1(B) shall be payable (i) in respect of New Shares subscribed by HM Treasury pursuant to clause 7.4, on the date of Accepted Shares Admission, and (ii) otherwise on the date of Non-Accepted Shares Admission; and

	(C)	the expenses referred to in clause 9.1(C) shall be payable whether or not this Agreement becomes unconditional or is terminated for any reason and shall be payable on the earlier of Accepted Shares Admission and the second Business Day after the day on which this Agreement is terminated.

9.3	Each of the Joint Sponsors, the Joint Bookrunners and the Company agree that, with the exception of the reimbursement of expenses referred to in clause 9.1(C) above, no fees or commissions shall be payable to the Joint Sponsors, the Joint Bookrunners or any of them by the Company for the services to be performed by such Joint Sponsor and the Joint Bookrunners under this Agreement or otherwise in connection with or in any way related to the transactions contemplated by this Agreement.

9.4	HM Treasury may deduct the amount of the commissions and expenses payable under clause 9.1 together with, in each case, an amount in respect of any VAT chargeable thereon, from any payment to be made by HM Treasury to the Company under clause 7.3. For the avoidance of doubt, HM Treasury acknowledges and agrees that the Company shall not be required to pay any commission except that provided for in clauses 9.1(A) and 9.1(B) in respect of any New Shares subscribed for by subscriber(s) procured by the Joint Bookrunners pursuant to clause 3.5 or clause 4.1.

9.5	In consideration of the Joint Bookrunners agreeing to use reasonable endeavours to procure subscriber(s) for any Non-Accepted Shares, the Joint Bookrunners shall be entitled to deduct an amount equal to 0.20 per cent. of the aggregate value of the Non-Accepted Shares at the price per Non-Accepted Share at which subscribers are procured pursuant to clause 3.5 and clause 4.1, which may be taken into account in calculating and deducted from any payment to be made by the Joint Bookrunners to the Receiving Agent on behalf of Non-Accepting Shareholders pursuant to clause 5.3(B) or to the Company (or to the Receiving Agent on behalf of the Company) pursuant to clause 4.2.

9.6	Without prejudice to clause 9.1(C), the Company shall bear all reasonable costs and expenses of or incidental to the Open Offer, the matters contemplated by this Agreement (including, for the avoidance of doubt, any applicable amounts in respect of VAT thereon, in accordance with clause 9.10), such expenses including, without


	limitation, the fees and expenses of its professional advisers, the cost of preparation, advertising, printing and distribution of the Issue Documents and all other documents connected with the Open Offer, the redemption of the Preference Shares, the Registrars’ fees, the listing fees of the FSA, any charges by CREST and the fees of the London Stock Exchange. The Company shall forthwith (and, in relation to VAT, in accordance with clause 9.10) upon demand by HM Treasury or any of the Joint Sponsors or the Joint Bookrunners (accompanied by the relevant receipt therefor) reimburse such person the amount of any such expenses. This clause 9.6 shall not apply to any Tax (provision for which is, for the avoidance of doubt, made in clauses 9.7, 9.8, 9.9 and 9.10), except to the extent provided for in clauses 9.7, 9.8, 9.9 or 9.10.

9.7	The Company shall pay and bear any Stamp Tax which is payable or paid (whether by HM Treasury, any of the Joint Sponsors, the Joint Bookrunners or otherwise) in connection with the allotment and issue of the New Shares, the redemption of the Preference Shares, the delivery of the New Shares and/or the subscription for the New Shares in the manner contemplated by this Agreement or the execution, delivery, performance or enforcement of this Agreement, provided that this clause 9.7 shall not apply to:

	(A)	any Stamp Tax payable in respect of transfers of, or agreements to transfer, New Shares subsequent to any such New Shares having been subscribed for by HM Treasury in the manner contemplated by this Agreement; or

	(B)	any stamp duty chargeable at a rate determined under section 67 or 70 of the Finance Act 1986 or SDRT chargeable under section 93 or 96 of the Finance Act 1986.

	References in this clause 9.7 to New Shares include any interest in or rights to allotment of New Shares.

9.8	If any of the Joint Sponsors, CGMEL, HM Treasury or any other Indemnified Person is subject to Tax in respect of any sum payable under this Agreement (other than any fees or commission payable under clause 9.1, clause 9.2, clause 9.3 or 9.5) or any sum payable on redemption of the Preference Shares, or if any such sum is taken into account in computing the taxable profits or income of any of the Joint Sponsors, CGMEL or HM Treasury or such other Indemnified Person, the sum payable shall be increased to such amount as will ensure that after payment of such Tax (including, for the avoidance of doubt, any additional Tax payable as a result of such increase) the relevant Joint Sponsor, CGMEL, HM Treasury or the relevant Indemnified Person (as the case may be) retains a sum equal to the sum that it would have received and retained in the absence of such Tax.

9.9	All sums (including, for the avoidance of doubt, any fees or commission payable under clause 9.1, clause 9.2, clause 9.3 or clause 9.5) payable by the Company (the “ Payer ”) to HM Treasury, to the Joint Sponsors (or any of them), to CGMEL or to any other Indemnified Person (the “ Payee ”) pursuant to this Agreement are expressed exclusive of any amount in respect of VAT which is chargeable on the supply or supplies for which such sums (or any part thereof) is or are the whole or part of the consideration for VAT purposes. If any Payee makes (or is deemed for VAT purposes to make) any supply to the Payer pursuant to this Agreement and VAT is or becomes chargeable in respect of


	such supply, the Payer shall pay to the Payee (within 14 days of the receipt of a valid VAT invoice) an additional sum equal to the amount of such VAT or, in the case of VAT payable in respect of amounts payable under clause 9.5, the Payee may deduct in respect of such VAT.

9.10	In any case where the Company is obliged to pay a sum to HM Treasury, to the Joint Sponsors (or any one of them) to CGMEL or to any other Indemnified Person under this Agreement by way of indemnity, reimbursement, damages or compensation for or in respect of any fee, liability, cost, charge or expense (the “ Relevant Cost ”), the Company shall pay to HM Treasury, to the Joint Sponsors (or any one of them) to CGMEL or to any other Indemnified Person (as the case may be) at the same time an additional amount determined as follows:

	(A)	if the Relevant Cost is for VAT purposes the consideration for a supply of goods or services made to HM Treasury, to the Joint Sponsors (or any one of them), to CGMEL or to any other Indemnified Person (including, for the avoidance of doubt, where such supply is made to HM Treasury, the Joint Sponsors (or any of them), CGMEL or any other Indemnified Person acting as agent for the Company within the terms of section 47 VATA), such additional amount shall be equal to any input VAT which was incurred by HM Treasury, by any Joint Sponsor, by CGMEL or by any other Indemnified Person (as the case may be) in respect of that supply and which it is not able to recover from the relevant Tax Authority; and

	(B)	if the Relevant Cost is for VAT purposes a disbursement incurred by HM Treasury, any Joint Sponsor, CGMEL, or any other Indemnified Person as agent on behalf of the Company and the relevant supply is made to the Company for VAT purposes, such additional amount shall be equal to any amount in respect of VAT which was paid in respect of the Relevant Cost by HM Treasury, by any Joint Sponsor, by CGMEL or by any other Indemnified Person, and HM Treasury, the relevant Joint Sponsor, CGMEL or the relevant other Indemnified Person shall use reasonable endeavours to procure that the relevant third party issues a valid VAT invoice in respect of the Relevant Cost to the Company.

10.	COVENANTS

10.1	The Company shall comply in all material respects with the Companies Acts, FSMA, the Prospectus Rules, the Listing Rules, the DTRs and the Admission and Disclosure Standards and all other applicable laws and regulations, in each case insofar as they are relevant to the Open Offer (including, for the avoidance of doubt, the allotment and issue of the New Shares), the redemption of the Preference Shares or Accepted Shares Admission or Non-Accepted Shares Admission.

10.2	To the extent that it is required, at the general meeting of the Company to approve the terms of the APS, the Company shall table a resolution, in a form acceptable to HM Treasury pursuant to which Ordinary Shareholders are to waive any obligation of HM Treasury to make an offer under Rule 9 of the City Code on Takeovers and Mergers in relation to the subscription and holding of Class B Shares (including as a result of their


	conversion to Ordinary Shares and the voting rights attaching to the Class B Shares becoming exercisable).

10.3	Except for the publication of the Issue Documents, the Company undertakes to HM Treasury, to the Joint Sponsors and to CGMEL that, until the close of business on the sixtieth day after the Closing Date, it shall not, and will procure that each Group Company does not, publish, make or despatch a public announcement or communication concerning, or which is reasonably likely to be material in the context of, the Open Offer, the subscription of Non-Accepted Shares by subscriber(s) procured by the Joint Bookrunners pursuant to clause 3.5 or clause 4.1, the redemption of the Preference Shares or implementation of, and the Company’s participation in, the APS:

	(A)	where the announcement or communication is required by law, the FSA, the DTRs, the LSE, or under the Regulations or the rules, practices and procedures laid down by Euroclear, without prior consultation with HM Treasury, the Joint Sponsors and CGMEL (where legally permitted and practicable) and having due regard to all reasonable requests which HM Treasury or the Joint Sponsors or CGMEL may make; or

	(B)	in any other case, without the prior consent of HM Treasury, the Joint Sponsors and CGMEL as to the content, timing and manner of the publication, making or despatch of the announcement or communication (such consent not to be unreasonably withheld).

10.4	Between the date of this Agreement and the close of business on the sixtieth day after the Closing Date, the Company undertakes to HM Treasury, to the Joint Sponsors and to CGMEL that it shall:

	(A)	not, and shall procure that each Group Company shall not, without the prior written consent of HM Treasury, the Joint Sponsors and CGMEL, take any steps (including, without limitation, making any public statement or issuing or publishing any material or document) which, in the opinion of HM Treasury or the Joint Sponsors or CGMEL (acting in good faith), would be materially inconsistent with any expression of policy or intention or statement contained in the Prospectus, subject in each case to applicable law and regulation (including the fiduciary duties of the Directors) (provided that where any Group Company considers itself or the directors thereof consider themselves bound by law or by regulation to take any such steps they shall consult with HM Treasury, the Joint Sponsors and CGMEL before doing so);

	(B)	use, and shall procure that each Group Company uses, all reasonable endeavours to ensure that the Company or Group Company concerned consults with HM Treasury, the Joint Sponsors and CGMEL as early as reasonably practicable in advance of the entry into or variation (other than in the ordinary course of business) of any commitment, agreement or arrangement, or any Group Company placing itself in a position where it is obliged to announce that any commitment, agreement or arrangement may be entered into or varied which, in any case, is either material in the context of the Group or may involve an increase in the issued capital of a Group Company (other than an increase in


		the issued capital of a Group Company where all the capital is to be issued to another Group Company);

	(C)	consult with HM Treasury, the Joint Sponsors and CGMEL as early as reasonably practicable in advance regarding any public statement or document which relates to the Group’s results, dividends, participation in the APS or prospects, or to any acquisition, disposal, re-organisation, takeover, management development or any other significant matter (whether or not similar to the foregoing) and which it or any Group Company proposes to make or publish; and

	(D)	consult with HM Treasury, the Joint Sponsors and CGMEL as early as reasonably practicable in advance with respect to any other information which may be required to be notified to a Regulatory Information Service in accordance with Chapter 2 of the DTRs.

10.5	The Company shall use all reasonable endeavours to procure that employees of the Company and its subsidiaries and advisers to and agents of the Company (other than the Joint Sponsors, Joint Bookrunners and their respective Affiliates) and its subsidiaries observe the restrictions set out in clauses 10.2 and 10.4 as if they were parties thereto.

10.6	The Company shall not (without the prior written consent of HM Treasury) directly or indirectly, issue, offer, pledge, sell, contract to issue or sell, issue or sell any option or contract to purchase or subscribe, purchase any option or contract to sell or issue, grant any option, right or warrant to purchase, deposit into any depositary receipt facility or otherwise transfer or dispose of (or publicly announce any such issue, pledge, sale, grant, deposit, transfer or disposal of) any Ordinary Shares or any securities convertible into or exercisable or exchangeable for Ordinary Shares or enter into any swap or other agreement that transfers, in whole or in part, directly or indirectly any of the economic consequences of the ownership of Ordinary Shares at any time before the expiry of the period of 60 days following Accepted Shares Admission or, if later, Non-Accepted Shares Admission save in respect of the New Shares and any Ordinary Shares or Class B Shares to be issued to HM Treasury pursuant to the APS or any Ordinary Shares to be issued pursuant to the grant or exercise of options, awards or other rights to acquire Ordinary Shares pursuant to any employee share scheme or the grant of options or making of awards under the Group’s employee share incentive plans provided that this clause 10.6 shall not prevent the Company from doing any thing or executing any document which is conditional upon this Agreement lapsing, failing to become unconditional or being terminated.

10.7	The Company undertakes to make all such announcements concerning the Open Offer and the redemption of the Preference Shares as shall be necessary to comply with the Listing Rules, the DTRs, the Prospectus Rules, the Admission and Disclosure Standards and section 118, sections 118A to 118C inclusive and section 397 of the FSMA, or which any of the Joint Sponsors, CGMEL or HM Treasury otherwise reasonably considers to be necessary or desirable and any of the Joint Sponsors, CGMEL and HM Treasury shall be entitled to make any such announcement if the Company fails (in the opinion of HM Treasury or such Joint Sponsor or CGMEL acting in good faith) promptly to fulfil its obligations under this clause 10.7.


10.8	The Company undertakes to provide:

	(A)	publications, reports and other information with respect to the Company and its subsidiaries and affiliates and their businesses; and

	(B)	access to the books and records and management and other employees of the Company and its subsidiaries and affiliates and their businesses,

	as may be required in order to allow HM Treasury (including any agent or nominee of HM Treasury) to comply fully with all legal and regulatory and other requirements under the laws and regulations of any jurisdiction applicable to HM Treasury (and/or any such agent or nominee of HM Treasury) as a direct or indirect consequence of its shareholdings in the Company, including by subscription for New Shares and the redemption of the Preference Shares.

10.9	The Company will promptly provide to the Joint Sponsors and the Joint Bookrunners, during the period commencing on the date hereof and ending on the date that is 90 days after Accepted Shares Admission or, if later, Non-Accepted Shares Admission, as many copies of the Prospectus, the Circular and any Supplementary Prospectus as they may reasonably require.

10.10	The Company will procure that each of the Circular and the Prospectus (and any amendments or supplements to either of them) is filed, published and /or issued in accordance with, or complies with, the Prospectus Rules and the Listing Rules (insofar as they apply) and that:

	(A)	sufficient copies of the Prospectus and the Circular (and any amendment or supplement to either of them) are made available at the appropriate times to the public and at the offices of the Registrars and the Document Viewing Facility, in accordance with the requirements of the FSA and the London Stock Exchange; and

	(B)	the documents described in the Prospectus and the Circular (and any amendment or supplement to any of them) as being available for inspection are made available as described.

10.11	The Company undertakes to HM Treasury that it shall apply the proceeds of the issue of the New Shares (other than, for the avoidance of doubt, any amounts received from subscribers procured by the Joint Bookrunners pursuant to clause 3.5 which are in excess of the Minimum Rump Placing Amount which will, subject to clause 5.4(C), at all times be held as agent for and on trust for the Non-Accepting Shareholders pro rata to the number of New Shares each such Non-Accepting Shareholder did not validly apply to subscribe for (or was treated as having not validly applied to subscribe for)) to effect the redemption of the Preference Shares and to pay the commissions due to HM Treasury in terms of clauses 9.1(A) and 9.1(B) and, to the extent the proceeds of the issue of the New Shares are insufficient for such purpose, shall provide additional finance from its own resources and make use of its own reserves to enable such redemption to be effected in full. The Company and HM Treasury agree that the Preference Shares shall be redeemed at the date of Accepted Shares Admission to the extent of the proceeds of the Accepted Shares and by no later than Non-Accepted


	Shares Admission to the extent of any outstanding Preference Shares at an aggregate amount equal to £4,040,000,000 together with an amount equal to the dividend accrued on the relevant Preference Shares from and including 15 January 2009 to but excluding the date of redemption. The Company shall, as soon as is practicable after the date hereof, propose such amendments to the terms of the Preference Shares to enable such redemption to take place and HM Treasury agrees, in its capacity as the holder of the Preference Shares, to vote in favour of such amendments and, in its capacity as a holder of Ordinary Shares, to vote in favour of the Resolutions (to the extent permitted to do so under the Listing Rules and applicable law). Upon such redemption, the Preference Share Subscription Agreement will terminate without further liability for any party thereto (but without prejudice to any accrued rights thereunder).

10.12	The Company undertakes to HM Treasury to comply in full with all statements, conditions and undertakings which are set out in the Press Announcement.

10.13	The Company undertakes to HM Treasury that it shall not issue any New Shares which are to be subscribed for by HM Treasury pursuant to this Agreement to any person referred to in section 67 or 70 of the Finance Act 1986 or section 93 or 96 of the Finance Act 1986 (such that stamp duty or SDRT would apply at the rate determined under any such section) unless HM Treasury requests that such New Shares are to be so issued.

11.	REPRESENTATIONS, WARRANTIES AND UNDERTAKINGS

11.1	The Company represents, warrants and undertakes to HM Treasury that, save as fairly disclosed in any Previous Announcement or in any Due Diligence Meetings, the representations, warranties and undertakings set out in Part I of Schedule 3 are true, accurate and not misleading as at the date of the Original Placing Agreement and, save as fairly disclosed in the Draft Circular, the Draft Prospectus, any Previous Announcement, the Chairmanship Announcement, the Second Press Announcement or in any Due Diligence Meetings, on the date of this Agreement.

11.1A	The Company represents, warrants and undertakes to each of the Joint Sponsors and to each of the Joint Bookrunners that (a) save as fairly disclosed in any Previous Announcement or in any Due Diligence Meetings, the representations, warranties and undertakings set out in Part I of Schedule 3 are true, accurate and not misleading as at the date of the Amended and Restated Placing Agreement and (b) save as fairly disclosed in the Draft Circular, the Draft Prospectus, any Previous Announcement, the Chairmanship Announcement, the Second Press Announcement or in any Due Diligence Meetings, on the date of this Agreement.

11.2	All Warranties in paragraphs 5 to 13 and paragraph 15 of Part II of Schedule 3 are qualified by information fairly disclosed in the Circular, the Prospectus, any Previous Announcement or in any Due Diligence Meetings or, if such Warranties are given on or after the publication of any Supplementary Prospectus, as fairly disclosed in the Prospectus as supplemented by such Supplementary Prospectus.

11.3	The Company agrees with HM Treasury and with each of the Joint Sponsors and each of the Joint Bookrunners that subject to clause 11.2, each statement set out in Part II of Schedule 3 will be true and accurate and not misleading on the Posting Date, at such


	time as a Supplementary Prospectus shall be issued in accordance with this Agreement, at the Time of Sale, if any, and immediately prior to each of Accepted Shares Admission and Non-Accepted Shares Admission, in each case by reference to the facts and circumstances then existing and will be treated as Warranties given and/or repeated on such dates. Warranties shall be deemed to be repeated under this clause in relation to the relevant document, announcement or event on the basis that any reference in any such Warranty to something being done or something being the case in relation to such document, announcement or event which is expressed in the future tense shall be regarded as being expressed in the present tense.

11.4	If it comes to the knowledge of the Company or any of the Directors that any of the Warranties was breached or untrue or inaccurate when made (whether under the Original Placing Agreement, the Amended and Restated Placing Agreement or this Agreement) and/or that any of the Warranties is or would be breached or untrue or inaccurate if it were to be repeated by reference to the facts and circumstances or the knowledge, opinions, intentions or expectations of any of the Directors subsisting at any time up to immediately prior to Accepted Shares Admission or Non-Accepted Shares Admission, if later, it will notify HM Treasury, the Joint Sponsors and the Joint Bookrunners immediately. The Company will make reasonable enquiries to ascertain whether any of the Warranties was, or if so repeated would be, breached or untrue or inaccurate and as to whether a Specified Event has occurred.

11.5	If, at any time prior to Accepted Shares Admission or Non-Accepted Shares Admission, if later, HM Treasury and the Joint Sponsors and the Joint Bookrunners shall receive a notice pursuant to clause 11.4 or otherwise become aware of any of the Warranties being or becoming or being likely (if repeated as referred to in clause 11.4) to become untrue or inaccurate, HM Treasury and the Joint Sponsors and the Joint Bookrunners may (without prejudice to any other provision of this Agreement) require the Company, at its own expense, to make or procure the making of such announcement or announcements and/or despatch such communication to Ordinary Shareholders as HM Treasury and the Joint Sponsors and the Joint Bookrunners shall, in their absolute discretion but after consultation with the Company, consider necessary.

11.6	The Warranties shall remain in full force and effect notwithstanding completion of the Open Offer and the redemption of the Preference Shares and all other matters and arrangements referred to in or contemplated by this Agreement.

11.7	The Company will deliver to HM Treasury and the Joint Sponsors and the Joint Bookrunners a certificate in the form set out in Part A of Schedule 1 prior to and with effect immediately before Accepted Shares Admission and Non-Accepted Shares Admission and in the form set out in Part B of Schedule 1 prior to and with effect immediately before the issue of any Supplementary Prospectus and at the Time of Sale, if any.

11.8	The Company acknowledges that HM Treasury and the Joint Sponsors and the Joint Bookrunners are entering into this Agreement in reliance on the Warranties and each such representation, warranty and undertaking shall not be limited by reference (express or implied) to the terms of any other representation, warranty or undertaking or any other provision of this Agreement.


11.9	For the purposes of this clause 11 and Schedule 3, where any of the Warranties is qualified by a reference to knowledge, awareness or belief, that reference shall be deemed to include a statement to the effect that it has been given after reasonable enquiry.

11.10	The Company undertakes to HM Treasury and to the Joint Sponsors and the Joint Bookrunners:

	(A)	promptly to give notice to HM Treasury and to the Joint Sponsors and the Joint Bookrunners of the occurrence of any Specified Event, which shall come to the knowledge of the Company prior to the earlier of:

		(i)	this Agreement being terminated in accordance with its terms; and

		(ii)	the date of allotment of the New Shares pursuant to clauses 5 and/or 7 (as appropriate) (whichever is later); and

	(B)	not to cause and to use all reasonable endeavours not to permit, and to procure that each Group Company and the Directors do not cause and use all reasonable endeavours not to permit, any Specified Event to occur before the earlier of:

		(i)	this Agreement being terminated in accordance with its terms; and

		(ii)	the date of allotment of the New Shares pursuant to clauses 5 and/or 7 (as appropriate) (whichever is later),

		provided that any breach of the covenant in this clause 11.10(B) will not give rise to a remedy in damages against the Company in respect of such breach in circumstances where this Agreement has been terminated pursuant to clause 14 as a result of a Specified Event.

11.11	For the purposes of clauses 11.10(A) and 11.10(B), each of the Warranties and the undertakings contained in this clause 11 shall take effect with the exclusion of any qualification contained therein with respect to the knowledge, information, awareness or belief of the Company or any of the Directors or any other person.

11.12	Each Joint Sponsor and the Joint Bookrunners severally represents, warrants and undertakes to the Company that it is an “accredited investor” as defined in Rule 501(a) of Regulation D under the Securities Act.

12.	INDEMNITIES

12.1	The Company agrees to fully and effectively indemnify and hold harmless each Indemnified Person on an after-Tax basis from and against any and all Losses or Claims, whatsoever, as incurred, (and whether or not the relevant Loss or Claim is suffered or incurred or arises in respect of circumstances or events existing or occurring before, on or after the Effective Date and regardless of the jurisdiction in which such Loss or Claim is suffered or incurred) if such Losses or Claims, arise, directly or indirectly, out of, or are attributable to, or connected with, anything done or omitted to be


	done by any person (including by the relevant Indemnified Person) in connection with the Open Offer, the redemption of the Preference Shares, Accepted Shares Admission or Non-Accepted Shares Admission or the arrangements contemplated by the Issue Documents or any of them (or any amendment or supplement to any of them), or this Agreement or any other agreement relating to the Open Offer or the redemption of the Preference Shares, including but not limited to:

	(A)	any and all Losses or Claims whatsoever, as incurred, arising out of the Issue Documents, or any of them (or any amendment or supplement to any of them) not containing or fairly presenting, or being alleged not to contain or not to fairly present, all information required to be contained therein, or arising out of any untrue or inaccurate statement or alleged untrue or inaccurate statement of a material fact contained in the Issue Documents, or any of them (or any amendment or supplement to any of them), or the omission or alleged omission therefrom of a fact necessary in order to make the statements therein not misleading in any material respect, or any statement therein being or being alleged to be in any respect not based on reasonable grounds, in the light of the circumstances in which they were made; and/or

	(B)	any and all Losses or Claims whatsoever, as incurred, arising out of any breach or alleged breach by the Company of any of its obligations, including any of the Warranties or the representations, covenants and undertakings set out in this Agreement or out of the arrangements contemplated by the Issue Documents or any of them (or any amendment or supplement to any of them) or this Agreement or any other agreement relating to the Open Offer or the redemption of the Preference Shares; and/or

	(C)	any and all Losses or Claims whatsoever, as incurred, in connection with or arising out of the issue, publication or distribution of the Issue Documents, or any of them (or any amendment or supplement to any of them) and/or any other documents or materials relating to the applications for Accepted Shares Admission or Non-Accepted Shares Admission; and/or

	(D)	any and all Losses or Claims whatsoever, as incurred, in connection with or arising out of any failure or alleged failure by the Company or any of the Directors or any of its or his agents, employees or advisers to comply with CA 1985, CA 2006, FSMA, the Listing Rules, the Prospectus Rules, the DTRs, the rules and regulations of the London Stock Exchange and the Admission and Disclosure Standards or any other requirement or statute or regulation in any jurisdiction in relation to the applications for Accepted Shares Admission or Non-Accepted Shares Admission, the Open Offer, or the arrangements contemplated by the Issue Documents (including, without limitation, the issue and allotment of the New Shares and the redemption of the Preference Shares), or any of them (or any amendment or supplement to any of them), or this Agreement or any other agreement relating to the Open Offer or the redemption of the Preference Shares; and/or

	(E)	any and all Losses or Claims whatsoever, as incurred, suffered or incurred by such Indemnified Person:


		(i)	as a person who has communicated or approved the contents of any financial promotion (other than the Issue Documents, or any of them, or any amendment or supplement to any of them) made in connection with the Open Offer or the applications for Accepted Shares Admission or Non-Accepted Shares Admission for the purpose of section 21 of FSMA; or

		(ii)	(in the case of each of the Joint Sponsors only) in their capacity as sponsor to the Company’s applications for Accepted Shares Admission and Non-Accepted Shares Admission,

	PROVIDED THAT, the indemnity contained in this clause 12.1 shall not apply to any Losses or Claims (i) in respect of HM Treasury (otherwise than in connection with the matters referred to in clauses 12.1(A), (B), (C), (D) and (E)) to the extent finally and judicially determined to have arisen as a result of the fraud, bad faith or wilful default of that HMT Indemnified Person; (ii) in respect of CGMEL, UBS and JPMC (otherwise than in connection with the matters referred to in clauses 12.1(A), (B), (C) and (D)) to the extent judicially determined to have arisen as a result of the fraud, negligence, bad faith or wilful default of that CGMEL Indemnified Person or that UBS Indemnified Person or that JPMC Indemnified Person or (iii) if and to the extent arising out of a decline in market value of the New Shares suffered or incurred by HM Treasury as a result of it having been required to subscribe for New Shares pursuant to clause 7, save to the extent such decline is caused by or results from or is attributable to or would not have arisen but for (in each case directly or indirectly) the neglect or default of the Company in relation to the content, publication, issue or distribution of the Issue Documents or any breach by the Company of any of its obligations under this Agreement, including any of the Warranties, representations, undertakings or covenants. This clause 12.1 shall not apply to any Loss or Claim in respect of Tax which is covered by clauses 9.7, 9.8, 9.9 and 9.10 (or which would have been so covered but for any exclusion contained therein).

12.2	Each Indemnified Person shall and shall procure that its Indemnified Persons shall:

	(A)	give notice as promptly as reasonably practicable to the Company of any action commenced against it after receipt of a written notice of any Claim or the commencement of any action, claim, suit, investigation or proceeding in respect of which a Claim for indemnification may be sought under this clause 12; and

	(B)	as promptly as reasonably practicable notify the Company after any such action is formally commenced (by way of service with a summons or other legal process giving information as to the nature and basis of the claim),

	and shall keep the Company informed of, and, to the extent reasonably practicable, consult with the Company in relation to, all material developments in respect thereof, but in each case, only insofar as may be consistent with the terms of any relevant insurance policy and provided (in each case) that to do so would not, in such Indemnified Person’s view (acting in good faith), be prejudicial to it (or to any Indemnified Person connected to it) or to any obligation of confidentiality or other legal or regulatory obligation which that Indemnified Person owes to any third party or to any regulatory request that has been made of it. However, the failure to so notify the


	Company and keep the Company informed shall not relieve the Company from any liability hereunder to the extent it is not materially prejudiced as a result thereof and in any event shall not relieve the Company from any liability which it may have otherwise than on account of the indemnity set out in this clause 12.

12.3	Legal advisers for Indemnified Persons shall be selected by HM Treasury in respect of HMT Indemnified Persons, CGMEL in respect of CGMEL Indemnified Persons, UBS in respect of UBS Indemnified Persons and JPMC in respect of JPMC Indemnified Persons.. The Company may participate at its own expense in the defence of any action commenced against it provided however that legal advisers for the Company shall not (except with the consent of the relevant Indemnified Person) also be legal advisers for the Indemnified Person.

12.4	In no event shall the Company be liable for fees and expenses of more than one legal adviser (in addition to any local legal advisers) separate from its own legal advisers for all CGMEL Indemnified Persons, UBS Indemnified Persons and JPMC Indemnified Persons in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances.

12.5	The Company shall not, without the prior written consent of the relevant Indemnified Persons (acting in good faith), settle or compromise or consent to the entry of any judgment with respect to any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever in respect of which indemnification or contribution could be sought under this clause 12 or clause 13 (whether or not the Indemnified Persons are actual or potential parties thereto), unless such settlement, compromise or consent:

	(A)	includes an unconditional release of each Indemnified Person from all liability arising out of such litigation, investigation, proceeding or claim; and

	(B)	does not include a statement as to or an admission of fault, culpability or a failure to act by or on behalf of any Indemnified Person.

12.6	The Company will promptly notify HM Treasury and each of the Joint Sponsors and the Joint Bookrunners of any limitation (whenever arising) on the extent to which the Company and/or any of its respective subsidiary undertakings, affiliates, or associates may claim against any third party or parties and/or of any waiver or release of any right of the Company to so claim (each a “ Limitation ”) in respect of anything which may arise, directly or indirectly, out of or is based upon or is in connection with the Open Offer, the redemption of the Preference Shares, Accepted Shares Admission or Non-Accepted Shares Admission or the subject matter of the obligations or services to be performed under this Agreement or in connection with the Open Offer itself or the redemption of the Preference Shares, by HM Treasury or the Joint Bookrunners or by the Joint Sponsors or on its or their behalf. Where any damage or loss is suffered by the Company for which any Indemnified Person would otherwise be jointly and severally liable with any third party or third parties to the Company, or any of its relevant subsidiary undertakings, affiliates, or associates, the extent to which such damage or loss will be recoverable from the Indemnified Person shall be limited so as to be in proportion to the contribution of the Indemnified Person to the overall fault for such damage or loss, as agreed between the parties, or, in the absence of agreement, as


	determined by a court of competent jurisdiction, but in any event, the Indemnified Person shall have no greater liability than if the Limitation did not apply.

12.7	The degree to which any Indemnified Person shall be entitled to rely on the work of any adviser to the Company or any other third party will be unaffected by any Limitation (as defined in clause 12.6) which the Company may have agreed with any third party.

12.8	The provisions of this clause 12 will remain in full force and effect notwithstanding the completion of all matters and arrangements referred to in or contemplated by this Agreement.

13.	CONTRIBUTION

13.1	If and to the extent that the indemnification provided for in clause 12 is unavailable to or insufficient to hold harmless (to the extent specified in clause 12) an Indemnified Person in respect of any Loss or Claim referred to therein, then the Company, in lieu of indemnifying such Indemnified Person thereunder, shall contribute to the amount paid or payable by such Indemnified Person as a result of such Loss or Claim (i) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and HM Treasury or the Joint Sponsors or the Joint Bookrunners on the other hand from the Open Offer or (ii) if the allocation provided by sub-clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in sub-clause (i) above but also the relative fault of the Company on the one hand and HM Treasury or the Joint Sponsors or the Joint Bookrunners on the other in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative benefits received by HM Treasury on the one hand and the Company on the other shall be deemed to be in the same respective proportions respectively as the total fees received by HM Treasury pursuant to this Agreement bear to the aggregate Issue Price. The relative benefits received by the Company on the one hand and the Joint Sponsors and the Joint Bookrunners on the other shall be deemed to be in the same respective proportions respectively as the aggregate Issue Price and the total fees received by the Joint Bookrunners and the Joint Sponsors, as set forth in the Engagement Letters and clause 9.5, bear to the aggregate Issue Price. The relative fault of the Company on the one hand and HM Treasury or the Joint Sponsors and the Joint Bookrunners on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or by HM Treasury or the Joint Sponsors or the Joint Bookrunners and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission.

13.2	Notwithstanding the provisions of this clause 13, neither HM Treasury nor the Joint Sponsors nor the Joint Bookrunners will be entitled to recover from the Company by way of contribution under clause 13.1 any amount in excess of the amount that the Company would have been liable to pay to HM Treasury or to the Joint Sponsors or the Joint Bookrunners (as the case may be) had the indemnification provided for in clause 12 been available to the extent provided in that clause in respect of the relevant Loss or Claim.


13.3	The parties hereto agree that it would not be just and equitable if contribution pursuant to this clause 13 were determined by pro rata allocation (even if HM Treasury and the Joint Sponsors and the Joint Bookrunners were treated as one entity for such purposes) or by any other method of allocation that does not take account of the equitable considerations referred to in clause 13.1. The amount paid or payable by an Indemnified Person as a result of the Loss or Claim referred to in clause 13.1 shall be deemed to include, any legal or other expenses incurred by such Indemnified Person in connection with investigating or defending any such action or claim.

13.4	The indemnity and contribution agreements contained in this clause 13 are in addition to and shall not be construed to limit, affect or prejudice any liability which the Company may otherwise have to the Indemnified Persons referred to above or any other right or remedy in law or otherwise available to any Indemnified Person.

14.	TERMINATION

14.1	If following the date of this Agreement but (i) before Accepted Shares Admission it shall come to the notice of HM Treasury or any of the Joint Sponsors or CGMEL, or (ii) before Non-Accepted Shares Admission it shall come to the notice of either of the Joint Sponsors or CGMEL, that:

	(A)	any statement contained in the Issue Documents (or any amendment or supplement thereto) has become or been discovered to be untrue, inaccurate or misleading; or

	(B)	matters have arisen or have been discovered which would, if any of the Issue Documents (or any amendment or supplement thereto) were to be issued at that time, constitute an omission therefrom and which would render any such Issue Documents (or any amendment or supplement thereto) to be misleading; or

	(C)	there has been a breach of any of the Warranties or of any other provision of this Agreement; or

	(D)	a Specified Event has occurred; or

	(E)	the Company’s applications to the UK Listing Authority for admission of the New Shares to the Official List and/or the Company’s application to the London Stock Exchange for admission to trading of the New Shares on the London Stock Exchange’s market for listed securities is withdrawn by the Company and/or refused by the UK Listing Authority or London Stock Exchange (as appropriate),

	which, in each case, is in HM Treasury’s or any of the Joint Sponsors’ or CGMEL’s sole judgement, as relevant, material in the context of the Group and/or the context of the Open Offer, the subscription of Non-Accepted Shares by subscriber(s) procured by the Joint Bookrunners pursuant to clause 3.5 or clause 4.1, or the redemption of the Preference Shares or Accepted Shares Admission or Non-Accepted Shares Admission, HM Treasury or such Joint Sponsor or CGMEL may forthwith give notice thereof to the Company, in which case clause 14.3 shall apply.


14.2	If following the date of this Agreement but before Accepted Shares Admission:

	(A)	in the sole opinion of HM Treasury (acting in good faith) there shall have been any Material Adverse Effect, whether or not foreseeable at the date of this Agreement;

	(B)	any matter has arisen which would require the publication of a Supplementary Prospectus;

	(C)	the condition set out in clause 2.1(BB) is not fulfilled; or

	(D)	there has been:

		(i)	a change in national or international financial, political, economic or stock market conditions (primary or secondary);

		(ii)	an incident of terrorism, outbreak or escalation of hostilities, war, declaration of martial law or any other calamity or crisis;

		(iii)	a suspension or material limitation in trading of the securities of the Company by the London Stock Exchange or on any exchange or over-the-counter market, or if trading generally on the New York Stock Exchange, the NASDAQ National Market or the London Stock Exchange has been suspended or limited, or minimum or maximum prices for trading have been fixed, or maximum ranges for prices have been required, by any of such exchanges or by such system or by order of the SEC, the National Association of Securities Dealers, Inc. or any governmental authority, or a material disruption has occurred in commercial banking or securities settlement or clearance services in the United States or in the EEA; or

		(iv)	a moratorium in commercial banking has been declared by the United States, the United Kingdom or a member state of the EEA,

		as would in the sole opinion of HM Treasury, acting in good faith, be likely to materially prejudice the success of the Open Offer, the subscription of Non-Accepted Shares by subscriber(s) procured by the Joint Bookrunners pursuant to clause 3.5 or clause 4.1, redemption of the Preference Shares, Accepted Shares Admission, Non-Accepted Shares Admission or dealings in the New Shares in the secondary market, then HM Treasury may give notice of any such matter to the Company, in which case clause 14.3 shall apply.

14.3	Where this clause applies and:

	(A)	notice has been given to the Company pursuant to clause 14.1 or 14.2 by HM Treasury, HM Treasury may in its sole discretion:

		(i)	allow the Open Offer to proceed on the basis of the Issue Documents subject, if HM Treasury so requests, to (i) the publication of a Supplementary Prospectus pursuant to section 87G of FSMA (ii) the


			publication of a supplementary Circular and (iii) to any additional requirements of the Prospectus Rules or the FSA; or

		(ii)	if it does not consider it to be necessary that the arrangements contemplated by this Agreement proceed to completion in order to maintain the financial stability of the United Kingdom, give notice to the Company and to the Joint Sponsors and CGMEL at any time prior to Accepted Shares Admission to the effect that this Agreement shall terminate and cease to have effect; and/or

	(B)	notice has been given to the Company pursuant to clause 14.1 by any of the Joint Sponsors or CGMEL, then clause 14.4 shall apply.

14.4	Where this clause applies, the Joint Sponsor that gave notice to the Company pursuant to clause 14.1 or CGMEL (the “ Notifying Sponsor ”) may, having consulted with HM Treasury and the UK Listing Authority, give notice to the Company and to HM Treasury terminating its appointment under this Agreement and all obligations of the Notifying Sponsor under this Agreement shall thereupon terminate and:

	(A)	if an application for Accepted Shares Admission or Non-Accepted Shares Admission and/or a declaration on production of a circular has been submitted to the FSA, the Notifying Sponsor shall, if relevant notify the FSA of the termination of its appointment as sponsor in respect of the Open Offer and/or the publication of the Circular;

	(B)	all references in this Agreement to the Joint Sponsors shall be deemed to be references to any Joint Sponsor that is not the Notifying Sponsor (if any) and, if the Notifying Sponsor is CGMEL, all reference to the Joint Bookrunners shall be deemed to be references to the Joint Bookrunners other than CGMEL;

	(C)	in respect of the Notifying Sponsor, the Notifying Sponsor shall have no claim against any other party to this Agreement and no other party to this Agreement shall have any claim against the Notifying Sponsor, in each case for fees, costs, damages, compensation or otherwise in respect of such resignation except that:

		(i)	such termination shall be without prejudice to any accrued rights or obligations under this Agreement;

		(ii)	the provisions of this clause 14.4 and clauses 1, 9, 10.2, 10.3, 11, 12, 13, 15, 16, 17, 18, 19 and 20 shall remain in full force and effect,

		and in particular the Company shall pay the commission and fees (to HM Treasury) and the costs and expenses as are payable in such circumstances under and in accordance with clauses 9.1 and 9.2; and

	(D)	the Company shall consult with HM Treasury and with any Joint Sponsor that is not the Notifying Sponsor to determine whether a further sponsor (and where the Notifying Sponsor is CGMEL, a further bookrunner) should be appointed in relation to the Open Offer and/or the publication of the Circular, as appropriate.


14.5	HM Treasury, the Joint Sponsors and CGMEL shall have no right to terminate this Agreement on or after Accepted Shares Admission, without prejudice to any of the rights and remedies of HM Treasury, the Joint Sponsors and CGMEL in respect of any breach by the Company of its obligations under this Agreement.

14.6	In the event that this Agreement is terminated by HM Treasury pursuant to the provisions of this clause 14, no party to this Agreement will have any claim against any other party to this Agreement for fees, costs, damages, compensation or otherwise except that:

	(A)	such termination shall be without prejudice to any accrued rights or obligations under this Agreement;

	(B)	the Company shall pay the commissions, fees, costs and expenses as are payable in such circumstance under and in accordance with clause 9.1 and clause 9.2; and

	(C)	the provisions of this clause 14.6 and clauses 1, 9, 10.2, 10.3, 10.7, 11, 12, 13, 15, 16, 17, 18, 19 and 20 shall remain in full force and effect.

15.	EXCLUSIONS OF LIABILITY

15.1	Without prejudice to clause 15.2, no claim shall be made by the Company or any of its subsidiary undertakings, affiliates or associates or by HM Treasury, or any of the directors, officers or employees of any of them in any jurisdiction against any Indemnified Person to recover any Loss or Claim suffered or incurred by any person and which arises out of the carrying out by any Indemnified Person of obligations or services in connection with this Agreement, or the redemption of the Preference Shares or any other agreements relating to the Open Offer or the redemption of the Preference Shares, or in connection with the Open Offer itself or the redemption of the Preference Shares except (otherwise than in connection with the matters referred to in clauses 11 or 13 or otherwise than as a result of a payment made or an obligation or liability to make payment arising under clauses 12 or 13) to the extent only that the Loss or Claim is determined in a final judgement by a court of competent jurisdiction, in the case of a HMT Indemnified Person, to have resulted from the fraud, bad faith or wilful default of such HMT Indemnified Person and, in the case of a CGMEL Indemnified Person, a UBS Indemnified Person, or a JPMC Indemnified Person is judicially determined, to have resulted from the fraud, bad faith, negligence or wilful default of that CGMEL Indemnified Person, UBS Indemnified Person, or JPMC Indemnified Person.

15.2	Notwithstanding any rights or claims which the Company or any of its respective subsidiary undertakings, affiliates or associates or any of the directors, officers or employees of any of them may have or assert against the Joint Sponsors or CGMEL in connection with this Agreement, the Open Offer, the redemption of the Preference Shares, or any of the other arrangements contemplated by the Issue Documents, or any of them, or this Agreement, no claim will be brought by the Company or by any of its respective subsidiary undertakings, affiliates or associates or any of the directors, officers or employees of any of them against any director or any other officer and/or employee of any Indemnified Person in respect of any conduct, action or omission by the individual concerned in connection with this Agreement, the Open Offer, the


	redemption of the Preference Shares or any of the other arrangements contemplated by the Issue Documents, or any of them, or this Agreement.

16.	MISCELLANEOUS

16.1	For the avoidance of doubt, the Company acknowledges and agrees that it is responsible for its own due diligence carried out in relation to the Open Offer and the redemption of the Preference Shares and that neither HM Treasury nor any of the Joint Sponsors nor the Joint Bookrunners shall be responsible to the Company or any Director for any due diligence of the Company in relation thereto unless it or they have agreed in writing to take specific responsibility for such due diligence.

16.2	The Company agrees that for the purpose of the Open Offer (including for the purposes of seeking subscriber(s) for Non-Accepted Shares pursuant to clause 3.5 or clause 4.1) and the redemption of the Preference Shares and of obtaining Accepted Shares Admission and Non-Accepted Shares Admission, neither HM Treasury nor any of the Joint Sponsors or the Joint Bookrunners shall be responsible for the provision of or obtaining advice as to the requirements of any applicable laws or regulations of any jurisdictions nor shall any such person be responsible where it or the Company has acted in the absence of such advice or in reliance on any advice obtained by the Company in respect thereof.

16.3	For the avoidance of doubt, and without prejudice to the provisions of clauses 11, 12 and 14, any costs and expenses incurred by the Joint Bookrunners or Joint Sponsors in connection with the arrangements contemplated by this Agreement that do not fall to be paid by the Company pursuant to clause 9, shall be payable by the Joint Bookrunners and Joint Sponsors in such proportions as they may agree, failing which shall be payable in equal proportions by each Joint Bookrunner.

17.	GENERAL

17.1	Any liability to any party under this Agreement may in whole or in part be released, compounded or compromised and time or indulgence may be given by any party in its absolute discretion as regards any other person under such liability without in any way prejudicing or affecting the first party’s rights against such other person under the same or a similar liability, whether joint and several or otherwise. For the avoidance of doubt, any reference in this Agreement to the agreement or consent of, or any notice or waiver by, HM Treasury or the Joint Sponsors or CGMEL shall be construed as the agreement or consent of, or any notice or waiver by (as the case may be), HM Treasury and each of the Joint Sponsors and CGMEL, except where expressly provided to the contrary.

17.2	No failure of any party to exercise, and no delay by it in exercising, any right, power or remedy in connection with this Agreement will operate as a waiver thereof, nor will any single or partial exercise of any such right preclude any other or further exercise of such right or the exercise of any other right. The rights provided in this Agreement are cumulative and not exclusive of any other rights (whether provided by law or otherwise). Any express waiver of any breach of this Agreement shall not be deemed a waiver of any subsequent breach.


17.3	Each of the parties hereto acknowledges that the Warranties given by the Company and the indemnity contained in clause 12 are, subject as provided in clause 17.13, given to HM Treasury, the Joint Sponsors, CGMEL and the Indemnified Persons (as the case may be) for themselves and not to them as agent of, trustee for or otherwise for the benefit of any other person including (without limitation) any person who may subscribe or purchase any of the New Shares.

17.4	Time shall be of the essence of this Agreement, both as regards any dates, times or periods mentioned and as regards any dates, times or periods which may be substituted for them in accordance with this Agreement or by agreement in writing between the parties.

17.5	This Agreement may be entered into in any number of counterparts and by the parties to it on separate counterparts, each of which when so executed and delivered shall be an original, but all the counterparts shall together constitute one and the same instrument.

17.6	Delivery of an executed counterpart signature page of this Agreement by e-mail (PDF) or telecopy shall be as effective as delivery of a manually executed counterpart of this Agreement. In relation to each counterpart, upon confirmation by or on behalf of the signatory that the signatory authorises the attachment of such counterpart signature page to the final text of this Agreement, such counterpart signature page shall take effect together with such final text as a complete authoritative counterpart.

17.7	This Agreement, together with the Engagement Letters (in the case of the Company, the Joint Sponsors and the Joint Bookrunners), the Original Placing Agreement and the Amended and Restated Placing Agreement (to the extent contemplated by clause 3.2), constitute the whole agreement and understanding between the parties in relation to the Open Offer, the redemption of the Preference Shares, Accepted Shares Admission, Non-Accepted Shares Admission and the publication of the Circular. Subject thereto, all previous agreements, understandings, undertakings, representations, warranties and arrangements of any nature whatsoever between the parties or any of them with any bearing on the Open Offer, the redemption of the Preference Shares, Accepted Shares Admission, Non-Accepted Shares Admission or the publication of the Circular are superseded and extinguished (and all rights and liabilities arising by reason of them, whether accrued or not at the date of this Agreement, are cancelled) to the extent they have such a bearing. In the event of any conflict between the terms of the Engagement Letters and this Agreement, this Agreement shall (as between the parties to the Engagement Letters) prevail. For the avoidance of doubt, the foregoing is without prejudice to the placing and open offer agreement dated 13 October 2008.

17.8	No variation of this Agreement shall be effective unless in writing and signed by or on behalf of each of the parties.

17.9	At any time after the date of this Agreement, the Company and the Joint Sponsors and the Joint Bookrunners shall, and shall use all reasonable endeavours to procure that any necessary third party shall, at the cost of that party execute such documents and do such acts and things as the party may reasonably require for the purpose of giving full effect to all the provisions of this Agreement by which it is bound.


17.10	If any provision in this Agreement shall be held to be illegal, invalid or unenforceable, in whole or in part, under any enactment or rule of law, such provision or part shall to that extent be deemed not to form part of this Agreement but the legality, validity and enforceability of the remainder of this Agreement shall not be affected.

17.11	All payments by the Company under this Agreement shall be paid without set-off or counterclaim, and free and clear of and without deduction or withholding for or on account of Tax, unless required by law. If any Tax is required by law to be deducted or withheld from or in connection with any such payment, the Company will:

	(A)	promptly upon becoming aware thereof, notify HM Treasury, the Joint Sponsors and CGMEL thereof;

	(B)	make that deduction or withholding and any payment of Tax required in connection with that deduction or withholding within the time allowed and in the minimum amount required by law;

	(C)	deliver to the payee such receipts, statements or other documents as the payee may reasonably request by way of evidence that the deduction or withholding has been made and any appropriate payment of Tax made to the relevant Tax Authority; and

	(D)	increase the amount payable so that the amount received by the payee (after such deduction or withholding, including for the avoidance of doubt any additional deduction or withholding required as a result of such increase) is equal to the amount which the payee would have received if no such deduction or withholding had been made.

17.12	If the Company makes an increased payment to HM Treasury, any Joint Sponsor, CGMEL or any other Indemnified Person in accordance with clause 9.8 or 17.11 and HM Treasury, the relevant Joint Sponsor or CGMEL or such other Indemnified Person (as the case may be) determines in good faith that it has obtained, utilised and retained a relief from Tax or a refund of Tax which is attributable to such increased payment made by the Company, then HM Treasury, the relevant Joint Sponsor or CGMEL or such other Indemnified Person (as the case may be) shall reimburse to the Company as soon as reasonably practicable an amount equal to such proportion of the Tax so saved or refunded as will leave HM Treasury, the relevant Joint Sponsor or CGMEL or the relevant other Indemnified Person (as the case may be), after such reimbursement, in the same after-Tax position (having regard to the time value of money) that it would have been in if the circumstances giving rise to such additional payment had not arisen. For the avoidance of doubt, nothing in this Agreement shall require HM Treasury, a Joint Sponsor or CGMEL or such other Indemnified Person to disclose any information in relation to its Tax affairs to the Company or any person acting for or on behalf of the Company.

17.13	Each Indemnified Person shall have the right under the Contracts (Rights of Third Parties) Act 1999 (which shall apply to this Agreement only to the extent provided in this clause 17.13) to enforce its rights against the Company under clause 12, clause 13, this clause 17 or clause 20.3, provided that HM Treasury will have the sole conduct of any action to enforce such rights on behalf of the HMT Indemnified Persons, CGMEL will


	have the sole conduct of any action to enforce such rights on behalf of the CGMEL Indemnified Persons, UBS will have the sole conduct of any action to enforce such rights on behalf of the UBS Indemnified Persons and JPMC will have the sole conduct of any action to enforce such rights on behalf of the JPMC Indemnified Persons. Except as provided above and as provided in clause 5.10, a person who is not a party to this Agreement has no right under the Contracts (Rights of Third Parties) Act 1999 to enforce any term of this Agreement. HM Treasury, the Joint Sponsors, CGMEL and the Company may agree to terminate this Agreement or vary any of its terms without the consent of any Indemnified Person or any other third party. Neither HM Treasury nor the Joint Sponsors nor CGMEL will have any responsibility to any Indemnified Person under or as a result of this Agreement.

18.	ASSIGNMENT OR NOVATION

18.1	Subject to clause 18.2, HM Treasury shall be permitted to novate its rights and obligations under this Agreement (including any obligation to subscribe for New Shares) to any entity which is wholly-owned, directly or indirectly, by HM Treasury (a “ Wholly-Owned Entity ”) and each of the Company, the Joint Bookrunners and the Joint Sponsors agrees to consent to, and to execute and deliver all such documentation as may be necessary to effect, any such novation provided that such novation is effected on substantially the same terms as are contained in the pro forma novation agreement set out in Schedule 4 to this Agreement.

18.2	In the event that HM Treasury novates its rights and obligations under this Agreement pursuant to clause 18.1, HM Treasury shall procure that, immediately prior to any such Wholly-Owned Entity ceasing to be wholly-owned directly or indirectly by HM Treasury, such rights and obligations under this Agreement shall be novated to HM Treasury or any other Wholly-Owned Entity.

18.3	Subject to clause 18.1, no party to this Agreement shall be permitted to assign or novate, or purport to assign or novate, all or any part of the benefit of, or its rights or benefits under, this Agreement to any other person without the prior written consent of each other party.

19.	NOTICES

19.1	Any notice, claim, demand or other communication in connection with this Agreement shall be in writing and shall be sufficiently given or served if delivered or sent:

	(A)	in the case of the Company to:

		Lloyds Banking Group plc
		Henry Duncan House
		129 George St
		Edinburgh
		Scotland EH2 4LH

		Attention: Company Secretary

	(B)	in the case of the Joint Sponsors and CGMEL to:


		(i)	Citigroup Global Markets U.K. Equity Limited
			Citigroup Centre
			Canada Square
			Canary Wharf
			London E14 5LB

			Fax: 020 7986 1103

			Attention: ECM Syndicate

		and

		(ii)	UBS Limited
			1 Finsbury Avenue,
			London, EC2M 2PP

			Fax: 020 7567 4127

			Attention: Equity Capital Markets Group

			With a copy to Transactions Legal

			Fax: 020 7567 2364

		and

		(iii)	J.P. Morgan Cazenove Limited
			20 Moorgate
			London EC2R 6FA

			Fax: 020 7155 9000

			Attention: Legal Department

		and

	(C)	in the case of HM Treasury to:

		Treasury Solicitor
		1 Horse Guards Road
		London SW1A 2HQ

		Fax: 0207 270 4844

		Attention: Nikhil Rathi (team leader, financial stability)

19.2	Any such notice or other communication shall be delivered by hand or sent by fax or pre-paid first class post. In the absence of evidence of earlier receipt, a notice or other communication is deemed given: (i) if delivered by hand, when left at the address referred to in clause 19.1; (ii) if sent by fax, when confirmation of its transmission has


	been recorded on the sender’s fax machine; and (iii) if sent by post, 48 hours from the time of posting.

19.3	Any notice given by HM Treasury or by a Joint Sponsor or Joint Bookrunner under clause 14.1 or 14.2 may also be given to the Company’s representative referred to in clause 19.1 or to any Director by any director or other authorised representative of HM Treasury or the Joint Sponsors or the Joint Bookrunners either personally or by telephone (to be confirmed immediately in writing) and shall have immediate effect.

19.4	Any party may notify the other party to this Agreement of a change of its name, relevant addressee, address or fax number for the purposes of clause 19.1 provided that such notification shall only be effective on:

	(A)	the date specified in the notification as the date on which the change is to take place; or

	(B)	if no date is specified or the date specified is less than five Business Days after the date on which notice is given, the date falling five Business Days after notice of any such change has been given.

20.	GOVERNING LAW AND SUBMISSION TO JURISDICTION

20.1	This Agreement and any non-contractual obligations arising out of or in connection with to it shall be governed by and construed in accordance with English Law.

20.2	Subject to clause 20.3, the courts of England have exclusive jurisdiction to hear and decide any suit, action or proceedings, and to settle any disputes (including claims for set-off and counterclaims), which may arise out of or in connection with this Agreement (respectively, “ Proceedings ” and “ Disputes ”) and, for these purposes, the Company and the Joint Sponsors and the Joint Bookrunners irrevocably submit to the jurisdiction of the courts of England.

20.3	Notwithstanding the provisions of clause 20.2, in the event that any Indemnified Person becomes subject to proceedings brought by a third party (the “ Foreign Proceedings ”) in the courts of any country other than England (including, without prejudice to the generality of the foregoing, in any court of competent jurisdiction in the United States) (the “ Foreign Jurisdiction ”), such Indemnified Person shall be entitled, without objection by the Company, to take such steps as are available in the Foreign Jurisdiction, in the circumstances of the Foreign Proceedings, including (if reasonably necessary) the issuing of separate proceedings, to ensure that any issues between any such Indemnified Person and the Company are determined in the Foreign Jurisdiction as part of, or as closely connected (as the procedure of the Foreign Jurisdiction will permit) with, the Foreign Proceedings and the Company hereby submits to the jurisdiction of the Foreign Jurisdiction for this purpose.

20.4	The Company and the Joint Sponsors and the Joint Bookrunners irrevocably waive any objection to the jurisdiction of any courts referred to in this clause 20.

20.5	The Company and the Joint Sponsors and the Joint Bookrunners irrevocably agree that a judgment and/or order of any court referred to in this clause 20 based on any matter


	arising out of or in connection with this Agreement (including but not limited to the enforcement of any indemnity) shall be conclusive and binding on it and may be enforced against it in any other jurisdiction, whether or not (subject to due process having been served on it) it participates in the relevant proceedings.

20.6	The Company agrees to appoint an agent for service of process in any Foreign Jurisdiction other than England in which any other party is subject to legal suit, action or proceedings based on or arising under this Agreement within 14 days of receiving written notice of such legal suit, action or proceedings and the request to appoint such agent for service. In the event that the Company does not appoint such an agent within 14 days of the notice requesting it to so, such other party may appoint a commercial agent for service for the Company on the Company’s behalf and at the Company’s expense and the Company agrees that subject to being notified of such appointment in writing, service upon such commercial agent will constitute service upon the Company.

20.7	The Company irrevocably appoints Lloyds TSB Bank plc of 25 Gresham Street, London EC2V 7HN to be its agent for the receipt of Service Documents. It agrees that any Service Document may be effectively served on it in connection with Proceedings in England and Wales by service on its agent effected in any manner permitted by the Civil Procedure Rules.

	“ Service Document ” means a claim form, application notice, order, judgment or other document relating to any Proceedings.

20.8	If the agent at any time ceases for any reason to act as such, the Company shall appoint a replacement agent having an address for service in England or Wales and shall notify HM Treasury and the Joint Sponsors of the name and address of the replacement agent. Failing such appointment and notification, HM Treasury, the Joint Sponsors and CGMEL shall be entitled by notice to the Company to appoint a replacement agent to act on behalf of the Company. The provisions of this clause applying to service on an agent apply equally to service on a replacement agent.

20.9	Process by which any Proceedings are begun in England may be served on a party by being delivered in accordance with clause 19. Nothing contained in this clause 19.9 affects the right to serve process in another manner permitted by law.

SCHEDULE 1
CERTIFICATES TO BE DELIVERED

Part A
Certificate to be delivered pursuant to clause 11.7 prior to and
with effect immediately before Accepted Shares Admission and Non-Accepted Shares
Admission

[ Company Letterhead ]


To:	The Commissioners of Her Majesty’s Treasury
	1 Horse Guards Road
	London SW1A 2HQ

	Attention of: Nikhil Rathi

	[ Joint Sponsors ]

	[ Joint Bookrunners ]

	[ date ]

Dear Sirs

Proposed Open Offer of 10,408,535,000 Ordinary Shares of 25 pence each (the “Open Offer”)

Further to the open offer agreement between Lloyds Banking Group plc and HM Treasury dated 7 March 2009 as amended and restated between Lloyds Banking Group plc, HM Treasury, Citigroup Global Markets U.K. Equity Limited, J.P. Morgan, Cazenove Limited and UBS Limited on 20 March 2009 and on 18 May 2009 (the “ Agreement ”), we confirm that:


(a)	the FSA has agreed to admit the Accepted Shares/Non-Accepted Shares to the Official List subject only to the making of an announcement in accordance with paragraph 3.2.7G of the Listing Rules;

(b)	the LSE has agreed to admit the Accepted Shares/Non-Accepted Shares to trading on the LSE subject only to the making of an announcement in accordance with paragraph 2.1 of the Admission and Disclosure Standards;

(c)	it has not come to the notice of any Director that there is any fact or circumstance which constitutes a breach of any of the Warranties given under the Agreement or which has caused or would or might cause any of the Warranties given pursuant to the Agreement to become untrue, inaccurate or misleading by reference to the facts or circumstances existing at 8.00 a.m. on [ ● ] ;

(d)	it has not come to the notice of any Director that a Material Adverse Effect has occurred;

(e)	it has not come to the notice of any Director that any other event has occurred that would entitle HM Treasury to terminate the Agreement;


(f)	the Resolutions have been passed without amendment at the GM;

(g)	it has not come to the notice of any Director that the Company is in breach of any of its obligations under the Agreement; and

(h)	[ insofar as the Directors are aware (subject only to the giving of this letter and excluding any conditions set out in clause 2.1 of the Agreement, the satisfaction of which has been waived by HM Treasury pursuant to clause 2.4 of the Agreement or by the Company pursuant to clause 2.5 of the Agreement, or which is treated as waived pursuant to clause 2.6 of the Agreement) the conditions set out in clause 2.1 of the Agreement have all been fulfilled. ] ¹

For the purposes of this letter, where in a representation, warranty or undertaking there is an express or implied reference to the “date of this Agreement”, that reference is to be construed as a reference to “immediately prior to Accepted Shares Admission”/Non-Accepted Shares Admission.

Yours faithfully

Director

for and on behalf of
Lloyds Banking Group PLC

¹ Only for letter delivered at Accepted Shares Admission.

Part B
Certificate to be delivered pursuant to clause 11.7 prior to and with effect
immediately before the issue of any Supplementary Prospectus
and at the Time of Sale, if any


To:	The Commissioners of Her Majesty’s Treasury
	1 Horse Guards Road
	London SW1A 2HQ

	Attention of: Nikhil Rathi

	[ Joint Sponsors ]

	[ Joint Bookrunners ]

	[ date ]

Dear Sirs

Proposed Open Offer of up to 10,408,535,000 ordinary shares of 25 pence each (the “Open Offer”)

Further to the open offer agreement between Lloyds Banking Group plc, HM Treasury dated 7 March as amended and restated between Lloyds Banking Group plc, HM Treasury, Citigroup Global Markets U.K. Equity Limited, J.P. Morgan, Cazenove Limited and UBS Limited on 20 March 2009 and on 18 May 2009 (the “ Agreement ”), we confirm that:


(a)	it has not come to the notice of any Directors that there is any fact or circumstance which constitutes a breach of any of the Warranties given under the Agreement or which has caused or would or might cause a Warranty to become untrue, inaccurate or misleading by reference to the facts or circumstances existing at 8.00 a.m. on [ • ] ; and

(b)	it has not come to the notice of any Director that the Company is in breach of any of its obligations under the Agreement;

(c)	it has not come to the notice of any Director that a Material Adverse Effect has occurred; and

(d)	it has not come to the notice of any Director that any other event has occurred that would entitle HM Treasury to terminate the Agreement.

Yours faithfully

Director
for and on behalf of
Lloyds Banking Group PLC

SCHEDULE 2
DOCUMENTS TO BE DELIVERED

References in this Schedule 2 to copies or certified copies of documents, accounts, minutes, reports or other information shall be deemed to refer to one copy for each party to this Agreement other than the Company.

PART I
Documents to be delivered prior to, on or as soon as practical after execution of this
Agreement

Certified copies of an extract of the minutes of a meeting of the Board (or of the duly authorised committee of such Board) approving and authorising, the execution of this Agreement (and, if the said resolution is of such a committee, a certified copy of the resolution of the Board appointing such committee) are to be delivered by the Company to the Joint Sponsors, HM Treasury and the Joint Bookrunners prior to, on or as soon as practical after execution of this Agreement.

PART II
Documents relating to the Circular and the Application Form to be delivered on the
Posting Date under clause 3.19

The following documents are to be delivered by the Company to the Joint Sponsors, HM Treasury and, where agreed between the Company and the Joint Bookrunners, the Joint Bookrunners on the Posting Date, to the extent such documents are applicable under the Listing Rules and/or Prospectus Rules, as referred to in clause 3.19:


1.	copies of the Circular bearing evidence of the formal approval of the FSA pursuant to the Listing Rules;

2.	certified copies of letters in a form acceptable to the Joint Sponsors, acting reasonably, signed by each of the Directors authorising the publication of the Circular and accepting responsibility for the Circular and including a power of attorney in favour of each of the other Directors;

3.	certified copies of the Verification Materials prepared in connection with the Circular signed by or on behalf of each person to whom responsibility is therein assigned and copies of all evidence supporting answers in the notes;

4.	certified copies of the resolution of the Board of Directors (or of the duly authorised Committee of such Board) approving and authorising the issue of the Circular, the Form of Proxy, the Application Form and any other documents to be issued on the Posting Date (and if the said resolution is of such a Committee, a certified copy of the resolution of the Board of Directors appointing such Committee);

5.	certified copies of a memorandum to the Directors from Linklaters LLP in connection with the Open Offer explaining the nature of their responsibilities and obligations as directors of a listed company under the Listing Rules and DTRs, in a form acceptable to the Joint Sponsors, acting reasonably;

6.	original copies of the letter, in a form acceptable to the Joint Sponsors and CGMEL, acting reasonably, duly signed by the Auditors and dated the Posting Date:

(a)	providing comfort on there being no significant change in the financial and trading position (including indebtedness) of the Group since 31 December 2008; and

(b)	providing comfort on the proper and accurate extraction of financial information relating to the Group contained in the Circular.

7.	original copies of the letter, in a form acceptable to the Joint Sponsors and CGMEL, acting reasonably, duly signed by the Auditors and dated the Posting Date giving consent to the inclusion in the Circular of their name and reports and letters in the form and context in which they are respectively included;

8.	original copies of the letter, in a form acceptable to the Joint Sponsors and CGMEL, acting reasonably, duly signed by the Company and dated the Posting Date providing


	comfort on there being no significant change in the financial and trading position (including indebtedness) of the Group since 31 December 2008;

9.	certified copies of any press release relating to the posting of the Circular;

10.	copies of the Form of Proxy;

11.	copies of the Application Form;

12.	copies of any other document(s) issued on the Posting Date;

13.	a certified copy of each of the other documents stated in the Prospectus and the Circular as being available for inspection; and

14.	such other documents as may be reasonably required by HM Treasury and/or the Joint Sponsors.

PART III
Documents relating to the Prospectus to be delivered on the Posting Date under
clause 3.20

The following documents are to be delivered by the Company to the Joint Sponsors, HM Treasury and, (other than where the document is solely for the purposes of the Joint Sponsors in their capacity as sponsors), the Joint Bookrunners on the Posting Date as referred to in clause 3.20 and the date of publication of each Supplementary Prospectus:


1.	certified copies of the signed applications for admission to the Official List of the New Shares;

2.	certified copies of the signed application for admission to trading of the New Shares on the London Stock Exchange;

3.	certified copies of the passporting confirmation for the Prospectus issued by the competent authority in the Relevant Member State into which the Prospectus is being passported;

4.	certified copies of the completed ‘Form A’, to be submitted to the FSA in accordance with paragraph 3.1.1(1) of the Prospectus Rules for approval of a prospectus in accordance with Part VI of the FSMA;

5.	certified copies of the Prospectus bearing evidence of the formal approval of the FSA pursuant to the Listing Rules;

6.	original letters, in a form acceptable to the Joint Sponsors and CGMEL, acting reasonably, duly signed by the Company’s counsel in relation to paragraph 8.3.4R of the UK Listing Rules and dated the Posting Date;

7.	original letters, in a form acceptable to the Joint Sponsors and CGMEL, acting reasonably, duly signed by the Company’s counsel in relation to paragraphs, 8.4.8R and 8.4.9R of the UK Listing Rules and dated the Posting Date;

8.	original letters, in a form acceptable to the Joint Sponsors and CGMEL, acting reasonably, duly signed by the Company in relation to paragraphs 8.3.4R, 8.4.8R and 8.4.9R of the UK Listing Rules and dated the Posting Date;

9.	original letters, in a form acceptable to the Joint Sponsors and CGMEL, acting reasonably, duly signed by the Auditors in relation to paragraphs 8.4.8(1), 8.4.8(2) and 8.4.9(3) of the UK Listing Rules and dated the Posting Date;

10.	original letters, in a form acceptable to the Joint Sponsors and CGMEL, acting reasonably, signed by each of the Directors authorising the publication of the Prospectus, accepting responsibility for information contained in the Prospectus and any Supplementary Prospectus and acknowledging their understanding of their responsibilities under the UK Listing Rules and the Disclosure Rules in accordance with paragraph 8.3.4R of the UK Listing Rules and dated the Posting Date;


11.	certified copies of the Verification Materials prepared in connection with the Prospectus signed by or on behalf of each person to whom responsibility is therein assigned and copies of all evidence supporting answers in the notes;

12.	certified copies of the resolution of the Board of Directors (or of the duly authorised Committee of such Board) approving and authorising the issue of the Prospectus (and if the said resolution is of such a Committee, a certified copy of the resolution of the Board of Directors appointing such Committee);

13.	to the extent not provided under Part II of Schedule 2, original copies of any pro forma financial information report incorporated in the Prospectus, duly signed by the Auditors and dated the Posting Date;

14.	to the extent not provided under Part II of Schedule 2, certified copies of the Profit Forecast Report;

15.	certified copies of each of the documents stated in the Prospectus as being available for inspection and incorporated by reference into the Prospectus;

16.	original copies of the letter, in a form acceptable to the Joint Sponsors and CGMEL, acting reasonably, duly signed by the Auditors and dated the Posting Date:


(a)	providing comfort on there being no significant change in the financial and trading position (including indebtedness) of the Group since 31 December 2008;

(b)	providing comfort on the proper and accurate extraction of financial information relating to the Group contained in the Prospectus; and

(c)	providing comfort on the capitalisation and indebtedness statement included in the Prospectus;


17.	original copies of the letter, in a form acceptable to the Joint Sponsors and CGMEL, acting reasonably, duly signed by the Auditors and dated the Posting Date providing comfort on UK taxation information as contained in the Prospectus;

18.	original copies of the letter, in a form acceptable to the Joint Sponsors and CGMEL, acting reasonably, duly signed by the Auditors and dated the Posting Date giving consent to the inclusion in the Prospectus of their name and reports and letters in the form and context in which they are respectively included;

19.	original copies of letters, in a form acceptable to the Joint Sponsors and CGMEL, acting reasonably, duly signed by the Auditors and dated the same date as the Prospectus on the matters contemplated in the U.S. Statement of Auditing Standards No. 72 (and including four original copies of a “SAS 72 look-a-like” letter) with respect to the financial statements and certain financial information relating to the Group contained, or incorporated by reference, in the Prospectus;

20.	original copies of the letter, in a form acceptable to the Joint Sponsors and CGMEL, acting reasonably, duly signed by KPMG LLP and dated the Posting Date, providing


	comfort on the proper and accurate extraction of historical financial information relating to the HBOS Group contained in the Prospectus;

21.	original copies of the letter, in a form acceptable to the Joint Sponsors and CGMEL, acting reasonably, duly signed by KPMG LLP and dated the Posting Date, in relation to paragraphs 8.4.8R and 8.4.9R of the Listing Rules;

22.	original copies of the letter, in a form acceptable to the Joint Sponsors and CGMEL, acting reasonably, duly signed by the Company and dated the Posting Date providing comfort on there being no significant change in the financial and trading position (including indebtedness) of the Group since 31 December 2008;

23.	original copies of a rule 10b-5 disclosure letter and no-registration, tax disclosure and “investment company” opinions from Linklaters LLP (as U.S. counsel for the Company), and a rule 10b-5 disclosure letter and no-registration opinion from US Counsel for the Joint Bookrunners, in each case, in a form acceptable to the Joint Sponsors and CGMEL and to HM Treasury, acting reasonably;

24.	certified copies of a memorandum to the Directors from Linklaters LLP in connection with the Open Offer explaining the nature of their responsibilities and obligations as directors of a listed company under the Listing Rules and DTRs, in a form acceptable to the Joint Sponsors and CGMEL, acting reasonably;

25.	certified copies of the registrar’s agreement entered into by the Company with the Registrar in relation to the Open Offer;

26.	certified copies of the press release relating to the posting of the Prospectus;

27.	certified copies of the Memorandum and Articles of Association of the Company;

28.	certified copies of any power of attorney pursuant to which any Director signed any of the documents mentioned above in a form acceptable to the Joint Sponsors and CGMEL, acting reasonably;

29.	original copies of the Working Capital Report relating to the Group duly signed by PricewaterhouseCoopers LLP, in a form acceptable to the Joint Sponsors and CGMEL, acting reasonably, and dated the Posting Date; and

30.	such other documents as may be reasonably required by HM Treasury, the Joint Bookrunners and/or the Joint Sponsors.

PART IV
Documents to be delivered immediately prior to Accepted Shares Admission, at the Time
of Sale, if any, and immediately prior to Non-Accepted Shares Admission

The following documents are to be delivered by the Company to the Joint Sponsors, HM Treasury and, where agreed between the Company and the Joint Bookrunners, the Joint Bookrunners (other than where the document is solely for the purposes of the Joint Sponsors in their capacity as sponsors) not later than 5.00 p.m. on the Dealing Day immediately preceding the proposed date of Accepted Shares Admission/Non-Accepted Shares Admission and at the Time of Sale, if any (where indicated):


1.	certified copies of the Resolutions;

2.	certified copies of the resolution of the Board (or of the duly authorised committee of the Board) provisionally allotting the relevant New Shares (and, if the said resolution is of such a committee, a certified copy of the resolution of the Board appointing such committee (if not previously delivered to the HM Treasury, the Joint Sponsors and CGMEL));

3.	certified copies of the resolution of the Board of Directors (or of the duly authorised committee of the Board) approving the redemption of the Preference Shares (and, if the said resolution is of such a committee, a certified copy of the resolution of the Board appointing such committee (if not previously delivered to HM Treasury, to the Joint Sponsors and CGMEL));

4.	original copies of a letter addressed to HM Treasury, to the Joint Sponsors and to CGMEL in the form set out in Part A of Schedule 1 dated as of the date of Accepted Shares Admission/Non-Accepted Shares Admission and in the form set out in Part B of Schedule 1 dated as at the Time of Sale, if any;

5.	original copies of updating versions of the letters referred to in paragraphs 6 and 8 of Part II of this Schedule 2 and paragraphs 7, 8, 16, 17, 18, 19 and 20 of Part III of this Schedule 2 to the extent in each case such letters related to the Prospectus as well as written opinions in the form previously provided to HM Treasury, the Joint Sponsors and to CGMEL from Linklaters LLP, the Solicitors to the Joint Sponsors and Joint Bookrunners and from Maclay Murray & Spens LLP, all dated the date of Accepted Shares Admission and Non-Accepted Shares Admission (and, in the case of the items referred to in paragraphs 6 and 8 of Part II of this Schedule 2 and paragraphs 7, 8, 16, 17, 18, 19 and 20 of Part III of this Schedule 2, also referencing the Time of Sale, if any); and

7.	such other documents as may be reasonably required by HM Treasury, the Joint Bookrunners and/or the Joint Sponsors.

	Note: It is agreed that, other than in respect of the Linklaters LLP and Solicitors to the Joint Sponsors and Joint Bookrunners opinions, the parties will discuss (acting reasonably) the extent, to which it is necessary and customary to update all of the documents referred to in paragraph 5.

SCHEDULE 3
WARRANTIES

PART I
Representations, warranties and undertakings given under clauses 11.1 and 11.1A


1.	Compliance

1.1	Each member of the Group, other than those undertakings in which the Company holds a proportion of the capital that is not likely to have a significant effect on the assessment of its own assets and liabilities, financial position or profits and losses, has been duly incorporated and is validly existing as a company with limited liability under the laws of the country of its incorporation with full corporate power and authority to own, lease and operate the properties which it owns, leases and operates and to own its other assets and carry on its business as presently carried on and as intended to be carried on in all material respects as described in the Prospectus, when published.

1.2	All licences, permissions, authorisations and consents which are material for carrying on the business of the Group have been obtained and are in full force and effect and, so far as the Company is aware, there are no circumstances which might lead to any of such licences, permissions, authorisations and consents being revoked, suspended, varied or refused renewal to an extent which would, or would be reasonably likely to, be (singly or in the aggregate) material in the context of the Open Offer, any subscription for New Shares by HM Treasury, Ordinary Shareholders or subscriber(s) procured by the Joint Bookrunners pursuant to clause 3.5 or clause 4.1, the redemption of the Preference Shares, Accepted Shares Admission, Non-Accepted Shares Admission or post-Accepted Shares or Non-Accepted Shares Admission dealings in the Ordinary Shares.

1.3	Save as would not be (singly or in the aggregate) material in the context of the Open Offer, any subscription for New Shares by HM Treasury, Ordinary Shareholders or subscriber(s) procured by the Joint Bookrunners pursuant to clause 3.5 or clause 4.1, the redemption of the Preference Shares, Accepted Shares Admission, Non-Accepted Shares Admission or post-Accepted Shares or Non-Accepted Shares Admission dealings in the Ordinary Shares, all sums due in respect of the issued share capital of the Company at the date of this Agreement have been paid to and received by the Company. No owner or holder of any of the share capital of the Company shall, with effect from Accepted Shares Admission or Non-Accepted Shares Admission, have any right, in his capacity as such, in relation to the Group other than as set out in the memorandum and articles of association of the Company.

1.4	Save as would not be (singly or in the aggregate) material in the context of the Open offer, any subscription for New Shares by HM Treasury, Ordinary Shareholders or subscriber(s) procured by the Joint Bookrunners pursuant to clause 3.5 or clause 4.1, the redemption of the Preference Shares, Accepted Shares Admission, Non-Accepted Shares Admission or post-Accepted Shares or Non-Accepted Shares Admission dealings in the Ordinary Shares, the Company is the beneficial owner free from all Adverse Interests of the shares it holds in each of its subsidiary undertakings.

1.5	Save as would not be (singly or in the aggregate) material in the context of the Open Offer, any subscription for New Shares by HM Treasury, Ordinary Shareholders or


	subscriber(s) procured by the Joint Bookrunners pursuant to clause 3.5 or clause 4.1, the redemption of the Preference Shares, Accepted Shares Admission, Non-Accepted Shares Admission or post-Accepted Shares or Non-Accepted Shares Admission dealings in the Ordinary Shares, the Company and the Directors have at all times complied with the provisions of the Company’s memorandum and articles of association and the Companies Acts and, subject to the passing of the Resolutions, have or will have the right, power and authority under the memorandum and articles of association of the Company, or pursuant to resolution passed in general meeting, to enter into and perform this Agreement (including, without limitation, the power to pay commissions, fees, costs and expenses provided for in this Agreement), to make the Open Offer, to allot and issue the New Shares in certificated and uncertificated form, to redeem the Preference Shares, to issue the Issue Documents in the manner proposed without any sanction or consent by members of the Company or any class of them and, subject to Accepted Shares Admission, there are no other consents, authorisations or approvals required by the Company in connection with the entering into and the performance of this Agreement and the actions referred to in this paragraph 1.5 which have not been irrevocably and unconditionally obtained. The Company’s existing Ordinary Shares are participating securities in, and have not been suspended from, CREST.

1.6	Save as would not be (singly or in the aggregate) material in the context of the Open Offer, any subscription for New Shares by HM Treasury, Ordinary Shareholders or subscriber(s) procured by the Joint Bookrunners pursuant to clause 3.5 or clause 4.1, the redemption of the Preference Shares, Accepted Shares Admission, Non-Accepted Shares Admission or post-Accepted Shares or Non-Accepted Shares Admission dealings in the Ordinary Shares, the allotment and issue of the New Shares, the issue and distribution of the Issue Documents and any other document by or on behalf of the Company in connection with Accepted Shares Admission or Non-Accepted Shares Admission, the Open Offer or the redemption of the Preference Shares will comply in all material respects with all agreements to which any Group Company is a party or by which any such Group Company is bound and will comply with: (a) all applicable laws and regulations of the United Kingdom (including, without limitation, the Companies Acts, FSMA, the Listing Rules, the Prospectus Rules, the DTRs and the Admission and Disclosure Standards) and all applicable United States laws and regulations and (in all material respects) with all applicable laws and regulations of any relevant jurisdiction; (b) the memorandum and articles of association of the Company; and (c) when published, the Working Capital Report; and will not exceed or infringe any restrictions or the terms of any contract, indenture, security, obligation, commitment or arrangement by or binding upon the board of directors of any Group Company or their respective properties, revenues or assets or result in the implementation of any right of pre emption or any other material provision thereof, or result in the imposition or variation of any material rights or obligations of any Group Company.

1.7	The statement set out in clause 2.1(J) is true and accurate and not misleading.

1.8	The New Shares will, upon allotment, be free from all Adverse Interests and will rank pari passu in all respects with the existing issued shares in the issued share capital of the Company.

1.9	The Company has complied in all material respects with the requirements of Euroclear and the Regulations.


1.10	No member of the Group or any person acting on its behalf has taken, directly or indirectly, any action designed to or which has constituted or which might reasonably be expected to cause or result in stabilisation or manipulation of the price of any security of the Company.

1.11	The Company has not paid or agreed to pay to any person any compensation for soliciting another to purchase any New Shares (except as contemplated in this Agreement).

1.12	All information provided by the Company, and any of its subsidiary undertakings or any of its or their officers or employees in connection with the Open Offer, the APS, the Class B Shares and at the Due Diligence Meetings to HM Treasury and/or to the Joint Sponsors and/or CGMEL and/or the Auditors in connection with its or their due diligence enquiries or similar requests for information has been supplied in good faith and such information was when supplied, and remains, true and accurate in all material respects and no further information requested has been withheld, the absence of which might reasonably be considered to be material to such due diligence enquiries or requests for information.

2.	Announcements

2.1	The Press Announcement does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, provided that this warranty shall not cover information contained in the Press Announcement which was furnished in writing to the Company by the Joint Sponsors expressly for use therein; and all expressions of opinion, intention, belief or expectation of the Company or the Directors contained in the Press Announcement are truly and honestly held and made on reasonable grounds after due and careful enquiry.

2.2	With respect to all Previous Announcements, all statements of fact contained therein were at the date of the relevant Previous Announcement and, save to the extent corrected, amended or supplemented in any document or announcement issued or made by or on behalf of the Company or any member of the Group subsequent thereto, remain true and accurate in all material respects and not misleading in any material respect and all estimates, expressions of opinion or intention or expectation of the Directors contained therein were made on reasonable grounds and were honestly held by the Directors and were fairly based and there were no facts known (or which could on reasonable enquiry have been known by the Directors) the omission of which would make (i) any material statement of fact, or (ii) any estimate or statement or expression of opinion, intention or expectation in any of the Previous Announcements misleading and all Previous Announcements complied in all material respects with the memorandum and articles of association of the Company, the Listing Rules, the DTRs, the Prospectus Rules, the Companies Acts, FSMA, all applicable rules and requirements of the London Stock Exchange and the FSA, all applicable US laws and regulations and (in all material respects) all other applicable requirements of statute, statutory regulation or any regulatory body.


3.	Accounts

3.1	The Accounts:

	(A)	have been prepared and audited in accordance and comply with IFRS, the Companies Acts and all applicable laws and regulations;

	(B)	give a true and fair view of the financial condition and of the state of affairs of the Group as at the end of each of the relevant financial periods (including the Accounts Date) and of the profit, loss, cash flow and changes in equity of the Group for such periods; and

	(C)	either made proper provision for, or, where appropriate, in accordance with IFRS, include a note in respect of all material liabilities or commitments, whether actual, deferred or contingent, of the Group.

3.2	The Directors have established procedures which provide a reasonable basis for them to make proper judgements on an ongoing basis as to the financial position and prospects of the Company and the Group.

3.3	There are no, and during the past four years have been no: (i) material weaknesses in the internal controls over financial reporting (whether or not remediated) of the Company or the Group; (ii) changes in the internal controls over financial reporting of the Company or the Group that have materially adversely affected, or would be reasonably likely to materially adversely affect, the internal controls over financial reporting of the Company or the Group; or (iii) material fraud that involves any current member of management of the Company or (so far as the Company is aware) of any other member of the Group and no material fraud that involves any employee of the Company or (so far as the Company is aware) of any other member of the Group.

4.	Guarantees, indemnities, borrowings and default

4.1	Save for:

	(A)	guarantees or indemnities given by any member of the Group in the ordinary course of business; and

	(B)	any guarantees, indemnities or other similar arrangements given by the Company or any Group Company to HM Treasury or any other UK government department and/or the Joint Sponsors,

	no member of the Group has given or has agreed to give any guarantee or indemnity or similar obligation in favour of a third party and no member of the Group has any current or known future liability, howsoever arising which, in any of the foregoing cases, would, or would be reasonably likely to, be (singly or in the aggregate) material in the context of the Open Offer, any subscription for New Shares by HM Treasury, Ordinary Shareholders or subscriber(s) procured by the Joint Bookrunners pursuant to clause 3.5 or clause 4.1, the redemption of the Preference Shares, Accepted Shares Admission, Non-Accepted Shares Admission or post-Accepted Shares or Non-Accepted Shares Admission dealings in the Ordinary Shares.


4.2	No event has occurred nor have any circumstances arisen (and the making and completion of the Open Offer itself, the redemption of the Preference Shares and the allotment and issue of the New Shares will not give rise to any such event or circumstance) so that any person is or would be entitled, or could, with the giving of notice or lapse of time or the fulfilment of any condition or the making of any determination, become entitled, to require repayment before its stated maturity of, or to take any step to enforce any security for, any indebtedness of any member of the Group and no person to whom any indebtedness, of any member of the Group which is payable on demand is owed has demanded or threatened to demand repayment of, or taken or threatened to take any step to enforce any guarantee, indemnity or other security for, the same, which, in any of the foregoing cases, would, or would be reasonably likely to, be (singly or in the aggregate) material or have material consequences in each case in the context of the Open Offer, any subscription for New Shares by HM Treasury, Ordinary Shareholders or subscriber(s) procured by the Joint Bookrunners pursuant to clause 3.5 or clause 4.1, the redemption of the Preference Shares, Accepted Shares Admission, Non-Accepted Shares Admission or post-Accepted Shares or Non-Accepted Shares Admission dealings in the Ordinary Shares or the business of the Group.

4.3	There are no companies, undertakings, partnerships or joint ventures in existence in which any member of the Group has an ownership interest but whose results are not consolidated with the results of the Group, but whose default would affect the indebtedness or increase the contingent liabilities of the Group to an extent which would, or would be reasonably likely to, be (singly or in the aggregate) material in the context of the Open Offer, any subscription for New Shares by HM Treasury, Ordinary Shareholders or subscriber(s) procured by the Joint Bookrunners pursuant to clause 3.5 or clause 4.1, the redemption of the Preference Shares, Accepted Shares Admission, Non-Accepted Shares Admission or post-Accepted Shares or Non-Accepted Shares Admission dealings in the Ordinary Shares.

4.4	No event or circumstance exists, has occurred or arisen or, so far as the Company is aware, is about to occur which constitutes or results in, or would with the giving of notice and/or lapse of time and/or the making of a relevant determination, constitute, or result in, termination of or a default or the acceleration or breach of any obligation under any agreement, instrument or arrangement to which any member of the Group is a party or by which any such member of the Group or any of its properties, revenues or assets are bound, in any of the foregoing cases to an extent which would, or would be reasonably likely to, be (singly or in the aggregate) material in the context of the Open Offer, any subscription for New Shares by HM Treasury, Ordinary Shareholders or subscriber(s) procured by the Joint Bookrunners pursuant to clause 3.5 or clause 4.1, the redemption of the Preference Shares, Accepted Shares Admission, Non-Accepted Shares Admission or post-Accepted Shares or Non-Accepted Shares Admission dealings in the Ordinary Shares.

5.	Taxation

	No stamp duty, SDRT or other issuance or transfer taxes or similar duties are payable in connection with the allotment, issue and delivery of the New Shares by the Company in accordance with the terms of this Agreement or otherwise in connection with the making or implementation of the Open Offer or the redemption of the Preference Shares, save


	for any stamp duty or SDRT payable under sections 67, 70, 93 or 96 of the Finance Act 1986 in relation to the issue of the New Shares.

6.	Intellectual property

6.1	Except to an extent that would not (singly or in the aggregate) be material in the context of the Open Offer, any subscription for New Shares by HM Treasury, Ordinary Shareholders or subscriber(s) procured by the Joint Bookrunners pursuant to clause 3.5 or clause 4.1, the redemption of the Preference Shares, Accepted Shares Admission, Non-Accepted Shares Admission or post-Accepted Shares or Non-Accepted Shares Admission dealings in the Ordinary Shares, and so far as the Company is aware, the Group does not infringe the Intellectual Property Rights of any third party nor so far as the Company is aware does any third party infringe the Intellectual Property Rights owned or used by the Group.

6.2	All material Intellectual Property Rights used by the Group are either legally or beneficially owned by the Group in all material respects or are used under a licence and are not subject to any Adverse Interests to an extent that would or might (singly or in the aggregate) be material in the context of the Open Offer, any subscription for New Shares by HM Treasury, Ordinary Shareholders or subscriber(s) procured by the Joint Bookrunners pursuant to clause 3.5 or clause 4.1, the redemption of the Preference Shares, Accepted Shares Admission, Non-Accepted Shares Admission or post-Accepted Shares or Non-Accepted Shares Admission dealings in the Ordinary Shares.

6.3	Save as would not (singly or in the aggregate) be material in the context of the Open Offer, any subscription for New Shares by HM Treasury, Ordinary Shareholders or subscriber(s) procured by the Joint Bookrunners pursuant to clause 3.5 or clause 4.1, the redemption of the Preference Shares, Accepted Shares Admission, Non-Accepted Shares Admission or post-Accepted Shares or Non-Accepted Shares Admission dealings in the Ordinary Shares, (i) all Intellectual Property Rights registered in the name of a member of the Group (if any) are beneficially owned by it and subsisting and if granted not subject to revocation and (ii) all requisite registration and renewal fees in respect thereof have been duly and timeously paid.

6.4	Save as would not (singly or in the aggregate) be material in the context of the Open Offer, any subscription for New Shares by HM Treasury, Ordinary Shareholders or subscriber(s) procured by the Joint Bookrunners pursuant to clause 3.5 or clause 4.1, the redemption of the Preference Shares, Accepted Shares Admission, Non-Accepted Shares Admission or post-Accepted Shares or Non-Accepted Shares Admission dealings in the Ordinary Shares, (i) all Intellectual Property Rights owned and used or reasonably likely to be used by the Group and capable of legal protection are subject to appropriate and enforceable protection (including, where reasonably appropriate, by registration), and (ii) so far as the Company is aware there is no restriction of the rights of the Group to use any Intellectual Property Rights owned by or licensed to the Company to engage in any of the activities presently or proposed to be undertaken by it.

7.	Insurance

	Save would not be (singly or in the aggregate) material in the context of the Open Offer, any subscription for New Shares by HM Treasury, Ordinary Shareholders or


	subscriber(s) procured by the Joint Bookrunners pursuant to clause 3.5 or clause 4.1, the redemption of the Preference Shares, Accepted Shares Admission, Non-Accepted Shares Admission or post-Accepted Shares or Non-Accepted Shares Admission dealings in the Ordinary Shares, the Group is insured to adequate levels against all risks which the Company reasonably believes to be commonly insured against by persons carrying on the same or similar businesses as those carried on by the Group and against all risks against which the Group might reasonably be expected to insure in the particular circumstances of the businesses carried on by each member of the Group, all such insurances are in full force and effect and to the best knowledge, information and belief of the Company, there are no circumstances which could render any such insurances void or voidable and there is no material insurance claim, pending, threatened or outstanding against any member of the Group and all premiums due in respect of all insurances have been duly paid.

8.	Rating

	Except as publicly announced the Company has not received notice of any intended or potential downgrading of the rating assigned to the Company’s (or any other member of its Group) credit or debt by a ratings agency.

9.	Insolvency

9.1	No member of the Group is unable to pay its debts within the meaning of section 123 of the Insolvency Act 1986 or is otherwise insolvent.

9.2	Save in the context of a solvent voluntary winding up or otherwise as would not (singly or in the aggregate) be material in the content of the Open Offer, any subscription for New Shares by HM Treasury, Ordinary Shareholders or subscriber(s) procured by the Joint Bookrunners pursuant to clause 3.5 or clause 4.1, the redemption of the Preference Shares, Accepted Shares Admission, Non-Accepted Shares Admission or post-Accepted Shares or Non-Accepted Shares Admission dealings in the Ordinary Shares, no order has been made, petition presented or resolutions passed for the winding up of any member of the Group and no meeting has been convened for the purpose of winding up any member of the Group. No member of the Group has been a party to any transaction which could be avoided in a winding up.

9.3	No steps have been taken for the appointment of an administrator or receiver (including an administrative receiver) of all or any part of the assets of any member of the Group.

9.4	By reason of actual or anticipated financial difficulties, no member of the Group has commenced negotiations with its creditors or any class of its creditors with a view to rescheduling any of its indebtedness or has made or proposed any arrangement or composition with its creditors or any class of its creditors.

10.	Regulatory

10.1	Each member of the Group required to be licensed (as a bank or otherwise) is duly licensed in its jurisdiction of incorporation and domicile and, except as would not reasonably be expected to be material, is duly licensed or authorised in each other jurisdiction where it is required to be licensed or authorised to conduct its business.


10.2	Save as otherwise as would not (singly or in the aggregate) be material in the context of the Open Offer, any subscription for New Shares by HM Treasury, Ordinary Shareholders or subscriber(s) procured by the Joint Bookrunners pursuant to clause 3.5 or clause 4.1, the redemption of the Preference Shares, Accepted Shares Admission, Non-Accepted Shares Admission or post-Accepted Shares or Non-Accepted Shares Admission dealings in the Ordinary Shares, the Company is not subject to any special or additional surveillance or supervision by the FSA or to any special or additional reporting requirements in relation to its assets, liquidity position, funding position or otherwise and the Company has not been subject to any visits, beyond customary visits, by the FSA.

10.3	The operations of each member of the Group are and have been conducted at all times in material compliance with the money laundering statutes of all jurisdictions, the rules and regulations thereunder and any related or similar rules, regulations or guidelines, issued, administered or enforced by any governmental agency (collectively, the “ Money Laundering Laws ”) and no material action, suit or proceeding by or before any court or governmental agency, authority or body or any arbitrator involving any member of the Group with respect to the Money Laundering Laws is pending or, to the best knowledge of the Company, threatened.

10.4	Except as previously disclosed by the Company, none of the Company, any other member of the Group or, to the knowledge of the Company, any director, officer, agent, employee or Affiliate of the Company is currently subject to any sanctions administered by the U.S. Department of the Treasury (“ OFAC ”) or any similar sanctions imposed by the European Union, the United Nations or any other body, governmental or other, to which the Company or ay of its Affiliates is subject (collectively, “ other economic sanctions ”); and the Company will not directly or indirectly use the proceeds of the Open Offer, or lend, contribute or otherwise make available such proceeds to any other member of the Group, joint venture partner or other person or entity, for the purpose of financing the activities of any person currently subject to any sanctions administered by OFAC or any other economic sanctions.

10.5	None of the Company, any other member of the Group or, to the knowledge of the Company, any director, officer, agent, employee or Affiliate of the Company, is aware of or has taken any action, directly or indirectly, that could result in a violation by such persons of the U.S. Foreign Corrupt Practices Act of 1977, as amended, or the rules and regulations thereunder (the FCPA) (including, without limitation, making use of the mail or any means or instrument of interstate commerce corruptly in furtherance of an offer, payment, promise to pay or authorisation of the payment of any money, or other property, gift, promise to give, or authorisation of the giving of anything of value to any “foreign official” (as such term is defined in the FCPA) or any foreign political office, in contravention of the FCPA), the OECD Convention on Bribery of Foreign Public Officials in International Business Transactions (the OECD Convention) or any similar law or regulation, to which the Company, any other member of the Group, any director, officer, agent, employee of any member of the Group or, to the knowledge of the Company, any Affiliate is subject; and the Company, each member of the Group and, to the knowledge of the Company, its Affiliates have conducted their businesses in compliance with the FCPA, the OECD Convention and any applicable similar law or regulation and have instituted and maintain policies and procedures designed to ensure, and which are reasonably expected to continue to ensure, continued compliance therewith.


11.	United States Securities Regulations

11.1	The Company is a “foreign issuer” (as defined in Regulation S under the Securities Act).

11.2	The Company reasonably believes that there is no “substantial US market interest” (as defined in Rule 902(j) of Regulation S under the Securities Act) in any of the New Shares.

11.3	The Company does not believe that it is and does not expect to become (whether as a result of the receipt and application of the proceeds of the sale of the New Shares or otherwise) a “passive foreign investment company” within the meaning of section 1297 of the US Internal Revenue Code of 1986.

11.4	The Company is not, and, immediately after giving effect to the offering and sale of the New Shares and the application of the proceeds thereof as set forth in the Draft Prospectus and, when published, the Prospectus, will not be, an “investment company” as such term is defined in the US Investment Company Act of 1940.

11.5	Other than HM Treasury, there are no persons with registration rights or other similar rights to have any shares registered by the Company under the Securities Act except to the extent that HM Treasury has transferred any of its registration rights to any person in accordance with the relevant provisions of the Registration Rights Agreement in effect from 12 January 2009.

11.6	During the period of six months after Accepted Shares Admission or, if later, Non-Accepted Shares Admission, the Company will not, and will not permit any of its Affiliates to, resell any New Shares which constitute “restricted securities” under Rule 144 that have been reacquired by any of them other than in transactions that meet the applicable requirements of Regulation S.

PART II
Representations, warranties and undertakings given on the Posting Date, on the date
of publication of each Supplementary Prospectus, at the Time of Sale, if any, and
immediately prior to Accepted Shares Admission and Non-Accepted Shares Admission


1.	The Issue Documents

1.1	The Issue Documents contain all particulars and information required by, and comply in all respects with the memorandum and articles of association of the Company, the Companies Acts, FSMA, the Listing Rules (including, without limitation, Chapters 10, 11 and 13 of the Listing Rules (as applicable)), the DTRs, the Prospectus Rules, the City Code on Takeovers and Mergers, all applicable rules and requirements of the London Stock Exchange, the FSA and all applicable US laws and regulations and all other applicable requirements of statute, statutory regulation or any regulatory body.

1.2	The Issue Documents (and any amendments or supplements thereto) do not and will not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading.

1.3	All expressions of opinion, intention or expectation contained in any Issue Document are, and were on the respective dates of such Issue Document, honestly held by the Directors and are fairly based and have been made on reasonable grounds after due and careful consideration and enquiry.

1.4	There are no facts or matters known, or which could on reasonable enquiry have been known, to the Company or any of the Directors and which are omitted from any Issue Document, the omission of which would make any statement of fact or expression of opinion, intention or expectation contained in a Issue Document misleading.

1.5	Having regard to the particular nature of the Company, the Group and the Company’s share capital and the other matters referred to in section 87A of the FSMA, the Issue Documents contain all information about the Group, which is or might be material for disclosure to potential investors and their professional advisers and which they would reasonably require and reasonably expect to find there for the purpose of making an informed assessment of the matters specified in section 87A(2) of the FSMA.

1.6	All statements made or information provided by or on behalf of and with the knowledge of the Company to the FSA or to any of the Joint Sponsors or to CGMEL (including in connection with any application for certain information to be omitted from the Prospectus and/or the Circular), are (or, when made, will be) true and accurate in all material respects and are not (or, when made, will not be) misleading and there are no facts which have not been disclosed to the FSA in connection therewith which by their omission make any such statements misleading or which are material for disclosure to the FSA. All expressions of opinion, intention, belief or expectation made by or on behalf of and with the knowledge of the Company to the FSA or to any of the Joint Sponsors or to CGMEL (including in connection with any application for certain information to be omitted from the Prospectus and/or the Circular), are (or, when made,


	will be) truly and honestly held and have been (or, when made, will be) made on reasonable grounds after due and careful consideration and enquiry.

1.7	There is no fact or circumstance which is not disclosed with sufficient prominence in the Issue Documents which ought to be taken into account by the UK Listing Authority in considering the application for listing of the New Shares.

1.8	The Open Offer (including without limitation, the creation, allotment and issue of the New Shares and the publication and distribution of the Issue Documents) has been and will be conducted in all material respects in accordance with the terms and conditions of the Issue Documents and the Company has complied and will comply with all laws, rules and regulations applicable to the Open Offer in each jurisdiction in which the New Shares are offered.

1.9	The Verification Materials have been prepared with due care and attention by persons who, collectively, have appropriate knowledge and responsibility to enable them to provide appropriate supporting materials for the statements in the Issue Documents in respect of which they are compiled.

2.	Provision of Information

2.1	The pro forma financial information on the Group incorporated by reference in the Prospectus has been duly and carefully prepared on the bases incorporated by reference in the Prospectus, in accordance with the Prospectus Rules and is presented on a basis consistent with the accounting principles, standards and practices normally applied by the Company.

2.2	The summary and selected financial information on the Group set out in the Prospectus has been duly and carefully extracted from the Accounts and has been properly compiled on a basis consistent with the accounting policies applied in the Accounts.

2.3	The capitalisation and indebtedness table in relation to the Group set out in the Prospectus has been properly compiled on a basis that is consistent with the accounting policies applied in the Accounts.

2.4	No member of the Group has any off balance sheet financing, investment or liability material for disclosure in the Prospectus that is not so fairly disclosed.

2.5	There are no facts or circumstances, which have not been included the Prospectus or any other information provided to the UK Listing Authority, which would cause the UK Listing Authority not to be satisfied that the Company’s capital adequacy is regulated by the FSA or suitably regulated by another regulatory body.

2.6	The particulars of the employees schemes contained in the Prospectus or, when published, any Supplementary Prospectus and, in particular, the information as to the dates on which options or other rights may be exercised and the number of options or other rights granted (conditionally or otherwise) on or before the date of this Agreement are accurate in all material respects and not misleading.


2.7	The share capital of the Company will, upon Accepted Shares Admission and on Non-Accepted Shares Admission, be as described in the Prospectus in all material respects; all of the New Shares will, upon Accepted Shares Admission and on Non-Accepted Shares Admission, be duly and validly allotted, authorised and issued and fully paid or credited as fully paid; and, except as disclosed in any previous announcements made by or on behalf of the Company or any other member of the Group in respect of public debt or preference share issuance, no person has the right (whether exercisable now or in the future and whether contingent or not) to call for the allotment, conversion, issue, sale or transfer of any share or loan capital or any other security giving rise to a right over the capital of the Company or any member of the Group under any option or other agreement (including conversion rights and rights of pre emption); all of the issued share capital of each other member of the Group has been duly and validly authorised and issued and fully paid or credited as fully paid and is owned by the Company or one or more wholly-owned subsidiaries of the Company and is free of all encumbrances.

3.	Reports

3.1	All information supplied by the Company or any member of the Group to the Joint Sponsors and/or CGMEL and/or the Auditors for the purposes of the Working Capital Report and/or any other report or letter prepared by the Auditors in connection with the Open Offer and in respect of any updates thereto, has been supplied to them in good faith; and such information was when supplied and remains true and accurate in all material respects and not misleading, and no information has been withheld the absence of which might reasonably have affected the contents of the Working Capital Report and/or any other such report or letter.

3.2	The Reports are fairly presented and all information contained in the Reports is true and accurate in all material respects and is not misleading and no fact or matter has been omitted from the Reports which would be necessary to make the information therein not misleading; and the Company has read and does not disagree with the statements of opinion contained in, or the contents of, the Reports and (where relevant) the statements of opinion, intention or expectation attributed to the Group in the Reports are accurate statements of the opinions, intentions or expectations held by the Group, which are fairly based upon facts within the knowledge of the Company, and have been made after due and careful consideration and enquiry.

3.3	The Working Capital Report has been approved by the Directors or a duly authorised committee thereof, the cashflow and working capital projections contained in the Working Capital Report have been prepared after due and careful consideration and enquiry, all assumptions on which such projections are based are set out in the Working Capital Report and are reasonable and such projections take into account all material matters of which the Company is aware concerning the Company, the other members of the Group or the markets in which any of them is carrying on, or is expecting to carry on, business and all factual information supplied to the Auditors by the Company or any other member of the Group or any of such person’s officers for the purpose of enabling the Auditors to identify or evaluate the assumptions underlying the relevant projections is true, accurate and not misleading and all other information (including any forecast or projection) supplied for that purpose was carefully prepared and given in good faith.


4.	Derogation

	Each statement made by or on behalf of the Company (and of which the Company is aware) in connection with any application to the London Stock Exchange or the UK Listing Authority for information to be omitted from the Prospectus is true, complete and accurate and not misleading. There is no information which has not been disclosed in writing to the London Stock Exchange or the UK Listing Authority in connection with such an application which by its omission makes such a statement untrue, inaccurate or misleading.

5.	Compliance

5.1	Each member of the Group has conducted its business in all material respects in accordance with all applicable laws and regulations of the United Kingdom and all relevant foreign countries or authorities, and there is no order, decree or judgment of any court or any governmental or other competent authority or agency of the United Kingdom or any foreign country outstanding against any member of the Group or any person for whose acts any member of the Group is vicariously liable which in any of the foregoing cases would, or would be reasonably likely to, be (singly or in the aggregate) material in the context of the Open Offer, any subscription for New Shares by HM Treasury, Ordinary Shareholders or subscriber(s) procured by the Joint Bookrunners pursuant to clause 3.5 or clause 4.1, the redemption of the Preference Shares, Accepted Shares Admission, Non-Accepted Shares Admission or post-Accepted Shares or Non-Accepted Shares Admission dealings in the Ordinary Shares.

5.2	This Agreement and the other agreements to be entered into by the Company in connection with Accepted Shares Admission or Non-Accepted Shares Admission, the redemption of the Preference Shares and the Open Offer have been or will be duly authorised, executed and delivered on behalf of the Company and assuming due authorisation, execution and delivery by the other parties thereto, do or will constitute valid and binding obligations of the Company enforceable against it in accordance with their terms (subject to mandatory rules of law relating to insolvency).

5.3	Other than pursuant to options or other rights granted under the Group’s share option schemes and save as otherwise would not (singly or in the aggregate) be material in the context of the Open Offer, any subscription for New Shares by HM Treasury, Ordinary Shareholders or subscriber(s) procured by the Joint Bookrunners pursuant to clause 3.5 or clause 4.1, Accepted Shares Admission, Non-Accepted Shares Admission or post-Accepted Shares or Non-Accepted Shares Admission dealings in the Ordinary Shares, there are no rights (conditional or otherwise) (i) to require the issue of any shares or other securities (including without limitation, any loan capital) or securities convertible into or exchangeable for, or warrants, rights or options to purchase, or obligations, commitments or intentions to create the same or (ii) to sell or otherwise dispose of any shares or other securities of a Group Company (other than to another Group Company, as the case may be) which are outstanding and in force.

6.	Position since Accounts Date

6.1	Since the Accounts Date and save as disclosed in the Press Announcement or via a Regulatory Information Service:


	(A)	each Group Company has carried on its respective business in the ordinary course in all material respects, and there has been no Material Adverse Effect;

	(B)	there has been no material impairment to charges in respect of any assets of the Company or of any Group Company, and there has been no increase in the provisions in respect of losses in relation to any mortgage, loans or other assets of the Company or of any Group Company that, in any of the foregoing cases, would, or would be reasonably likely to, be (singly or in the aggregate) material in the context of the Open Offer, any subscription for New Shares by HM Treasury, Ordinary Shareholders or subscriber(s) procured by the Joint Bookrunners pursuant to clause 3.5 or clause 4.1, the redemption of the Preference Shares, the redemption of the Preference Shares, Accepted Shares Admission, Non-Accepted Shares Admission or post-Accepted Shares or Non-Accepted Shares Admission dealings in the Ordinary Shares;

	(C)	save for any utilisation by the Company of the short-term liquidity measures being made available by the Bank of England (in the form notified by HM Government to the European Commission on 12 October 2008) or of the HM Treasury 2008 Credit Guarantee Scheme, no Group Company has, otherwise than in the ordinary course of business, entered into or assumed or incurred any contract, commitment (whether in respect of capital expenditure or otherwise), borrowing, indebtedness in the nature of borrowing, guarantee, liability (including contingent liability) or any other agreement or obligation that, in any of the foregoing cases, would, or would be reasonably likely to, be (singly or in the aggregate) material in the context of the Open Offer, any subscription for New Shares by HM Treasury, Ordinary Shareholders or subscriber(s) procured by the Joint Bookrunners pursuant to clause 3.5 or clause 4.1, the redemption of the Preference Shares, Accepted Shares Admission, Non-Accepted Shares Admission or post-Accepted Shares or Non-Accepted Shares Admission dealings in the Ordinary Shares;

	(D)	other than in the ordinary course of business, no debtor has been released by the Company to an extent which (singly or in the aggregate) is material in the context of the Open Offer, any subscription for New Shares by HM Treasury, Ordinary Shareholders or subscriber(s) procured by the Joint Bookrunners pursuant to clause 3.5 or clause 4.1, the redemption of the Preference Shares, Accepted Shares Admission, Non-Accepted Shares Admission or post-Accepted Shares or Non-Accepted Shares Admission dealings in the Ordinary Shares on terms that he pays less than the book value of his debt and no debt of such material amount owing to the Company or any Group Company has been deferred, subordinated or written off or has proven irrecoverable to any material extent;

	(E)	no Group Company has been involved in any transaction (other than any transaction provided for in this Agreement or a previous placing and open offer agreement between the parties entered into as of 13 October 2008) which has resulted or would be reasonably likely to result (singly or in the aggregate) in any liability for Tax on the Company or any Group Company, which, in any of the foregoing cases, would, or would be reasonably likely to, be (singly or in the aggregate) material in the context of the Open Offer, any subscription for New


		Shares by HM Treasury, Ordinary Shareholders or subscriber(s) procured by the Joint Bookrunners pursuant to clause 3.5 or clause 4.1, the redemption of the Preference Shares, Accepted Shares Admission, Non-Accepted Shares Admission or post-Accepted Shares or Non-Accepted Shares Admission dealings in the Ordinary Shares other than a transaction in the ordinary course of business; and

	(F)	no Group Company has been in default in any material respect under any agreement or arrangement to which any Group Company is a party and which is or is reasonably likely to be material and there are no circumstances likely to give rise to such default, to an extent which (singly or in the aggregate) would, or would be reasonably likely to, be material in the context of the Open Offer, any subscription for New Shares by HM Treasury, Ordinary Shareholders or subscriber(s) procured by the Joint Bookrunners pursuant to clause 3.5 or clause 4.1, the redemption of the Preference Shares, Accepted Shares Admission, Non-Accepted Shares Admission or post-Accepted Shares or Non-Accepted Shares Admission dealings in the Ordinary Shares.


7.	Litigation

7.1	No member of the Group or any of its officers or agents or employees is involved, or has during the recent past (being not less than 12 months ending on the date of this Agreement) been involved in any civil, criminal, arbitration, administrative, governmental or other proceedings or governmental regulatory or similar investigation or enquiry, whether as plaintiff, defendant or otherwise which, by itself or with other proceedings, which would be, or is reasonably likely to be, material in the context of the Open Offer, any subscription for New Shares by HM Treasury, Ordinary Shareholders or subscriber(s) procured by the Joint Bookrunners pursuant to clause 3.5 or clause 4.1, the redemption of the Preference Shares, Accepted Shares Admission, Non-Accepted Shares Admission or post-Accepted Shares or Non-Accepted Shares Admission dealings in the Ordinary Shares.

7.2	No litigation or arbitration, administrative, governmental, civil, criminal or other proceedings nor governmental, regulatory or similar investigation or enquiry are pending or have been threatened by or against any Group Company or any of its officers, agents or employees in relation to the affairs of any Group Company and, to the best of the knowledge, information and belief of the Company and the Directors, there are no facts or circumstances likely to give rise to any such litigation or arbitration, administrative, criminal, governmental, civil, or other proceedings or governmental, regulatory or similar investigation or enquiry, in each case, to an extent which, by itself or with other proceedings, would be, or is reasonably likely to be, material in the context of the Open Offer, any subscription for New Shares by HM Treasury, Ordinary Shareholders or subscriber(s) procured by the Joint Bookrunners pursuant to clause 3.5 or clause 4.1, the redemption of the Preference Shares, Accepted Shares Admission, Non-Accepted Shares Admission or post-Accepted Shares or Non-Accepted Shares Admission dealings in the Ordinary Shares.

7.3	No member of the Group or any of their respective officers or agents or employees in relation to the affairs of any Group Company has been a party to any undertaking or assurance given to any court or governmental agency or the subject of any injunction


	which in any of the foregoing cases is still in force and which, by itself or with other proceedings, which would be, or is reasonably likely to be, material in the context of the Open Offer, any subscription for New Shares by HM Treasury, Ordinary Shareholders or subscriber(s) procured by the Joint Bookrunners pursuant to clause 3.5 or clause 4.1, the redemption of the Preference Shares, Accepted Shares Admission, Non-Accepted Shares Admission or post-Accepted Shares or Non-Accepted Shares Admission dealings in the Ordinary Shares.

7.4	For the purpose of this paragraph 7, proceedings includes any action by any governmental, public or regulatory authority (including any investment exchange or any authority or body which regulates investment business or takeovers or which is concerned with regulatory, licensing, competition, taxation matters or matters concerning Intellectual Property Rights).

8.	Arrangements with directors, shareholders and advisors

8.1	Save for the articles of association of the Company, any service agreement with a Director and any contracts entered into in the ordinary course of business, there are no existing contracts or engagements or other arrangements to which any Group Company is a party and in which any of the directors of any Group Company and/or any associate of any of them is interested which would be material in the context of the Open Offer, any subscription for New Shares by HM Treasury, Ordinary Shareholders or subscriber(s) procured by the Joint Bookrunners pursuant to clause 3.5 or clause 4.1, the redemption of the Preference Shares, Accepted Shares Admission, Non-Accepted Shares Admission or post-Accepted Shares or Non-Accepted Shares Admission dealings in the Ordinary Shares; and to the extent that any such contracts, engagements or other arrangements exist they comply with the related party requirements of the Listing Rules of the UK Listing Authority (or other relevant regulator).

8.2	Other than HM Treasury, no Shareholder has any rights, in his capacity as such, in relation to any Group Company other than as set out in the articles of association of the Company.

8.3	The Company is not aware of any claim, demand or right of action against any member of the Group otherwise than for accrued remuneration in accordance with their contracts of employment by any officer or employee (or former officer or employee) of the Group and/or any associate of them in any of the foregoing cases, to an extent that (singly or in the aggregate) would, or would be reasonably likely to, be material in the context of the Open Offer, any subscription for New Shares by HM Treasury, Ordinary Shareholders or subscriber(s) procured by the Joint Bookrunners pursuant to clause 3.5 or clause 4.1, the redemption of the Preference Shares, Accepted Shares Admission, Non-Accepted Shares Admission or post-Accepted Shares or Non-Accepted Shares Admission dealings in the Ordinary Shares.

8.4	So far as the Company is aware, no Director nor any person connected with such Director nor any of the employees of the Group nor any person connected with any such employee is in breach of any restrictive covenant, employment agreement or contract for services which would, or would be reasonably likely to, affect the Company, any other member of the Group and so far as the Company is aware, there are no


	circumstances which might give rise to any claim of such a breach or any other dispute with any employer, former employer or other person for whom any Director or employee of the Group provides or has provided services, in any of the foregoing cases to an extent that (singly or in the aggregate) would, or would be reasonably likely to, be material in the context of the Open Offer, any acquisition of New Shares or subscription for Preference Shares by HM Treasury, Ordinary Shareholders or subscriber(s) procured by the Joint Bookrunners pursuant to clause 3.5 or clause 4.1, Accepted Shares Admission, Non-Accepted Shares Admission or post-Accepted Shares or Non-Accepted Shares Admission dealings in the Ordinary Shares.

8.5	For the purpose of this paragraph 8, associate has the meaning:

	(A)	in the case of an individual, given to “connected person” under section 96B(2) of FSMA; and

	(B)	in the case of a body corporate, given to “associated company” in sections 416 et seq . of the Income and Corporation Taxes Act 1988.

9.	Information technology

	Save as otherwise would not (singly or in the aggregate) be material in the context of the Open Offer, any subscription for New Shares or by HM Treasury, Ordinary Shareholders or subscriber(s) procured by the Joint Bookrunners pursuant to clause 3.5 or clause 4.1, the redemption of the Preference Shares, Accepted Shares Admission, Non-Accepted Shares Admission or post-Accepted Shares or Non-Accepted Shares Admission dealings in the Ordinary Shares:

	(A)	systems used or planned to be used in connection with the businesses of the Group are all the systems required for the present needs of the business of the Group, including, without limitation, as to system capacity and ability to process current peak volumes and anticipated volumes in a timely manner;

	(B)	in the 12 months prior to the date of this Agreement, the Group has not suffered any failures or bugs in or breakdowns of any systems used in connection with the businesses of the Group which have caused any substantial disruption or interruption in or to its use and the Company is not aware of any fact or matter which may so disrupt or interrupt or affect the use of such equipment following the date of this Agreement on the same basis as it is presently used;

	(C)	all hardware comprised in any systems, excluding any software and any external communications lines, used in the businesses of the Group are owned (except those items which are subject to finance leases) and operated by and are under the control of a member of the Group and are not wholly or partly dependent on any facilities which are not under the ownership, operation or control of the Group or (where governed by outsourcing or other similar arrangements) are otherwise openly accessible to the Group; and

	(D)	each member of the Group is validly licensed to use the software used in its business.


10.	Share Schemes

	Save as otherwise would not (singly or in the aggregate) be material in the context of the Open Offer, any subscription for New Shares by HM Treasury, Ordinary Shareholders or subscriber(s) procured by the Joint Bookrunners pursuant to clause 3.5 or clause 4.1, the redemption of the Preference Shares, Accepted Shares Admission, Non-Accepted Shares Admission or post-Accepted Shares or Non-Accepted Shares Admission dealings in the Ordinary Shares, and except for options or other rights granted under the Company’s approved share option schemes or other employee incentive arrangements in accordance with normal practice, there are no arrangements which (contingently or otherwise) may give rise to an obligation on the Company or any Group Company to allot, issue or grant any relevant securities as defined in section 80 of the CA 1985.

11.	Pension schemes

	Save as would otherwise not (singly or in the aggregate) be material in the context of the Open Offer, any subscription for New Shares by HM Treasury, Ordinary Shareholders or subscriber(s) procured by the Joint Bookrunners pursuant to clause 3.5 or clause 4.1, the redemption of the Preference Shares, Accepted Shares Admission, Non-Accepted Shares Admission or post-Accepted Shares or Non-Accepted Shares Admission dealings in the Ordinary Shares, the Group is not paying, and is not under any liability (actual or contingent) to pay or secure (other than by payment of employers’ contributions under national insurance or social security legislation), any pension or other benefit on retirement, death or disability or on the attainment of a specified age or on the completion of a specified number of years of service.

12.	Agreements

	Save as otherwise disclosed in any previous announcements made by or on behalf of the Company or any member of the Group in respect of public debt or preference share issuance and otherwise as would not (singly or in the aggregate) be material in the context of the Open Offer, any subscription for New Shares or by HM Treasury, Ordinary Shareholders or subscriber(s) procured by the Joint Bookrunners pursuant to clause 3.5 or clause 4.1, the redemption of the Preference Shares, Accepted Shares Admission, Non-Accepted Shares Admission or post-Accepted Shares or Non-Accepted Shares Admission dealings in the Ordinary Shares, there is no agreement, undertaking, instrument or arrangement requiring the creation, allotment, issue, redemption or repayment, or the grant to any person of the right (whether conditional or not) to require the allotment, issue, redemption or repayment, of any shares in the capital of the Company or any subsidiary undertaking of the Company (including, without limitation, an option or right of pre-emption or conversion).

13.	Regulatory

13.1	No member of the Group or any of its officers has failed to comply with any statutory provision or any rules, regulations, directions, requirements, notices and provisions of the FSA or any other regulatory body applying to such member of the Group in relation to its business including (without limitation) in respect of the maintenance of its Capital Resources Requirement and satisfaction of the Overall Financial Resources Rule and


	any equivalent capital requirements in any other jurisdiction that are applicable to any member of the Group; no obligation has arisen in respect of the general notification requirements under Chapter 15.3 of SUP, save in any of the foregoing cases to an extent which would not (singly or in the aggregate) be material in the context of the Open Offer, any subscription for New Shares by HM Treasury, Ordinary Shareholders or subscriber(s) procured by the Joint Bookrunners pursuant to clause 3.5 or clause 4.1, the redemption of the Preference Shares, Accepted Shares Admission, Non-Accepted Shares Admission or post-Accepted Shares or Non-Accepted Shares Admission dealings in the Ordinary Shares.

13.2	Save as otherwise would not (singly or in the aggregate) be material in the context of the Open Offer, any subscription for New Shares by HM Treasury, Ordinary Shareholders or subscriber(s) procured by the Joint Bookrunners pursuant to clause 3.5 or clause 4.1, the redemption of the Preference Shares, Accepted Shares Admission, Non-Accepted Shares Admission or post-Accepted Shares or Non-Accepted Shares Admission dealings in the Ordinary Shares, no member of the Group is the subject of any investigation, enforcement action (including, without limitation to vary the terms of any permission of licence) or disciplinary proceeding by the FSA or any other regulatory body having jurisdiction over such member of the Group, and no such investigation, enforcement action or disciplinary proceeding is threatened or pending.

14.	Competition

14.1	No member of the Group is a party to (or is concerned in) any agreement, arrangement, concerted practice or course of conduct which infringes, or of which particulars have or should have been delivered to any relevant governmental or other authority in any jurisdiction under any relevant legislation in any territory regarding anti-competitive or restrictive trade or business practices or which falls within Articles 81 and/or 82 of the EC Treaty, or otherwise, in any of the foregoing cases to an extent that (singly or in the aggregate) would, or would be reasonably likely to, be material in the context of the Open Offer, any subscription for New Shares or by HM Treasury, Ordinary Shareholders or subscriber(s) procured by the Joint Bookrunners pursuant to clause 3.5 or clause 4.1, the redemption of the Preference Shares, Accepted Shares Admission, Non-Accepted Shares Admission or post-Accepted Shares or Non-Accepted Shares Admission dealings in the Ordinary Shares.

14.2	No member of the Group is, or has been, in connection with its business or that of any other member of the Group, engaged in any practice which contravenes any such legislation as is referred to in the preceding paragraph or which is under investigation by any authority referred to in the preceding paragraph or which is the subject of undertakings to any such authority and, so far as the Company is aware, none of the practices carried on by any member of the Group contravenes or may contravene any such legislation or is reasonably likely to be subject to such investigation, in any of the foregoing cases to an extent that would, or would be reasonably likely to, be (singly or in the aggregate) material in the context of the Open Offer, any subscription for New Shares by HM Treasury, Ordinary Shareholders or subscriber(s) procured by the Joint Bookrunners pursuant to clause 3.5 or clause 4.1, the redemption of the Preference Shares, Accepted Shares Admission, Non-Accepted Shares Admission or post-Accepted Shares or Non-Accepted Shares Admission dealings in the Ordinary Shares.

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15.	Compliance

15.1	Each member of the Group, other than those undertakings in which the Company holds a proportion of the capital that is not likely to have a significant effect on the assessment of its own assets and liabilities, financial position or profits and losses, has been duly incorporated and is validly existing as a company with limited liability under the laws of the country of its incorporation with full corporate power and authority to own, lease and operate the properties which it owns, leases and operates and to own its other assets and carry on its business as presently carried on and as intended to be carried on in all material respects as described in the Circular and the Prospectus and, in relation to each member of the Group, to enter into and perform its obligations pursuant to the Open Offer itself and the redemption of the Preference Shares and to enter into and consummate all transactions in connection therewith.

15.2	The Company has duly authorised, executed and delivered this Agreement and the other agreements to be entered into by it in connection with the Open Offer itself and the redemption of the Preference Shares and each of them constitute valid and binding obligations enforceable against it in accordance with their respective terms.

15.3	All licences, permissions, authorisations and consents which are material for carrying on the business of the Group have been obtained and are in full force and effect and, so far as the Company is aware, there are no circumstances which might lead to any of such licences, permissions, authorisations and consents being revoked, suspended, varied or refused renewal to an extent which would, or would be reasonably likely to, be (singly or in the aggregate) material in the context of the Open Offer, any subscription for New Shares by HM Treasury, Ordinary Shareholders or subscriber(s) procured by the Joint Bookrunners pursuant to clause 3.5 or clause 4.1, the redemption of the Preference Shares, Accepted Shares Admission, Non-Accepted Shares Admission or post-Accepted Shares or Non-Accepted Shares Admission dealing in the Ordinary Shares.

15.4	Save as would not be (singly or in the aggregate) material in the context of the Open Offer, any subscription for New Shares by HM Treasury, Ordinary Shareholders or subscriber(s) procured by the Joint Bookrunners pursuant to clause 3.5 or clause 4.1, the redemption of the Preference Shares, Accepted Shares Admission, Non-Accepted Shares Admission or post-Accepted Shares or Non-Accepted Shares Admission dealings in the Ordinary Shares, all sums due in respect of the issued share capital of the Company at the date of this Agreement have been paid to and received by the Company. No owner or holder of any of the share capital of the Company shall, with effect from Accepted Shares Admission or Non-Accepted Shares Admission, have any right, in his capacity as such, in relation to the Group other than as set out in the memorandum and articles of association of the Company.

15.5	Save as would not be (singly or in the aggregate) material in the context of the Open Offer, any subscription for New Shares by HM Treasury, Ordinary Shareholders or subscriber(s) procured by the Joint Bookrunners pursuant to clause 3.5 or clause 4.1, the redemption of the Preference Shares, Accepted Shares Admission, Non-Accepted Shares Admission or post-Accepted Shares or Non-Accepted Shares Admission dealings in the Ordinary Shares, the Company is the beneficial owner free from all Adverse Interests of the shares it holds in each of its subsidiary undertakings.

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15.6	Save as would not be (singly or in the aggregate) material in the context of the Open Offer, any subscription for New Shares by HM Treasury, Ordinary Shareholders or subscriber(s) procured by the Joint Bookrunners pursuant to clause 3.5 or clause 4.1, the redemption of the Preference Shares, Accepted Shares Admission, Non-Accepted Shares Admission or post-Accepted Shares or Non-Accepted Shares Admission dealings in the Ordinary Shares, the Company and the Directors have at all times complied with the provisions of the Company’s memorandum and articles of association and the Companies Acts and, subject to the passing of the Resolutions, have or will have the right, power and authority under the memorandum and articles of association of the Company, or pursuant to resolution passed in general meeting, to enter into and perform this Agreement (including, without limitation, the power to pay commissions, fees, costs and expenses provided for in this Agreement), to make the Open Offer, to allot and issue the New Shares in certificated and uncertificated form to redeem the Preference Shares, to issue the Issue Documents in the manner proposed without any sanction or consent by members of the Company or any class of them and, subject to Accepted Shares Admission and, solely in relation to Non-Accepted Shares, Non-Accepted Shares Admission (if any), there are no other consents, authorisations or approvals required by the Company in connection with the entering into and the performance of this Agreement and the actions referred to in this paragraph 15.6 which have not been irrevocably and unconditionally obtained. The Company’s existing Ordinary Shares are participating securities in, and have not been suspended from, CREST.

15.7	Save as would not be (singly or in the aggregate) material in the context of the Open Offer, any subscription for New Shares by HM Treasury, Ordinary Shareholders or subscriber(s) procured by the Joint Bookrunners pursuant to clause 3.5 or clause 4.1, the redemption of the Preference Shares, Accepted Shares Admission, Non-Accepted Shares Admission or post-Accepted Shares or Non-Accepted Shares Admission dealings in the Ordinary Shares, the allotment and issue of the New Shares, the issue and distribution of the Issue Documents and any other document by or on behalf of the Company in connection with Accepted Shares Admission or Non-Accepted Shares Admission (if any), the Open Offer or the redemption of the Preference Shares will comply with all agreements to which any Group Company is a party or by which any such Group Company is bound and will comply with: (a) all applicable laws and regulations of the United Kingdom (including, without limitation, the Companies Acts, FSMA, the Listing Rules, the Prospectus Rules, the DTRs and the Admission and Disclosure Standards) and all applicable United States laws and regulations and with all applicable laws and regulations of any relevant jurisdiction; (b) the memorandum and articles of association of the Company; and (c) when published, the Working Capital Report; and will not exceed or infringe any restrictions or the terms of any contract, indenture, security, obligation, commitment or arrangement by or binding upon the board of directors of any Group Company or their respective properties, revenues or assets or result in the implementation of any right of pre emption or any other material provision thereof, or result in the imposition or variation of any material rights or obligations of any Group Company.

15.8	Save as would not be (singly or in the aggregate) material in the context of the Open Offer, any subscription for New Shares by HM Treasury, Ordinary Shareholders or subscriber(s) procured by the Joint Bookrunners pursuant to clause 3.5 or clause 4.1, the redemption of the Preference Shares, Accepted Shares Admission, Non-Accepted

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	Shares Admission or post-Accepted Shares or Non-Accepted Shares Admission dealings in the Ordinary Shares, none of the Company or any other member of the Group is and, so far as the Company is aware, no event is about to occur which would result in the Company or any other member of the Group being (a) in violation of its memorandum or articles of association or other governing or constitutional documents or (b) in breach or default in the performance or observance of any obligation, agreement, covenant or condition contained in any Agreement or Instruments, or (c) in violation of any applicable law, statute, rule, regulation, judgment, order, writ, claim form or decree of any government, government instrumentality or court, domestic or foreign, having jurisdiction over the Company or any other member of the Group or any of their respective assets, revenues or properties. Save as would not be (singly or in the aggregate) material in the context of the Open Offer, any subscription for New Shares by HM Treasury, Ordinary Shareholders or subscriber(s) procured by the Joint Bookrunners pursuant to clause 3.5 or clause 4.1, the redemption of the Preference Shares, Accepted Shares Admission, Non-Accepted Shares Admission or post-Accepted Shares or Non-Accepted Shares Admission dealings in the Ordinary Shares, the Company and each other member of the Group has complied and will comply with applicable securities laws and regulations in relation to the Open Offer itself and the redemption of the Preference Shares.

15.9	The statement set out in clause 2.1(J) is true and accurate and not misleading.

15.10	The New Shares will, upon allotment, be free from all Adverse Interests and will rank pari passu in all respects with the existing issued shares in the issued share capital of the Company.

15.11	The Company has complied in all material respects with the requirements of Euroclear and the Regulations.

15.12	No member of the Group or any person acting on its behalf has taken, directly or indirectly, any action designed to or which has constituted or which might reasonably be expected to cause or result in stabilisation or manipulation of the price of any security of the Company.

15.13	The Company has not paid or agreed to pay to any person any compensation for soliciting another to purchase any New Shares (except as contemplated in this Agreement).

15.14	All information provided by the Company, and any of its subsidiary undertakings or any of its or their officers or employees in connection with Open Offer, the APS, the Class B Shares and at the Due Diligence Meetings to HM Treasury and/or to the Joint Sponsors and/or CGMEL and/or the Auditors in connection with its or their due diligence enquiries or similar requests for information has been supplied in good faith and such information was when supplied, and remains, true and accurate in all material respects and no further information requested has been withheld, the absence of which might reasonably be considered to be material to such due diligence enquiries or requests for information.

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16.	Announcements

16.1	The Press Announcement does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, provided that this warranty shall not cover information contained in the Press Announcement which was furnished in writing to the Company by the Joint Sponsors expressly for use therein; and all expressions of opinion, intention, belief or expectation of the Company or the Directors contained in the Press Announcement are truly and honestly held and made on reasonable grounds after due and careful enquiry.

16.2	With respect to all Previous Announcements, all statements of fact contained therein were at the date of the relevant Previous Announcement and, save to the extent corrected, amended or supplemented in any document or announcement issued or made by or on behalf of the Company or any member of the Group subsequent thereto, remain true and accurate in all material respects and not misleading in any material respect and all estimates, expressions of opinion or intention or expectation of the Directors contained therein were made on reasonable grounds and were honestly held by the Directors and were fairly based and there were no facts known (or which could on reasonable enquiry have been known by the Directors) the omission of which would make (i) any material statement of fact, or (ii) any estimate or statement or expression of opinion, intention or expectation in any of the Previous Announcements misleading and all Previous Announcements complied in all material respects with the memorandum and articles of association of the Company, the Listing Rules, the DTRs, the Prospectus Rules, the Companies Acts, FSMA, all applicable rules and requirements of the London Stock Exchange and the FSA, all applicable US laws and regulations and (in all material respects) all other applicable requirements of statute, statutory regulation or any regulatory body. There is no existing profit forecast outstanding in respect of the Company, the Group taken as a whole, or any member thereof.

17.	Accounts

17.1	The Accounts incorporated by reference into the Circular and the Prospectus:

	(A)	have been prepared and audited in accordance and comply with IFRS, the Companies Acts and all applicable laws and regulations;

	(B)	give a true and fair view of the financial condition and of the state of affairs of the Group as at the end of each of the relevant financial periods (including the Accounts Date) and of the profit, loss, cash flow and changes in equity of the Group for such periods; and

	(C)	either made proper provision for, or, where appropriate, in accordance with IFRS, include a note in respect of all material liabilities or commitments, whether actual, deferred, or contingent of the Group.

17.2	The HBOS Accounts incorporated by reference into the Prospectus:

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	(A)	have been prepared and audited in accordance and comply with IFRS, the Companies Acts and all applicable laws and regulations;

	(B)	give a true and fair view of the financial condition and of the state of affairs of HBOS and the HBOS Group as at the end of each of the relevant financial periods (including the HBOS Accounts Date) and of the profit, loss, cash flow and changes in equity of HBOS and the HBOS Group for such periods; and

	(C)	either made proper provision for, or, where appropriate, in accordance with IFRS, include a note in respect of all liabilities or commitments, whether actual, deferred, contingent or disputed, of the HBOS Group.

17.3	The Directors have established procedures which provide a reasonable basis for them to make proper judgements on an ongoing basis as to the financial position and prospects of the Company and the Group.

17.4	The Directors have established procedures which provide a reasonable basis for them to make proper judgements on an ongoing basis as to the financial position and prospects of the Company and the Group.

17.5	There are no, and during the past four years have been no: (i) material weaknesses in the internal controls over financial reporting (whether or not remediated) of the Company or the Group; (ii) changes in the internal controls over financial reporting of the Company or the Group that have materially adversely affected, or would be reasonably likely to materially adversely affect, the internal controls over financial reporting of the Company or the Group; or (iii) material fraud that involves any current member of management of the Company or (so far as the Company is aware) of any other member of the Group and no material fraud that involves any employee of the Company or (so far as the Company is aware) of any other member of the Group.

18.	Guarantees, indemnities, borrowings and default

18.1	Save for:

	(A)	guarantees or indemnities given by any member of the Group in the ordinary course of business; and

	(B)	any guarantees, indemnities or other similar arrangements given by the Company or any Group Company to HM Treasury or any other UK government department and/or the Joint Sponsors,

	no member of the Group has given or has agreed to give any guarantee or indemnity or similar obligation in favour of a third party and no member of the Group has any current or known future liability, howsoever arising which, in any of the foregoing cases, would, or would be reasonably likely to, be (singly or in the aggregate) material in the context of the Open Offer, any subscription for New Shares by HM Treasury, Ordinary Shareholders or subscriber(s) procured by the Joint Bookrunners pursuant to clause 3.5 or clause 4.1, the redemption of the Preference Shares, Accepted Shares Admission, Non-Accepted Shares Admission or post-Accepted Shares or Non-Accepted Shares Admission dealings in the Ordinary Shares.

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18.2	No event has occurred nor have any circumstances arisen (and the making and completion of the Open Offer itself, the redemption of the Preference Shares and the allotment and issue of the New Shares will not give rise to any such event or circumstance) so that any person is or would be entitled, or could, with the giving of notice or lapse of time or the fulfilment of any condition or the making of any determination, become entitled, to require repayment before its stated maturity of, or to take any step to enforce any security for, any indebtedness of any member of the Group and no person to whom any indebtedness, of any member of the Group which is payable on demand is owed has demanded or threatened to demand repayment of, or taken or threatened to take any step to enforce any guarantee, indemnity or other security for, the same, which, in any of the foregoing cases, would, or would be reasonably likely to, be (singly or in the aggregate) material or have material consequences in each case in the context of the Open Offer, any subscription for New Shares by HM Treasury, Ordinary Shareholders or subscriber(s) procured by the Joint Bookrunners pursuant to clause 3.5 or clause 4.1, the redemption of the Preference Shares, Accepted Shares Admission, Non-Accepted Shares Admission or post-Accepted Shares or Non-Accepted Shares Admission dealings in the Ordinary Shares or the business of the Group.

18.3	There are no companies, undertakings, partnerships or joint ventures in existence in which any member of the Group has an ownership interest but whose results are not consolidated with the results of the Group, but whose default would affect the indebtedness or increase the contingent liabilities of the Group to an extent which would, or would be reasonably likely to, be (singly or in the aggregate) material in the context of the Open Offer, any subscription for New Shares by HM Treasury, Ordinary Shareholders or subscriber(s) procured by the Joint Bookrunners pursuant to clause 3.5 or clause 4.1, the redemption of the Preference Shares, Accepted Shares Admission, Non-Accepted Shares Admission or post-Accepted Shares or Non-Accepted Shares Admission dealings in the Ordinary Shares.

18.4	No event or circumstance exists, has occurred or arisen or, so far as the Company is aware, is about to occur which constitutes or results in, or would with the giving of notice and/or lapse of time and/or the making of a relevant determination, constitute, or result in, termination of or a default or the acceleration or breach of any obligation under any agreement, instrument or arrangement to which any member of the Group is a party or by which any such member of the Group or any of its properties, revenues or assets are bound, in any of the foregoing cases to an extent which would, or would be reasonably likely to, be (singly or in the aggregate) material in the context of the Open Offer, any subscription for New Shares by HM Treasury, Ordinary Shareholders or subscriber(s) procured by the Joint Bookrunners pursuant to clause 3.5 or clause 4.1, the redemption of the Preference Shares, Accepted Shares Admission, Non-Accepted Shares Admission or post Accepted Shares or Non-Accepted Shares Admission dealings in the Ordinary Shares.

19.	Taxation

	No stamp duty, SDRT or other issuance or transfer taxes or similar duties are payable in connection with the allotment, issue and delivery of the New Shares by the Company in accordance with the terms of this Agreement or otherwise in connection with the making or implementation of the Open Offer or the redemption of the Preference Shares, save

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	for any stamp duty or SDRT payable under sections 67, 70, 93 or 96 of the Finance Act 1986 in relation to the issue of the New Shares.

20.	Intellectual property

20.1	Except to an extent that would not (singly or in the aggregate) be material in the context of the Open Offer, any subscription for New Shares by HM Treasury, Ordinary Shareholders or subscriber(s) procured by the Joint Bookrunners pursuant to clause 3.5 or clause 4.1, the redemption of the Preference Shares, Accepted Shares Admission, Non-Accepted Shares Admission or post-Accepted Shares or Non-Accepted Shares Admission dealings in the Ordinary Shares, and so far as the Company is aware, the Group does not infringe the Intellectual Property Rights of any third party nor so far as the Company is aware does any third party infringe the Intellectual Property Rights owned or used by the Group.

20.2	All material Intellectual Property Rights used by the Group are either legally or beneficially owned by the Group in all material respects or are used under a licence and are not subject to any Adverse Interests to an extent that would or might (singly or in the aggregate) be material in the context of the Open Offer, any subscription for New Shares by HM Treasury, Ordinary Shareholders or subscriber(s) procured by the Joint Bookrunners pursuant to clause 3.5 or clause 4.1, the redemption of the Preference Shares, Accepted Shares Admission, Non-Accepted Shares Admission or post-Accepted Shares or Non-Accepted Shares Admission dealings in the Ordinary Shares.

20.3	Save as would not (singly or in the aggregate) be material in the context of the Open Offer, any subscription for New Shares by HM Treasury, Ordinary Shareholders or subscriber(s) procured by the Joint Bookrunners pursuant to clause 3.5 or clause 4.1, the redemption of the Preference Shares, Accepted Shares Admission, Non-Accepted Shares Admission or post-Accepted Shares or Non-Accepted Shares Admission dealings in the Ordinary Shares, (i) all Intellectual Property Rights registered in the name of a member of the Group (if any) are beneficially owned by it and subsisting and if granted not subject to revocation and (ii) all requisite registration and renewal fees in respect thereof have been duly and timeously paid.

20.4	Save as would not (singly or in the aggregate) be material in the context of the Open Offer, any subscription for New Shares by HM Treasury, Ordinary Shareholders or subscriber(s) procured by the Joint Bookrunners pursuant to clause 3.5 or clause 4.1, the redemption of the Preference Shares, Accepted Shares Admission, Non-Accepted Shares Admission or post-Accepted Shares or Non-Accepted Shares Admission dealings in the Ordinary Shares, (i) all Intellectual Property Rights owned and used or reasonably likely to be used by the Group and capable of legal protection are subject to appropriate and enforceable protection (including, where reasonably appropriate, by registration), and (ii) so far as the Company is aware there is no restriction of the rights of the Group to use any Intellectual Property Rights owned by or licensed to the Company to engage in any of the activities presently or proposed to be undertaken by it.

21.	Insurance

	Save as would not be (singly or in the aggregate) material in the context of the Open Offer, any subscription for New Shares by HM Treasury, Ordinary Shareholders or

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	subscriber(s) procured by the Joint Bookrunners pursuant to clause 3.5 or clause 4.1, the redemption of the Preference Shares, Accepted Shares Admission, Non-Accepted Shares Admission or post-Accepted Shares or Non-Accepted Shares Admission dealings in the Ordinary Shares, the Group is insured to adequate levels against all risks which the Company reasonably believes to be commonly insured against by persons carrying on the same or similar businesses as those carried on by the Group and against all risks against which the Group might reasonably be expected to insure in the particular circumstances of the businesses carried on by each member of the Group, all such insurances are in full force and effect and to the best knowledge, information and belief of the Company, there are no circumstances which could render any such insurances void or voidable and there is no material insurance claim, pending, threatened or outstanding against any member of the Group and all premiums due in respect of all insurances have been duly paid.

22.	Rating

	Except as publicly announced the Company has not received notice of any intended or potential downgrading of the rating assigned to the Company’s (or any other member of its Group’s) credit or debt by a ratings agency.

23.	Insolvency

23.1	No member of the Group is unable to pay its debts within the meaning of section 123 of the Insolvency Act 1986 or is otherwise insolvent.

23.2	Save in the context of a solvent voluntary winding up or otherwise as would not (singly or in the aggregate) be material in the content of the Open Offer, any subscription for New Shares by HM Treasury, Ordinary Shareholders or subscriber(s) procured by the Joint Bookrunners pursuant to clause 3.5 or clause 4.1, the redemption of the Preference Shares, Accepted Shares Admission, Non-Accepted Shares Admission or post-Accepted Shares or Non-Accepted Shares Admission dealings in the Ordinary Shares, no order has been made, petition presented or resolutions passed for the winding up of any member of the Group and no meeting has been convened for the purpose of winding up any member of the Group. No member of the Group has been a party to any transaction which could be avoided in a winding up.

23.3	No steps have been taken for the appointment of an administrator or receiver (including an administrative receiver) of all or any part of the assets of any member of the Group.

23.4	By reason of actual or anticipated financial difficulties, no member of the Group has commenced negotiations with its creditors or any class of its creditors with a view to rescheduling any of its indebtedness or has made or proposed any arrangement or composition with its creditors or any class of its creditors.

24.	Regulatory

24.1	Each member of the Group required to be licensed (as a bank or otherwise) is duly licensed in its jurisdiction of incorporation and domicile and, except as would not reasonably be expected to be material, is duly licensed or authorised in each other jurisdiction where it is required to be licensed or authorised to conduct its business.

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24.2	Save as otherwise as would not (singly or in the aggregate) be material in the context of the Open Offer, any subscription for New Shares by HM Treasury, Ordinary Shareholders or subscriber(s) procured by the Joint Bookrunners pursuant to clause 3.5 or clause 4.1, the redemption of the Preference Shares, Accepted Shares Admission, Non-Accepted Shares Admission or post-Accepted Shares or Non-Accepted Shares Admission dealings in the Ordinary Shares, the Company is not subject to any special or additional surveillance or supervision by the FSA or to any special or additional reporting requirements in relation to its assets, liquidity position, funding position or otherwise and the Company has not been subject to any visits, beyond customary visits, by the FSA.

24.3	The operations of each member of the Group are and have been conducted at all times in material compliance with the money laundering statutes of all jurisdictions, the rules and regulations thereunder and any related or similar rules, regulations or guidelines, issued, administered or enforced by any governmental agency (collectively, the “ Money Laundering Laws ”) and no material action, suit or proceeding by or before any court or governmental agency, authority or body or any arbitrator involving any member of the Group with respect to the Money Laundering Laws is pending or, to the best knowledge of the Company, threatened.

24.4	Except as previously disclosed by the Company, none of the Company, any other member of the Group or, to the knowledge of the Company, any director, officer, agent, employee or Affiliate of the Company is currently subject to any sanctions administered by the U.S. Department of the Treasury (“ OFAC ”) or any similar sanctions imposed by the European Union, the United Nations or any other body, governmental or other, to which the Company or ay of its Affiliates is subject (collectively, “ other economic sanctions ”); and the Company will not directly or indirectly use the proceeds of the Open Offer, or lend, contribute or otherwise make available such proceeds to any other member of the Group, joint venture partner or other person or entity, for the purpose of financing the activities of any person currently subject to any sanctions administered by OFAC or any other economic sanctions.

24.5	None of the Company, any other member of the Group or, to the knowledge of the Company, any director, officer, agent, employee or Affiliate of the Company, is aware of or has taken any action, directly or indirectly, that could result in a violation by such persons of the U.S. Foreign Corrupt Practices Act of 1977, as amended, or the rules and regulations thereunder (the FCPA) (including, without limitation, making use of the mail or any means or instrument of interstate commerce corruptly in furtherance of an offer, payment, promise to pay or authorisation of the payment of any money, or other property, gift, promise to give, or authorisation of the giving of anything of value to any “foreign official” (as such term is defined in the FCPA) or any foreign political office, in contravention of the FCPA), the OECD Convention on Bribery of Foreign Public Officials in International Business Transactions (the OECD Convention) or any similar law or regulation, to which the Company, any other member of the Group, any director, officer, agent, employee of any member of the Group or, to the knowledge of the Company, any Affiliate is subject; and the Company, each member of the Group and, to the knowledge of the Company, its Affiliates have conducted their businesses in compliance with the FCPA, the OECD Convention and any applicable similar law or regulation and have instituted and maintain policies and procedures designed to ensure, and which are reasonably expected to continue to ensure, continued compliance therewith.

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25.	United States Securities Regulations

25.1	The Company is a “foreign issuer” (as defined in Regulation S under the Securities Act).

25.2	The Company reasonably believes that there is no “substantial US market interest” (as defined in Rule 902(j) of Regulation S under the Securities Act) in any of the New Shares.

25.3	The Company does not believe that it is and does not expect to become (whether as a result of the receipt and application of the proceeds of the sale of the New Shares or otherwise) a “passive foreign investment company” within the meaning of section 1297 of the US Internal Revenue Code of 1986.

25.4	The Company is not, and, immediately after giving effect to the offering and sale of the New Shares and the application of the proceeds thereof as set forth in the Draft Prospectus and, when published, the Prospectus, will not be, an “investment company” as such term is defined in the US Investment Company Act of 1940.

25.5	Other than HM Treasury, there are no persons with registration rights or other similar rights to have any shares registered by the Company under the Securities Act except to the extent that HM Treasury has transferred any of its registration rights to any person in accordance with the relevant provisions of the Registration Rights Agreement in effect from 12 January 2009.

25.6	During the period of six months after Accepted Shares Admission or, if later, Non-Accepted Shares Admission, the Company will not, and will not permit any of its Affiliates to, resell any New Shares which constitute “restricted securities” under Rule 144 that have been reacquired by any of them other than in transactions that meet the applicable requirements of Regulation S.

26.	Panel Confirmation

	The Panel has confirmed that subject to the independent shareholders of the Company voting in favour of the Whitewash Resolution, the Panel will disapply the requirement to make a general offer under the terms of Rule 9 of the City Code on Takeovers and Mergers which would otherwise be required by the subscription by HM Treasury (or its nominee) for the New Shares.

27.	Profit forecast

27.1	The forecast loss before tax, before the recognition of negative goodwill, for the period ending 31 December 2009 set out in Part XVII of the Prospectus represents the honest belief of the Directors, has been made after due and careful enquiry by the Company, presents fairly the information shown therein, has been prepared in accordance with applicable guidelines and rules and has been properly compiled on the basis set out therein (and the basis of accounting used is consistent with the accounting policies of the Group) and the assumptions used in the preparation thereof are reasonable.

27.2	The Profit Forecast Report has been approved by the Directors or a duly authorised committee thereof, and takes into account all material matters and sensitivities of which

110

the Company is aware concerning the Company, the other members of the Group or the markets in which any of them is carrying on, or is expecting to carry on, business. All assumptions on which such projections are based are set out in the Profit Forecast Report and are reasonable and such projections take into account all material matters of which the Company is aware concerning the Company, the other members of the Group or the markets in which any of them is carrying on, or is expecting to carry on, business and all factual information supplied to the Auditors by the Company or any other member of the Group or any of such person’s officers for the purpose of enabling the Auditors to identify or evaluate the assumptions underlying the relevant projections is true, accurate and not misleading and all other information (including any forecast or projection) supplied for that purpose was carefully prepared and given in good faith.

111

SCHEDULE 4
PRO FORMA NOVATION AGREEMENT

THIS NOVATION AGREEMENT is made the [ ● ] day of [ ● ] , 20 [ ● ]

BETWEEN:


1.	THE COMMISSIONERS OF HER MAJESTY’S TREASURY, of 1 Horse Guards Road, London SW1A 2HQ (“ HMT ”)

2.	LLOYDS BANKING GROUP PLC , a company incorporated in Scotland with registered number 095000 and whose registered office is at Henry Duncan House, 120 George St, Edinburgh, Scotland EH2 4LH (the “ Lloyds ”);

3.	CITIGROUP GLOBAL MARKETS U.K. EQUITY LIMITED , a company incorporated in England and Wales with registered number 2019774 and whose registered office is at Citigroup Centre, Canada Square, Canary Wharf, London, E14 5LB (“ CGMEL ”);

4.	UBS LIMITED , a company incorporated in England and Wales with registered number 2035362 whose registered office is at 1 Finsbury Avenue, London EC2M 2PP (“ UBS ”); and

5.	J.P. MORGAN CAZENOVE LIMITED , a company incorporated in England and Wales with registered number 04153386 and whose registered office is 20 Moorgate, London EC2R 6DA (“ JPMC ”); and

6.	[ ] of [ ] [ (registered in England No. [ ] ) ] (the “ Company ”)

WHEREAS:


(A)	HMT, Lloyds, CGMEL, UBS and JPMC have entered into the Open Offer Agreement (as defined in this Agreement).

(B)	HMT wishes to be released and discharged from the Open Offer Agreement and the Company, CGMEL, UBS, and JPMC have agreed to release and discharge HMT from the Open Offer Agreement upon the terms of the Company’s undertaking to perform the Open Offer Agreement and be bound by its terms in the place of HMT and HMT agreeing to guarantee the Company’s obligations in respect of the Open Offer Agreement.

NOW IT IS AGREED as follows:-

112


1.	INTERPRETATION

1.1	In this Agreement:

“Open Offer Agreement”		means the agreement as amended and restated on 20 March 2009 and on 18 May 2009 between HMT and Lloyds, CGMEL, UBS and JPMC relating to, inter alia, the open offer of a number of Lloyds ordinary shares; and

“Continuing Parties”		means, Lloyds, CGMEL, UBS and JPMC and “ Continuing Party ” shall be construed accordingly.


1.2	In this Agreement, unless otherwise specified:

	(A)	references to clauses and sub-clauses are to clauses and sub-clauses of this Agreement; and

	(B)	headings to clauses and schedules are for convenience only and do not affect the interpretation of this Agreement.

2.	COMPANY’S UNDERTAKING

	With effect from the date of this Agreement and in consideration of the undertakings given by the Continuing Parties in clause 3 , the Company hereby undertakes to observe, perform, discharge and be bound by the Open Offer Agreement as if the Company were a party to that agreement in the place of HMT. Notwithstanding this undertaking, nothing in this Agreement shall:


	(A)	require the Company to perform any obligation created by or arising under the Open Offer Agreement falling due for performance, or which should have been performed, before the date of this Agreement;

	(B)	make the Company liable for any act, neglect, default or omission in respect of the Open Offer Agreement committed by HMT or occurring before the date of this Agreement; or

	(C)	impose any obligation on the Company for or in respect of any obligation performed by HMT under the Open Offer Agreement before the date of this Agreement.

3.	CONTINUING PARTIES’ UNDERTAKING AND RELEASE OF HMT

3.1	With effect from the date of this Agreement and in consideration of the undertakings given by the Company in clause 2 and the undertakings and guarantee given by HMT in clauses 4 and 5 respectively, each of the Continuing Parties hereby:

	(A)	releases and discharges HMT from all obligations to observe, perform, discharge and be bound by the Open Offer Agreement;

113


	(B)	accepts the Company’s undertaking to observe, perform, discharge and be bound by the Open Offer Agreement (such undertaking being set out in clause 2 ); and

	(C)	agrees to observe, perform, discharge and be bound by the Open Offer Agreement as if the Company were a party to the Open Offer Agreement in the place of HMT.

3.2	Notwithstanding the provisions of sub-clause 3.1(A) , nothing in this Agreement shall affect or prejudice any claim or demand whatsoever which any Continuing Party may have against HMT in relation to the Open Offer Agreement and arising out of matters prior to the date of this Agreement.

4.	HMT’S UNDERTAKING AND RELEASE OF THE CONTINUING PARTIES

	With effect from the date of this Agreement and in consideration of the undertakings given by the Continuing Parties in clause 3 , HMT hereby releases and discharges each of the Continuing Parties from all obligations to observe, perform, discharge and be bound by the Open Offer Agreement. Notwithstanding this undertaking and release, nothing in this Agreement shall affect or prejudice any claim or demand whatsoever which HMT may have against any Continuing Party in relation to the Open Offer Agreement and arising out of matters prior to the date of this Agreement.

5.	GUARANTEE AND INDEMNITY

5.1	In consideration of the undertakings given by the Continuing Parties in clause 3 , HMT hereby unconditionally and irrevocably guarantees to each Continuing Party the due and punctual performance and observance by the Company of all its obligations, commitments and undertakings under or pursuant to this Agreement and agrees to indemnify each Continuing Party on an after-tax basis against all loss, damage, costs and breach by the Company of its obligations, commitments or undertakings under or pursuant to this Agreement. The liability of HMT under this Agreement shall not be released or diminished by any variation of the terms of this Agreement or the Open Offer Agreement as novated by this Agreement (whether or not agreed by HMT), any forbearance, neglect or delay in seeking performance of the obligations hereby imposed or any granting of time for such performance.

5.2	If and whenever the Company defaults for any reason whatsoever in the performance of any obligation or liability undertaken or expressed to be undertaken by the Company under or pursuant to this Agreement, HMT shall forthwith upon demand unconditionally perform (or procure performance of) and satisfy (or procure the satisfaction of) the obligation or liability in regard to which such default has been made and so that the same benefits shall be conferred on each Continuing Party as such party would have received if such obligation or liability had been duly performed and satisfied by the Company.

5.3	This guarantee is to be a continuing guarantee and accordingly is to remain in force until all the obligations, commitments and undertakings of the Company referred to in sub-clause 5.1 shall have been performed or satisfied. This guarantee is in addition to and without prejudice to and not in substitution for any rights or security which any

114


	Continuing Party may now or hereafter have or hold for the performance and observance of the obligations, commitments and undertakings of the Company under or in connection with this Agreement.

5.4	As a separate and independent stipulation HMT agrees that any obligation expressed to be undertaken by the Company (including, without limitation, any moneys expressed to be payable under this Agreement or the Open Offer Agreement as novated by this Agreement) which may not be enforceable against or recoverable from the Company by reason of any legal limitation, disability or incapacity on or of the Company or any other fact or circumstance (other than any limitation imposed by this Agreement or the Open Offer Agreement as novated by this Agreement) shall nevertheless be enforceable against and recoverable from HMT as though the same had been incurred by HMT and HMT were the sole or principal obligor in respect thereof.

6.	COMPANY CEASES TO BE WHOLLY-OWNED BY HMT

	In the event that the Company at any time after the date of this Agreement ceases to be directly or indirectly wholly-owned by HMT, the Company shall, and HMT will procure that the Company shall, enter into a novation agreement upon substantially the same terms as this Agreement such that the rights and obligations assumed by the Company under this Agreement are novated either to HMT or to an entity which is, directly or indirectly, wholly-owned by HMT. The Continuing Parties agree to consent to, and to execute and deliver all such documentation as may be necessary to effect, such novation.

7.	NOTICES

	For the purposes of all provisions in the Open Offer Agreement concerning the service of notices, the address of the Company is its registered office as shown above from time to time and its fax number is [ ● ] . All notices served on the Company under the Open Offer Agreement should be marked for the attention of [ ● ] .

8.	COUNTERPARTS

8.1	This agreement may be executed in any number of counterparts, and by the parties on separate counterparts, but shall not be effective until each party has executed at least one counterpart.

8.2	Each counterpart shall constitute an original of this Agreement, but all the counterparts shall together constitute but one and the same instrument.

8.3	Delivery of an executed counterpart signature page of this Agreement by e-mail (PDF) or telecopy shall be as effective as delivery of a manually executed counterpart of this Agreement. In relation to each counterpart, upon confirmation by or on behalf of the signatory that the signatory authorises the attachment of such counterpart signature page to the final text of this Agreement, such counterpart signature page shall take effect together with such final text as a complete authoritative counterpart.

115


9.	GOVERNING LAW

	The Continuing Parties and the Company hereby agree that this Agreement and any non-contractual obligations arising out of or in connection with it shall be governed by and construed in accordance with English law and that the courts of England and Wales are to have exclusive jurisdiction to settle any matter, claim or dispute arising hereunder and submits to the jurisdiction of the English Courts.

10.	AGENT FOR SERVICE OF PROCESS

	The Company shall at all times maintain an agent for service of process and for service of any other documents and proceedings in England, or any other proceedings in connection with this Agreement. Such agent shall be [ agent with address in England ] and any writ, judgment or other notice of legal process shall be sufficiently served on the Company if delivered to such agent at its address for the time being. The Company irrevocably undertakes not to revoke the authority of the above agent and if, for any reason, the agent ceases to act as such, the Company shall appoint a replacement agent having an address for service in England and shall notify Lloyds, CGMEL, UBS and JPMC and HMT of the name and address of such replacement agent. If the Company fails to appoint another agent, Lloyds, having consulted with CGMEL, UBS and JPMC, shall be entitled to appoint one on the Company’s behalf and at the Company’s expense.

IN WITNESS of which this Agreement has been executed on the date which first appears on page 1 of this Agreement.



For and on behalf of
The Commissioners of Her Majesty’s Treasury


For and on behalf of
Citigroup Global Markets U.K. Equity Limited


For and on behalf of
UBS Limited


For and on behalf of
J.P. Morgan Cazanove Limited


For and on behalf of
*[ Insert name of the Company* ]**

116

SCHEDULE 5
US INVESTOR LETTER


[ Name, address, fax number and attention details for the Company ]

[ Names, addresses, fax numbers and attention details for the Placing Agents ]

cc: [You must fax a copy of this letter to the financial intermediary through which your existing ordinary shares are held. Accordingly please insert here name, address and contact details of the relevant financial intermediary.]

_________________, 2009

Ladies and Gentlemen

In connection with our proposed subscription for new shares (the “ New Shares ”) of [ insert name of company ] (the “ Company ”), which are being offered by way of an open offer (the “ Open Offer ”), we represent, warrant, agree and confirm that:


1.	To the extent we are an existing shareholder of the Company, we are the beneficial holder of and/or exercise full investment discretion with respect to our ordinary shares of the Company.

2.	We are an institution which (a) has such knowledge and experience in financial and business matters that we are capable of evaluating the merits and risks of our investments in the New Shares, and (b) we, and any accounts for which we are acting, are able to bear the economic risk, and sustain a complete loss, of such investment in the New Shares.

3.	We are a “qualified institutional buyer” (a “ QIB ”) as defined in Rule 144A (“ Rule 144A ”) under the US Securities Act of 1933, as amended (the “ Securities Act ”). Further, if we are subscribing for the New Shares as a fiduciary or agent for one or more investor accounts, (a) each such account is a QIB, (b) we have investment discretion with respect to each account, and (c) we have full power and authority to make the representations, warranties, agreements and acknowledgements herein on behalf of each such account.

117


4.	We will base our investment decision on a copy of the Company’s prospectus dated [ ● ] , 2009, including the documents incorporated by reference therein (the “ Prospectus ”). We acknowledge that neither the Company nor any of its affiliates nor any other person (including [ insert names of placing agents ] (together, the “ Placing Agents ”)) has made any representations, express or implied, to us with respect to the Company, the Open Offer, the New Shares or the accuracy, completeness or adequacy of any financial or other information concerning the Company, the Open Offer or the New Shares, other than (in the case of the Company and its affiliates only) the information contained or incorporated by reference in the Prospectus. We acknowledge that we have not relied on any information contained in any research reports prepared by the Placing Agents or any of their respective affiliates. We understand that the Prospectus has been prepared in accordance with UK format, style and content, which differs from US format, style and content. In particular, but without limitation, the financial information contained in the Prospectus have been prepared in accordance with International Financial Reporting Standards, and thus may not be comparable to financial statements of US companies prepared in accordance with US generally accepted accounting principles. We will not distribute, forward, transfer or otherwise transmit the Prospectus, or any other presentational or other materials concerning the Open Offer (including electronic copies thereof) to any person within the United States (other than a QIB on behalf of which we act). We acknowledge that we have read and agreed to the matters set forth under the heading “ [ insert name of relevant section of Prospectus containing notices to oversees investors, including US investors ] ” in the Prospectus.

5.	We will make our own independent investigation and appraisal of the business, results, financial condition, prospects, creditworthiness, status and affairs of the Company and we will make our own investment decision to subscribe for the New Shares. We understand that there may be certain consequences under US and other tax laws resulting from an investment in the New Shares, including that we must bear the economic risk of an investment in the New Shares for an indefinite period of time, and we will make such investigation and consult such tax and other advisors with respect thereto as we deem appropriate.

6.	Any New Shares we subscribe for will be for our own account (or for the account of a QIB as to which we exercise sole investment discretion and have authority to make the statements contained in this letter) for investment purposes, and not with a view to resale or distribution within the meaning of the US securities laws, subject to the understanding that the disposition of our property shall at all times be and remain within our control.

7.	We understand that the New Shares are being offered in a transaction not involving any public offering in the United States within the meaning of the Securities Act and that the New Shares are not being and will not be registered under the Securities Act or with any State or other jurisdiction of the United States. We acknowledge and agree that we are not taking up the New Shares as a result of any general solicitation or general advertising (as those terms are defined in Regulation D under the Securities Act). We understand and agree that, although offers and sales of the New Shares are being made in the United States to QIBs, they are not being made under Rule 144A, and that the New Shares are not eligible for resale pursuant to Rule 144A.

8.	We understand that the New Shares will be “restricted securities” within the meaning of Rule 144(a)(3) under the Securities Act and we agree that for so long as such securities

118


	are “restricted securities” (as so defined), they may not be deposited into any unrestricted depositary facility established or maintained by any depositary bank, including the current American Depositary Receipt (“ ADR ”) facility maintained by The Bank of New York Mellon, as depositary for the Company’s ADR facility (the “ Depositary ”).

9.	As long as the New Shares are “restricted securities” within the meaning of Rule 144(a)(3) under the Securities Act, we will not reoffer, resell, pledge or otherwise transfer the New Shares, except in an offshore transaction in accordance with Rule 903 or Rule 904 of Regulation S under the Securities Act (which, for the avoidance of doubt, includes a sale over the London Stock Exchange) and in accordance with any applicable securities laws of any state or other jurisdiction of the United States.

10.	We understand that, to the extent the New Shares are delivered in certificated form, the certificate delivered in respect of the New Shares will bear a legend substantially to the following effect for so long as the securities are “restricted securities” within the meaning of Rule 144(a)(3) under the Securities Act:

	THE SHARES REPRESENTED HEREBY HAVE NOT BEEN AND WILL NOT BE REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR WITH ANY SECURITIES REGULATORY AUTHORITY OF ANY STATE OR OTHER JURISDICTION OF THE UNITED STATES, AND MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH RULE 903 OR RULE 904 OF REGULATION S UNDER THE SECURITIES ACT AND IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION OF THE UNITED STATES. NOTWITHSTANDING ANYTHING TO THE CONTRARY IN THE FOREGOING, THE SHARES MAY NOT BE DEPOSITED INTO ANY UNRESTRICTED DEPOSITARY RECEIPT FACILITY IN RESPECT OF SHARES ESTABLISHED OR MAINTAINED BY A DEPOSITARY BANK. EACH HOLDER, BY ITS ACCEPTANCE OF THESE SHARES, REPRESENTS THAT IT UNDERSTANDS AND AGREES TO THE FOREGOING RESTRICTIONS.

11.	We acknowledge that, whether or not we currently hold the Company’s ADRs, we will receive the New Shares in the form of ordinary shares and not in the form of ADRs.

12.	We acknowledge that until six months after the latest date on which the New Shares are delivered in the Open Offer (which is currently expected to be [ • ] 2009), the Depositary will not accept deposits of the New Shares in the ADR facility, or permit pre-releases of the Company’s American Depositary Shares from the ADR facility, unless we (or a broker on behalf of us) certify, among other things, that the shares to be deposited were not subscribed or purchased pursuant to the Open Offer, and that we have not borrowed shares to be deposited with the intention of replacing them with New Shares subscribed or purchased pursuant to the Open Offer.

13.	We understand and acknowledge that the Company shall have no obligation to recognize any offer, sale, pledge or other transfer made other than in compliance with the restrictions on transfer set forth and described herein and that the Company may make notation on its records or give instructions to [ insert name of registrar ] and any transfer agent of the New Shares and to the Depositary under its ADR facility in order to implement such restrictions.

119


14.	We understand that the foregoing representations, warranties, agreements and acknowledgements are required in connection with United States and other securities laws and that the Company, its affiliates, the Placing Agents and their respective affiliates, and others are entitled to rely upon the truth and accuracy of the representations, warranties, agreements and acknowledgements contained herein. We agree that if any of the representations, warranties, agreements and acknowledgements made herein are no longer accurate, we shall promptly notify the Company and the Placing Agents. All representations, warranties, agreements and acknowledgements we have made in this letter shall survive the execution and delivery hereof.

15.	We confirm that, to the extent we are purchasing the New Shares for the account of one or more other persons, (a) we have been duly authorized to sign this letter and make the confirmations, acknowledgements and agreements set forth herein on their behalf and (b) the provisions of this letter constitute legal, valid and binding obligations of us and any other person for whose account we are acting.

16.	We irrevocably authorize the Company, its affiliates, the Placing Agents and their respective affiliates and any person acting on their behalf to produce this letter or a copy hereof to any interested party in any administrative or legal proceedings, dispute or official inquiry with respect to the matters covered hereby.

17.	This letter shall be governed by, and construed in accordance with, the laws of the State of New York.

18.	We agree to promptly notify you if, at any time prior to [ insert relevant date ] , any of the foregoing ceases to be true.


Yours truly,

[ Signature of authorized signatory ]

ON BEHALF OF [ Institution ]

By:	[ Name of authorized signatory ]

	[ Title of authorized signatory ]

	[ Institution ]

	[ Address ]

[ Name of nominee, if applicable ]

120

IN WITNESS WHEREOF the Original Placing Agreement has been entered into as of 7 March 2009 and has been amended and restated by way of the Amended and Restated Placing Agreement as of 20 March 2009 and the Amended and Restated Placing Agreement has been amended and restated by way of this Agreement as of the date which appears on page 1 of this Agreement.


	121	Project Broom Open Offer Agreement


SIGNED by and for and on behalf of LLOYDS BANKING GROUP PLC	) ) )	ERIC DANIELS

SIGNED by and for and on behalf of CITIGROUP GLOBAL MARKETS U.K. EQUITY LIMITED	) ) )	ANDREW THOMPSON

SIGNED by and for and on behalf of UBS LIMITED	) ) )	MICHAEL O’BRIEN DANIEL HOLMES

SIGNED by and for and on behalf of J.P. MORGAN CAZENOVE LIMITED	) ) )	TIM WISE

SIGNED by two of THE COMMISSIONERS OF HER MAJESTY’S TREASURY	) ) ) )	BOB BLIZZARD STEVE McCABE

Conformed copy

Dated as of 7 March 2009,
as Amended and Restated as at 20 March 2009 and as at 18 May 2009

LLOYDS BANKING GROUP PLC

and

CITIGROUP GLOBAL MARKETS U.K. EQUITY LIMITED

and

UBS LIMITED

and

J.P. MORGAN CAZENOVE LIMITED

and

THE COMMISSIONERS OF HER MAJESTY’S TREASURY

OPEN OFFER AGREEMENT

Slaughter and May
One Bunhill Row
London
EC1Y 8YY

(RRO/CPYC)
CD090780056

Contents


		Page

1.	INTERPRETATION	2

2.	CONDITIONS	21

3.	THE OPEN OFFER AND APPOINTMENTS	27

4.	FRACTIONAL ENTITLEMENTS	35

5.	ALLOTMENT OF THE NEW SHARES, CONSIDERATION AND REGISTRATION	36

6.	OVERSEAS SHAREHOLDERS	38

7.	HM TREASURY SUBSCRIPTION	41

8.	CAPACITY	44

9.	FEES, COMMISSIONS, EXPENSES AND VAT	45

10.	COVENANTS	48

11.	REPRESENTATIONS, WARRANTIES AND UNDERTAKINGS	52

12.	INDEMNITIES	54

13.	CONTRIBUTION	58

14.	TERMINATION	59

15.	EXCLUSIONS OF LIABILITY	62

16.	MISCELLANEOUS	63

17.	GENERAL	63

18.	ASSIGNMENT OR NOVATION	66

19.	NOTICES	66

20.	GOVERNING LAW AND SUBMISSION TO JURISDICTION	68

SCHEDULE 1		70

CERTIFICATES TO BE DELIVERED		70

SCHEDULE 2 DOCUMENTS TO BE DELIVERED		74


SCHEDULE 3 WARRANTIES			81

SCHEDULE 4 PRO FORMA NOVATION AGREEMENT			111

SCHEDULE 5 US INVESTOR LETTER			116

Exhibit 4(a)(vi)


THIS AGREEMENT is dated June 2009 and effective as of 11 June 2009 between


(1)	LLOYDS BANKING GROUP PLC, a company incorporated in Scotland with registered number 095000 and whose registered office is at Henry Duncan House, 120 George Street, Edinburgh EH2 4LH (the “Company” ); and

(2)	THE COMMISSIONERS OF HER MAJESTY’S TREASURY of 1 Horse Guards Road, London SW1A2HQ (“HM Treasury” ).

WHEREAS


(A)	HM Treasury has purchased Ordinary Shares and other Securities.

(B)	It is anticipated that HM Treasury will acquire or subscribe further Securities.

(C)	Pursuant to the terms of the pre-accession commitments given by the Company on 7 March 2009 in connection with the asset protection scheme announced by HM Treasury on 19 January 2009 and the Placing and Open Offer Agreement between, among others, the parties and dated as of 7 March 2009 (as amended and restated on 20 March 2009 and 18 May 2009), the Company has agreed to grant certain rights to HM Treasury.

NOW THEREFORE IT IS AGREED as follows:


1.	INTERPRETATION

1.1	In this Agreement (including the Recitals):

	“$”	means a United States Dollar;

	“Asset Protection Scheme”	means the asset protection scheme originally announced by HM Treasury on 19 January 2009 and proposed to be made available by HM Treasury to financial institutions in the United Kingdom;

	“Business Day”	means any day (other than a Saturday or Sunday) on which clearing banks are open for a full range of banking transactions in London;

	“Claims”	means any and all claims, actions, liabilities, demands, proceedings, investigations, judgments or awards whatsoever (and in each case whether or not successful, compromised or settled and whether joint or several) threatened, asserted, established or instituted against any Indemnified Person and “Claim” shall be construed accordingly;


	“Close Period”	means any close period as defined in Annex I to Chapter 9 of the Listing Rules made by the UK Financial Services Authority pursuant to Part VI of the Financial Services and Markets Act 2000 in relation to the Company;

	“Companies Act”	means the Companies Act 2006;

	“Company Share Offering”	has the meaning given in clause 2.2;

	“Earliest Documentary Demand Date”	means 22 July 2009;

	“Excess Capacity”	has the meaning given in clause 2.2(A)(ii);

	“FSA”	means the Financial Services Authority acting in its capacity as the competent authority for the purposes of Part VI of FSMA;

	“FSMA”	means the Financial Services and Markets Act 2000, including any regulations made pursuant thereto;

	“HMT Indemnified Persons”	means:


		(a)	The Commissioners of Her Majesty’s Treasury;

		(b)	HM Treasury;

		(c)	the Treasury Solicitor:

		(d)	any Wholly Owned Entity; and

		(e)	any person who is, on or at any time after the date of this agreement, a director, officer, official, agent or employee of or under any person specified in paragraph (a), (b), (c) or (d) above:


		and “HMT Indemnified Person” shall be construed accordingly;

	“HMT Shares”	means (i) any Securities of the Company acquired, subscribed for or held by HM Treasury from time to time and (ii) any Securities issued or issuable with respect to or in exchange or replacement for any such Securities;


	“Holder”	means HM Treasury and any New Holder;

	“Holder Indemnified Persons”	means:


		(a)	each Holder and any subsidiary, branch or affiliate of such Holder: and

		(b)	a person who is, on or at any time after the date of this Agreement, a director, officer, partner or employee of an undertaking specified in paragraph (a) above:


		and “Holder Indemnified Person” shall be construed accordingly;


	“Holders’ Counsel”	means (i) if HM Treasury is the sole selling holder, HM Treasury’s legal counsel, or (ii) if there is more than one selling Holder, the legal counsel chosen either by agreement between such Holders or (in the absence of agreement) by the person holding a majority interest in the Relevant Shares being offered or sold;

	“Initiating Holder”	has the meaning given in clause 2.1(A);

	“Listing Document”	means any prospectus, listing particulars, offering circular or similar document;

	“Listing Rules”	means the Listing Rules made by the FSA pursuant to section 73A of the FSMA, as amended from time to time;

	“Losses”	means any and all loss, damage, cost, liability, demand, charge or expense (including legal fees), in each case whether joint or several. which any Indemnified Person may suffer or incur (including, but not limited to, all Losses suffered or incurred in investigating, preparing for or disputing or defending or settling any Claim and/or in establishing its right to be indemnified pursuant to clause 3 and/or in seeking advice regarding any Claim or in any way related to or in connection with the indemnity contained in clause 3) and “Loss” shall be construed accordingly;

	“Marketing Document”	means any information memoranda, offering memoranda, presentations and marketing


		documents;

	“New Holder”	means any person to whom HMT Shares have been sold, distributed or otherwise transferred and to whom any or all of the rights conferred on HM Treasury by this Agreement have been assigned, transferred or novated in accordance with clause 4;

	“New Holder Shares”	means any HMT Shares which are sold, distributed or otherwise transferred to a New Holder;

	“Notice of Demand”	has the meaning given in clause 2.1(A);

	“Offering Expenses”	means all costs and expenses incurred by the Company or any Holder in effecting any offering or sale pursuant to this Agreement (including any applicable amounts in respect of VAT thereon), such expenses including, without limitation: (i) in respect of any Share Offering, the fees and expenses of their primary legal counsel in England, Scotland and the United States of America and in any other jurisdiction in which Securities are listed; (ii) the cost of preparation, advertising, printing and distribution of all Listing Documents, Marketing Documents and all other documents connected with the relevant offering or sale: (iii) the Registrars’ fees; (iv) the fees and charges of any regulator, investment exchange, central securities depository or clearing or settlement service; and (v) the expenses of the Company’s independent accountants in connection with any regular or special reviews or audits incident to or required in connection with the relevant offering or sale. but shall exclude Selling Expenses;

	“Other Shareholder”	means any holder of Securities other than a Holder:

	“Ordinary Shares”	means ordinary shares of 25 pence each (or such other nominal amount resulting from any merger, share exchange, reorganisation, recapitalisation, sub-division, consolidation or other similar transactions resulting in a change in the nominal amount of the ordinary shares) in the capital of the Company;


	“Public Offer”	means a Share Offering conducted (in whole or in part) by means of a marketed offer to the public requiring the preparation and approval of a Listing Document in accordance with applicable law;

	“Registrable Securities”	has the meaning given to that term in the US Registration Rights Agreement;

	“Registrars”	means the Company’s registrars from time to time;

	“Related Securities”	means any securities of any description caused by HM Treasury to be issued by any person from time to time and which are exchangeable for, convertible into, give rights over or otherwise reference any HMT Shares;

	“Relevant Shares”	means any HMT Shares and any New Holder Shares;

	“SEC”	means the U.S. Securities and Exchange Commission and any successor agency thereof;

	“Securities”	means shares in the capital of the Company and other securities of any description issued by the Company from time to time;

	“Selling Expenses”	means all underwriting discounts, selling commissions and share transfer taxes applicable to the offering or sale of HMT Shares and the fees and expenses of any Holder’s financial advisers;

	“Share Offering”	has the meaning given in clause 2.1(A);

	“Stamp Tax”	means any stamp, documentary, registration or capital duty or tax (including, without limitation, stamp duty, SDRT and any other similar duty or similar tax) and any fines, penalties and/or interest relating thereto;

	“Tax”	means all forms of taxation and statutory, governmental, state, provincial, local governmental or municipal impositions, duties, contributions and levies (including, for the avoidance of doubt, Stamp Tax), in each case in the nature of taxation, duty, contribution or levy, whether of the United Kingdom or elsewhere in the world whenever imposed and whether


		chargeable directly or primarily against or attributable directly or primarily to any person and all penalties, charges, costs and interest relating thereto;

	“Third Party Transferee”	has the meaning given in 4.1(B);

	“Treasury Solicitor”	has the same meaning as in the Treasury Solicitor Act 1876;

	“US Registration Rights Agreement”	means the agreement between HM Treasury and the Company dated 12 January 2009 as amended and restated on the date hereof in respect of the registration of Securities in the United States of America; and

	“Wholly Owned Entity”	has the meaning given in clause 4.1(A).


1.2	In this Agreement unless otherwise specified:

	(A)	references to clauses and sub-clauses are to clauses and sub-clauses of this Agreement;

	(B)	a reference to any statute or statutory provision shall be construed as a reference to the same as from time to time amended, modified or re-enacted;

	(C)	references to a “ company ” shall be construed so as to include any company, corporation or other body corporate, wherever and however incorporated or established;

	(D)	references to a “ person ” shall be construed so as to include any individual, firm, company, government, state or agency of a state or any potential subdivision thereof, local or municipal authority or government body or any joint venture, association or partnership (whether or not having separate legal personality);

	(E)	any reference to a “ day ” (including within the phrase “ Business Day ”) shall mean a period of 24 hours running from midnight to midnight;

	(F)	references to writing shall include any modes or reproducing words in a legible and non-transitory form;

	(G)	references to times of the day are to London time;

	(H)	headings to clauses are for convenience only and do not affect the interpretation of this Agreement;

	(I)	references to any English legal term for any action, remedy, method of judicial proceeding, legal document, legal status, court, official, or any legal concept or


		thing shall in respect of any jurisdiction other than England be deemed to include what most nearly approximates in that jurisdiction to the English legal term;

	(J)	the rule known as the ejusdem generis rule shall not apply and accordingly general words Introduced by the word “other” shall not be given a restrictive meaning by reason of the fact that they are preceded by words indicating a particular class of acts, matters or things;

	(K)	general words shall not be given a restrictive meaning by reason of the fact that they are followed by particular examples intended to be embraced by the general words; and

	(L)	any reference to any indemnity, covenant to pay or payment (a “Payment Obligation” ) being given or made on an “after-Tax basis” or expressed to be calculated on an “after-Tax basis” means that, in calculating the amount payable pursuant to such Payment Obligation (the “Payment” ), there shall be taken into account (if and to the extent that the same has not already been taken into account in the calculation of the Payment):

		(i)	any Tax suffered by the person entitled to receive the Payment to the extent that it arises as a result of the matter giving rise to the Payment Obligation or as a result of receiving, or being entitled to receive, the Payment; and

		(ii)	any relief, exemption, allowance or credit which is available to set against any Tax otherwise payable or against any income, profits or gains for Tax purposes, and any right to any refund or reimbursement of any Tax, which in each case is available to the person entitled to receive the Payment if and to the extent that the same arises as a result of the matter giving rise to the Payment Obligation or as a result of receiving, or being entitled to receive, the Payment,

		such that the person entitled to receive the Payment is in the same economic position after Tax that it would have been in if the matter giving rise to the Payment Obligation had not occurred.

2.	SHARE OFFERINGS

2.1	Assistance with sales and share sales and offerings

	(A)	Subject to the conditions of this clause 2.1, if at any time the Company shall receive a written notification from a Holder (the “Initiating Holder” ) that the Holder wishes to offer or sell Relevant Shares or Related Securities (whether by way of a public offer, private placement or by any other means, and whether to persons located in the United Kingdom and/or in any other jurisdiction (other than SEC registered public offers in the United States of America which are covered by the US Registration Rights Agreement)) (being a “Share Offering” ), which notification shall include confirmation that the number of Relevant Shares proposed to be offered or sold directly or through Related Securities would


		cause the condition in clause 2.1(C)(ii) to be satisfied and the intended method of such offering or sale (a “Notice of Demand” ), then the Company shall, subject to clauses 2.1(B) and (C), take all such steps and do all such things as the initiating Holder may (acting at all times reasonably with respect to the items set out in clauses 2.1(A)(i) to 2.1(A)(xiv) below) request in connection with such Share Offering as promptly as reasonably practicable (taking into account such reasonable timeframe as the Initiating Holder may specify) including, without limitation, the following:

		(i)	for a Public Offer, prepare any Listing Document required in connection with the Share Offering and, subject to clause 2.1(A)(viii), have the same approved in accordance with applicable law;

		(ii)	prepare any other Marketing Documents required by the Initiating Holder in connection with the Share Offering in accordance with customary market practice (to the extent relevant to the Share Offering);

		(iii)	participate in, and make documents and information available for due diligence generally in relation to the Share Offering in accordance with customary market practice (to the extent relevant to the Share Offering);

		(iv)	make available appropriate members of management of the Company for due diligence generally in relation to the Share Offering and for assistance reasonably required in the selling effort relating to the Share Offering including, but not limited to, participation in “road shows” in each case in accordance with customary market practice (to the extent relevant to the Share Offering);

		(v)	carry out customary due diligence in relation to the Share Offering and verification in relation to the Listing Documents and the Marketing Documents;

		(vi)	procure that its directors accept responsibility for the content of the Listing Documents and the Marketing Documents relating to the Share Offering (other than content relating to HM Treasury, HM Government (or any department, body, agency or other subdivision thereof) or the policy or intentions of HM Treasury or HM Government (or any department, body, agency or other subdivision thereof) except as may be required by law or regulation) in accordance with customary market practice and applicable law and regulation;

		(vii)	allow HM Treasury to review and comment on all Listing Documents and Marketing Documents relating to the Share Offering and accept any changes reasonably required thereto by HM Treasury in respect of references to HM Treasury, HM Government (or any department, body, agency or other subdivision thereof) or the policy or intentions of HM Treasury or HM Government (or any department, body, agency or other subdivision thereof);


(viii)	withhold from filing, posting or otherwise making public any Listing Documents or Marketing Documents relating to the Share Offering without the prior approval of the Initiating Holder unless otherwise required by applicable law or regulation;

(ix)	prepare such amendments and supplements to any Listing Documents or Marketing Documents relating to the Share Offering as may be necessary to comply with applicable law and with customary market practices for a FTSE 100 company and, subject to clause 2.1(A)(viii), have the same approved in accordance with applicable law;

(x)	provide the Initiating Holder with such number of copies of the Listing Documents and Marketing Documents as it may reasonably request in connection with the Share Offering;

(xi)	for a Public Offer, ‘passport’ any Listing Documents prepared in connection with the Share Offering to such jurisdictions as the Initiating Holder may reasonably request;

(xii)	notify the Initiating Holder:

	(a)	when any Listing Document or Marketing Document prepared in connection with the Share Offering has been approved in accordance with applicable law; and

	(b)	of any material correspondence relating to any Listing Document or Marketing Document in respect of the Share Offering between the Company and any authority, regulator, stock exchange or similar body, save to the extent prohibited by applicable law and regulation;

(xiii)	if the Share Offering is to be underwritten, undertaken by way of a block or similar trade and/or if a bookrunner or bookrunners are to be appointed by a Holder in relation to the Share Offering, enter into an underwriting, sale and purchase and/or bookrunners’ agreement (as relevant) in form and substance reasonably satisfactory to the Holders with each of the underwriters, purchasers and/or bookrunners (as the case may be) to the Share Offering, such underwriting, sale and purchase and/or bookrunners’ agreement to incorporate customary protections given to underwriters, purchasers and/or bookrunners (as the case may be) by issuers for the type of Share Offering contemplated (including customary warranties and covenants given in favour of, and indemnification of, such underwriters, purchasers and/or bookrunners (as the case may be) by the Company in form and substance satisfactory to the Company, acting reasonably), provided that such protections shall not be required to cover the content of the Listing Documents or the Marketing Documents relating to the Share Offering to the extent that the Company’s directors are not required to accept responsibility for content relating to HM Treasury pursuant to clause 2(A)(vi); and


	(xiv)	enter into such other customary agreements as are reasonably required to effect the Share Offering.

(B)	If the Initiating Holder intends to offer or sell the Relevant Shares or Related Securities covered by its Notice of Demand by means of an underwritten offering:

	(i)	it shall so advise the Company as a part of its Notice of Demand made pursuant to this clause 2.1; and

	(ii)	it shall have the right to appoint a managing underwriter or underwriters and/or bookrunners of recognised international standing, provided that:

		(a)	to the extent appropriate and permitted under applicable law, such Initiating Holder shall consider the qualifications of any affiliate of the Company in selecting the managing underwriters, other underwriters and bookrunners for any such offering; and

		(b)	in connection with any Share Offering requiring:

			(1)	the participation of members of management of the Company in selling efforts; or

			(2)	the entry by the Company into any underwriting agreement, sale and purchase and/or bookrunners’ agreement,

			HM Treasury shall consult with the Company before making such appointments.

(C)	The Company shall not be required to provide any assistance pursuant to clause 2.1(A):

	(i)	prior to the Earliest Documentary Demand Date in relation to the preparation of any Listing Document or Marketing Documents if such work would require, in the view of the Company and HM Treasury, both acting reasonably, onerous financial, accounting or audit work in order to ensure that the requested materials comply with relevant securities laws;

	(ii)	unless:

		(a)	in relation to a Share Offering being conducted in whole or in part by way of a Public Offer, the aggregate market value of the Relevant Shares or, in respect of Related Securities, the Relevant Shares in respect of which exchange, conversion or other rights may be exercised, which are the subject of the Share Offering is (when aggregated, as appropriate, with the anticipated aggregate offering price of any Registrable Securities in respect of which a registration is to be effected


		pursuant to the US Registration Rights Agreement contemporaneously with such Share Offering) at least $200,000,000 (or the equivalent sum in any other currency);

	(b)	in relation to a Share Offering being conducted exclusively other than by way of a Public Offer, the aggregate market value of the Relevant Shares or, in respect of Related Securities, the Relevant Shares in respect of which exchange, conversion or other rights may be exercised, which are the subject of the Share Offering is (when aggregated, as appropriate, with the anticipated aggregate offering price of any Registrable Securities in respect of which a registration is to be effected pursuant to the US Registration Rights Agreement contemporaneously with such Share Offering) at least $100,000,000 (or the equivalent sum in any other currency); or

	(c)	the Relevant Shares or, in respect of Related Securities, the Relevant Shares in respect of which exchange, conversion or other rights may be exercised, which are the subject of a proposed Share Offering constitute all the Relevant Shares of that class held by the Initiating Holder at that time;

(iii)	in respect of more than four Notices of Demand relating to separate Public Offers in any 12 month period (with all Public Offers that take place contemporaneously being deemed to be the same Public Offer);

(iv)	to Third Party Transferees:

	(a)	in respect of more than four Notices of Demand relating to separate Share Offerings in any 12 month period (with all Share Offerings that take place contemporaneously being deemed to be the same Share Offering); and

	(b)	for as long as HM Treasury or a Wholly Owned Entity is a Holder, in respect of any Notice of Demand by a Third Party Transferee relating to a Public Offering, without the prior consent of HM Treasury;

(v)	subject to clause 2.2, with respect to a Share Offering during the period starting with the date 30 calendar days prior to the Company’s good faith estimate of the launch date of, and ending on a date 90 calendar days after the closing date of, a Company Share Offering, provided that:

	(a)	the Company is actively employing in good faith all reasonable endeavours to launch such offering within such timescales; and

	(b)	the Company notifies the Initiating Holder of any proposed Company Share Offering within such timescale as soon as possible following its receipt of the relevant Notice of Demand;


	(vi)	if the Company notifies the Holders that it anticipates, in good faith and in its reasonable business judgement, announcing a corporate transaction or event or state of affairs within 30 calendar days of the date of the Notice of Demand which announcement, in the reasonable good faith business judgement of the Company, is or would be material in the context of the Company and does or would interfere with the Share Offering referred to in the Notice of Demand, in which case the Company shall have the right to defer the provision of such assistance (but not the preparation of any Listing Document or Marketing Document or the provision of assistance with customary confirmatory due diligence in relation to any Share Offering) for a period of not more than 30 calendar days after receipt of the Notice of Demand, provided that:

		(a)	the Company is actively employing in good faith all reasonable endeavours to make such announcement as soon as practicable;

		(b)	the Company notifies the Initiating Holder of any such anticipated announcement as soon as practicable following its receipt of the relevant Notice of Demand;

		(c)	the Company keeps the Initiating Holder regularly updated as to the date on which such announcement is anticipated to be made and, in particular, informs the Initiating Holder without delay if the Company no longer proposes to make the anticipated announcement (in which case the restrictions in this clause 2.1(C)(vi) shall cease to apply); and

		(d)	such right to defer the provision of assistance may not be exercised by the Company more than two times in any 12 month period and in any case for not more than 30 calendar days in the aggregate in any 12 month period; or

	(vii)	in respect of any Share Offering during any Close Period, in which event the Company shall have the right to defer the provision of such assistance (but not the preparation of any Listing Document or Marketing Document or the provision of assistance with customary confirmatory due diligence in relation to any Share Offering) until the earlier of the end of such Close Period and the date falling 45 calendar days after receipt of Notice of Demand.

(D)	Nothing in this clause 2 shall require the Company to obtain a listing for any securities on any exchange or in any market in which it does not already have a listing where the Company and HM Treasury, both acting reasonably, agree that obtaining such listing would be unduly onerous having regard to the additional listing obligations to which the Company would be subject as a result of, or in connection with, obtaining such listing.


	(E)	The Company acknowledges and accepts that a Notice of Demand does not indicate or give rise to any commitment on the part of a Holder to proceed with a Share Offering, nor is it intended to give any binding indication of the number of Relevant Shares to which any Share Offering may relate or the terms, pricing or timing of any Share Offering.

2.2	Company share offerings

	Whenever the Company proposes to offer or sell (whether by way of a public offer, private placement or otherwise and whether to persons located in the United Kingdom and/or in any other jurisdiction) any of its Securities (except (a) for any offer or sale of securities to employees or directors of the Company pursuant to any employee share option plan or other employee benefit plan arrangement, (b) pursuant to a Share Offering effected in accordance with clause 2.1 or (c) any issue of Securities to HM Treasury in order to fund the participation fee payable by the Company in relation to its accession to the Asset Protection Scheme) (a “Company Share Offering” ), the Company shall:

	(A)	except in the case of a routine offering or sale by the Company of debt securities in terms of a customary debt issuance programme:

		(i)	consult with the Holders at the earliest reasonable opportunity as to the intended timing, size and structure of a proposed Company Share Offering;

		(ii)	in conjunction with the Holders, determine whether there is any capacity in the market for the offer or sale (whether by way of a public offer, private placement or otherwise and whether to persons located in the United Kingdom and/or in any other jurisdiction) of any of the Company’s Securities of the same class as those comprised in the Company Share Offering or of any Related Securities in respect of which the Relevant Shares are Securities of the same class as those comprised in the Company Share Offering, in excess of that proposed to be taken by the Company Share Offering (any such excess capacity being “Excess Capacity” ); and

		(iii)	if required by the Holders, provide the Holders with assistance pursuant to clause 2.1(A) in connection with a Share Offering in respect of such Excess Capacity;

	(B)	take such steps as may be necessary to ensure that any Listing Document or Marketing Document produced in connection with such Company Share Offering is consistent with all Listing Documents and Marketing Documents produced, or to be produced, in connection with such a Share Offering; and

	(C)	allow HM Treasury to review and comment on all Listing Documents and Marketing Documents relating to the Company Share Offering and accept any changes reasonably required thereto by HM Treasury in respect of references to HM Treasury, HM Government (or any department, body, agency or other


		subdivision thereof) or the policy or intentions of HM Treasury or HM Government (or any department, body, agency or other subdivision thereof).

2.3	Expenses of Share Offerings

	(A)	Except as specifically provided herein, all Offering Expenses incurred in connection with any offering or sale of Relevant Shares and in complying with the terms of this Agreement shall be borne by the Company.

	(B)	The Company shall not, however, be required to pay for Offering Expenses incurred in relation to any Share Offering pursuant to clause 2.1, which Share Offering has been subsequently withdrawn by the initiating Holder, unless the withdrawal is based upon:

		(i)	any fact, circumstance, event, change, effect or occurrence that individually or in the aggregate with all other facts or circumstances, events, changes, effects or occurrences has a material adverse effect on the Company or which otherwise requires the preparation or publication of any amended or supplemental Listing Document or Marketing Document; or

		(ii)	material adverse information concerning the Company that the Company had not publicly revealed at least 48 hours prior to its receipt of the Notice of Demand or that the Company had not otherwise notified the initiating Holder of at the time of it serving the Notice of Demand.

	(C)	In the absence of any agreement to the contrary among them:

		(i)	all Selling Expenses shall be borne by the Holders selling Relevant Shares or Related Securities pursuant to the Share Offering pro rata to the number of Relevant Shares sold whether directly or through the sale of Related Securities; and

		(ii)	all Offering Expenses to which clause 2.3(B) applies shall be born by the Holders proposing to sell Relevant Shares or Related Securities pursuant to the proposed Share Offering pro rata to the number of Relevant Shares proposed to be sold whether directly or through the sale of Related Securities.

2.4	Suspension of offering or sale

	(A)	Upon receipt of written notice from the Company that a significant new factor has arisen or that a Listing Document does not contain or fairly present all information required to be contained therein or contains any untrue or inaccurate statement of a material fact or omits therefrom a fact necessary in order to make the statements in there not misleading in any material respect or contains any statement which is in any respect not based on reasonable grounds or that circumstances exist that make inadvisable the use of such Listing Document, each Holder of Relevant Shares or, as the case may be, Related Securities shall forthwith discontinue its offering or sale of Relevant


		Shares until such Holder has received copies of such supplemental or amended Listing Documents as may be necessary, or until such Holder is advised in writing by the Company that the use of the Listing Documents may be resumed, and, if so directed by the Company, such Holder shall deliver to the Company (at the Company’s expense) all copies, other than permanent file copies then in such Holder’s possession, of the relevant Listing Documents in respect of the offer or sale of such Relevant Shares current at the time of receipt of such notice.

	(B)	The total number of days that any such suspension may be in effect in any 12 month period shall not exceed the excess of 45 calendar days over the number of days in such twelve-month period that the Company has delayed providing assistance pursuant to clause 2.1 in reliance on clause 2,1(C)(iv).

2.5	Furnishing information

	The Holders agree to furnish to the Company such customary information regarding themselves, the Relevant Shares or, as the case may be, Related Securities held by them and the intended method of offering or sale of the Relevant Shares or, as the case may be, Related Securities as shall be required in connection with the preparation of any Listing Document or Marketing Document.

3.	INDEMNIFICATION

3.1	The Company agrees to fully and effectively indemnify and hold harmless each HMT Indemnified Person and each Holder Indemnified Person (each, an “Indemnified Person” ), on an after-Tax basis against any and all Losses or Claims whatsoever, as incurred, in connection with, arising out of or based upon:

	(A)	the Listing Documents or the Marketing Documents or any of them (or any amendment or supplement to any of them) prepared by the Company or authorised by it in writing for use by such Indemnified Person not containing or fairly presenting, or being alleged not to contain or not to fairly present, all information required to be contained therein, or arising out of or based upon any untrue or inaccurate statement or alleged untrue or inaccurate statement of a material fact contained in the Listing Documents or the Marketing Documents or any of them (or any amendment or supplement to any of them), or the omission or alleged omission therefrom of a fact necessary in order to make the statements therein not misleading in any material respect, or any statement therein being or being alleged to be in any respect not based on reasonable grounds, in the light of the circumstances in which they were made; and/or

	(B)	any failure or alleged failure by the Company or any of its directors or any of its or his agents, employees or advisers to comply with any statute, rule or regulation in any jurisdiction applicable to a Share Offering; and/or

	(C)	any breach or alleged breach by the Company of any of its obligations or the representations, covenants and undertakings set out in this Agreement or the arrangements contemplated by this Agreement,


	provided that the Company shall not be liable to such Indemnified Person in any such case (i) to the extent that any such Loss or Claim is in connection with, arises out of or is based the matters referred to in clause 3.1(A) in respect of a Listing Document or a Marketing Document or any amendment or supplement thereto prepared by the Company or authorised by it in writing for use by such Indemnified Person in reliance upon and in conformity with information regarding such Indemnified Person or its ownership interests or the Share Offering which was furnished in writing to the Company for use in connection with such Listing Document or Marketing Document, (ii) to the extent that any such Loss or Claim is in connection with, arises out of, or is based on any references to HM Treasury, HM Government (or any department, body, agency or other subdivision thereof) or to the policy or intentions of HM Treasury, HM Government (or any department, body, agency or other subdivision thereof) contained in any Listing Document or Marketing Document which references HM Treasury has reviewed and commented on pursuant to clause 2.1(A)(vii) or clause 2.2(C) and where any changes required by HM Treasury to such reference have been accepted in full, and (iii) to the extent that any such Loss or Claim is finally and judicially determined to have arisen as a result of the fraud, bad faith or willful default of that Indemnified Person and (iv) if and to the extent that any such Loss or Claim arises out of a decline in market value of the Relevant Shares or, as the case may be, Related Securities or is incurred by HM Treasury as a result of the Share Offering, save to the extent such decline is caused by or results from or is attributable to or would not have arisen but for (in each case directly or indirectly) the neglect or default of the Company in relation to the content, publication, issue or distribution of any Listing Document or Marketing Document or any breach by the Company of any of its obligations under this Agreement.

3.2	If the indemnification provided for in clause 3.1 is unavailable to an Indemnified Person with respect to any Losses or Claims referred to therein or is insufficient to hold the Indemnified Person harmless as contemplated therein, then the Company, in lieu of indemnifying such Indemnified Person, shall contribute to the amount paid or payable by such Indemnified Person as a result of such Losses or Claims in such proportion as is appropriate to reflect the relative fault of the Indemnified Person, on the one hand, and the Company, on the other hand, in connection with the statements or omissions which resulted in such Losses or Claims as well as any other relevant equitable considerations. The relative fault of the Company, on the one hand, and of the Indemnified Person, on the other hand, shall be determined by reference to, among other factors, whether the circumstances referred to in clause 3.1(A) giving rise to such contribution relates to information supplied by the Company or by the Indemnified Person and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission (as relevant); the Company and each Holder agree that it would not be just and equitable if contribution pursuant to this clause 3.2 were determined by pro rata allocation or by any other method of allocation that does not take account of the equitable considerations referred to in this clause 3.2. Notwithstanding the provisions of this clause 3, in connection with any Listing Document or Marketing Document prepared by the Company, no Indemnified Person shall be required to contribute any amount in excess of the net proceeds received by such Indemnified Person from the sale of Relevant Shares or Related Securities effected pursuant to such Listing Document or Marketing Document. No Indemnified Person guilty of fraudulent misrepresentation shall be entitled to contribution from the Company if the Company was not guilty of such fraudulent misrepresentation.


3.3	Each lndemnified Person shall:

	(A)	give notice as promptly as reasonably practicable to the Company of any action commenced against it after receipt of a written notice of any claim or the commencement of any action, claim, suit, investigation or proceeding in respect of which a claim for indemnification may be sought under this clause 3; and

	(B)	as promptly as reasonably practicable notify the Company after any such action is formally commenced (by way of service with a summons or other legal process giving information as to the nature and basis of the claim),

	and shall keep the Company informed of, and, to the extent reasonably practicable, consult with the Company in relation to, all material developments in respect thereof, but in each case, only insofar as may be consistent with the terms of any relevant insurance policy and provided (in each case) that to do so would not, in such lndemnified Person’s view (acting in good faith), be prejudicial to it (or to any lndemnified Person connected to it) or to any obligation of confidentiality or other legal or regulatory obligation which that lndemnified Person owes to any third party or to any regulatory request that has been made of it. However, the failure to so notify the Company and keep the Company Informed shall not relieve the Company from any liability hereunder to the extent it is not materially prejudiced as a result thereof and in any event shall not relieve the Company from any liability which it may have otherwise than on account of the indemnity set out in this clause 3.

3.4	Legal advisers for lndemnified Persons shall be selected by each Holder in respect of its lndemnified Persons. The Company may participate at its own expense in the defence of any action commenced against it provided that legal advisers for the Company shall not (except with the consent of the relevant lndemnified Person) also be legal advisers for the Indemnified Person.

3.5	In no event shall the Company be liable for fees and expenses of more than one legal adviser in each relevant jurisdiction in addition to its own legal advisers for all Holders in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances.

3.6	The Company shall not, without the prior written consent of the relevant lndemnified Persons (acting in good faith), settle or compromise or consent to the entry of any judgment with respect to any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever in respect of which indemnification or contribution could be sought under this clause 3 (whether or not the lndemnified Persons are actual or potential parties thereto), unless such settlement, compromise or consent: (i) includes an unconditional release of each lndemnified Person from all liability arising out of such litigation, investigation, proceeding or claim; and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act by or on behalf of any lndemnified Person.

4.	TRANSFER OF RIGHTS AND OBLIGATIONS

4.1	Subject to clauses 4.2 and 4.3, each Holder shall be permitted to transfer, assign or novate its rights and obligations under this Agreement to:


	(A)	any entity which is wholly owned, directly or indirectly, by HM Treasury (a “ Wholly Owned Entity”); and

	(B)	any person (other than a Wholly Owned Entity) to which such Holder transfers or sells Relevant Shares or Related Securities, if the aggregate market value of the Relevant Shares or, in respect of Related Securities, the Relevant Shares in respect of which exchange, conversion or other rights may be exercised, transferred to such person is at the date of such transfer at least $500,000,000 (or the equivalent sum in any other currency) (each such person being “ Third Party Transferee ”),

	provided that the Holder shall consult with the Company prior to transferring, assigning or novating its rights and obligations to a person pursuant to clause 4.1(A) and provided further that any such consultation or its outcome shall not be binding on such Holder and shall in no way limit such Holder’s right and ability to effect a transfer, assignment or novation in accordance with clause 4.1(A).

4.2	In the event of an assignment, transfer or novation of rights or obligations made pursuant to clause 4.1(A), the relevant Holder shall procure that, immediately prior to any such Wholly Owned Entity ceasing to be wholly owned directly or indirectly by HM Treasury, such rights or obligations (as appropriate) shall be novated, assigned or transferred to HM Treasury or to any other Wholly Owned Entity.

4.3	Subject to clause 4.1, no party to this Agreement shall be permitted to assign, transfer or novate, or purport to assign, transfer or novate, all or any of its rights, benefits or obligations under this Agreement to any other person without the prior written consent of the other party.

4.4	The Company acknowledges and agrees with HM Treasury and each New Holder that each Holder shall be entitled to participate in, and thereby offer to sell, Relevant Securities or Related Securities in any offer or sale of Relevant Securities or Related Securities by another Holder or Holders by means of a Share Offering initiated pursuant to a single Notice of Demand on such terms as the relevant Holders may agree and that any Share Offering by more than one Holder initiated pursuant to a single Notice of Demand is, and shall for all purposes be deemed to be, the same Share Offering. However, nothing in this clause obliges, or is deemed to oblige, HM Treasury to consult with, or inform, any other Holder before launching a Share Offering.

5.	OTHER OFFERING RIGHTS

	The Company shall not:

	(A)	grant to any Other Shareholder any rights to request that the Company assist in respect of the offering or sale of any Securities unless such rights are set forth in a written agreement with the Other Shareholder and such rights and the terms of such agreement are no more favourable to such Other Shareholder than the rights and terms set forth in this Agreement; or

	(B)	provide any Other Shareholder with any assistance in respect of the offering or sale of any Securities, except where such Other Shareholder has been given


		the right to request such assistance in accordance with the terms of this Agreement.

6.	MISCELLANEOUS

6.1	No inconsistent agreements

	The Company represents and warrants that it has not entered into, and undertakes that it shall not enter into, any agreement, contract, understanding or arrangement (whether written or verbal, formal or informal) that is inconsistent with the rights granted to the Holders in this Agreement or otherwise conflicts with the provisions hereof.

6.2	Authority and enforceability

	The Company represents and warrants that:

	(A)	it has the corporate power and the authority to enter into this Agreement and to carry out its obligations hereunder;

	(B)	it is duly organised and validly existing under the laws of its jurisdiction of organisation, and the execution of this Agreement and the consummation of the transactions contemplated herein have been duly authorised by all necessary action, and no other act or proceeding, corporate or otherwise, on its part is necessary to authorise the execution of this Agreement or the consummation of any of the transactions contemplated hereby; and

	(C)	it has duly executed and delivered this Agreement.

6.3	Adjustments affecting Relevant Shares

	The Company shall not amend, or permit any amendment of, its articles of association or similar organisational documents, which would or would reasonably be expected to, adversely affect the ability of Holders to effect the offering or sale of Relevant Shares or Related Securities or which would or would reasonably be expected to, adversely affect the marketability of such Relevant Shares or Related Securities in any such offering or sale.

6.4	Successors and assigns

	Except as otherwise provided herein, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties (including transferees or acquirers of any Relevant Shares or Related Securities to the extent set forth herein), and subject to the restrictions on assignments and novation set out in clause 4. Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective permitted successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement.


6.5	Applicable law and submission to jurisdiction

	(A)	This Agreement and any non-contractual obligations arising out of or in connection with it shall be governed by and construed in accordance with the laws of England.

	(B)	Each party hereby irrevocably submits to the exclusive jurisdiction of the English courts in respect of any suit, action or proceeding arising out of or relating to this Agreement or the transactions contemplated thereby and irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of venue of any such suit, action or proceeding brought in such a court and any claim that any such suit, action or proceeding brought in such a court has been brought in an inconvenient forum.

	(C)	The Company agrees to appoint an agent for service of process in any jurisdiction other than England in which any other party is subject to legal suit, action or proceedings based on or arising under this Agreement within 14 days of receiving written notice of such legal suit, action or proceedings and the request to appoint such agent for service. In the event that the Company does not appoint such an agent within 14 days of the notice requesting it to so, such other party may appoint a commercial agent for service for the Company on the Company’s behalf and at the Company’s expense and the Company agrees that subject to being notified of such appointment in writing, service upon such commercial agent will constitute service upon the Company.

6.6	Counterparts

	For the convenience of the parties hereto, this Agreement may be executed in any number of separate counterparts, each such counterpart being deemed to be an original instrument, and all such counterparts will together constitute the same agreement.

6.7	Notices

	Except as otherwise provided in this Agreement, all notices, requests, claims, demands, waivers and other communications hereunder shall be in writing and shall be deemed to have been duly given when delivered by hand or overnight courier service, or when received by facsimile transmission if promptly confirmed, as follows:

	(A)	if to the Company, to:

		Lloyds Banking Group plc
		Henry Duncan House
		120 George Street
		Edinburgh EH2 4LH
		Attention: Company Secretary

		with copies to:

		Linklaters LLP
		One Silk Street


		London EC2Y 8HQ
		Attention: Jeremy Parr and Matthew Bland
		Fax: + 44 (0) 20 7456 2222

	(B)	if to HM Treasury, to:

		The Commissioners of Her Majesty’s Treasury
		1 Horse Guards Road
		London SW1A 2HQ
		Attention: Nikhil Rathi (Team leader, financial stability)
		Fax: + 44 (0) 20 7270 7562

		with copies to:

		(i)	Slaughter and May
			One Bunhill Row
			London EC1Y 8YY
			Attention: Charles Randell and John Papanichola
			Fax: +44 (0) 20 7090 5000; and

		(ii)	UK Financial Investments Limited
			1 Horse Guards Road
			London SW1A 2HQ
			Attention: John Crompton (Head of Market Investments)
			Fax: +44 (0) 20 7270 6668

		or to such other address, facsimile number or telephone as either party may, from time to time, designate in a written notice given in a like manner.

6.8	Amendments and waivers

	Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company, HM Treasury and the Holders of a majority of the Relevant Shares then held by Holders. Any amendment or waiver effected in accordance with this paragraph shall be binding upon each Holder of any Relevant Shares then outstanding, each future Holder of all such Relevant Shares, and the Company.

6.9	Severability

	If any provision of this Agreement or the application thereof to any person or circumstance is determined by a court of competent jurisdiction to be invalid, void or unenforceable, the remaining provisions hereof, or the application of such provision to persons or circumstances other than those as to which it has been held invalid or unenforceable, will remain in full force and effect and shall in no way be affected. impaired or invalidated thereby, so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any party. Upon such determination, the parties shall negotiate in good faith in an effort


	to agree upon a suitable and equitable substitute provision to effect the original intent of the parties.

6.10	Aggregation of interests

	All Relevant Shares held or acquired by any affiliates of a Holder (which in the case of HM Treasury includes governmental or quasi-governmental entity or Wholly Owned Entity) and each person or entity, if any, that is an affiliate of a Holder shall be aggregated together for the purpose of determining the availability of any rights under this Agreement.

6.11	Contracts (Rights of Third Parties) Act 1999

	Each Indemnified Person and each person to whom rights or obligations are transferred, assigned or novated pursuant to clause 4 shall have the right under the Contracts (Rights of Third Parties) Act 1999 to enforce its rights against the Company under this Agreement. Except as provided above, a person who is not a party to this Agreement has no right under the Contracts (Rights of Third Parties) Act 1999 to enforce any term of this Agreement.

6.12	Entire agreement

	This Agreement constitutes the entire agreement, and supersedes all other prior agreements, understandings, representations and warranties, both written and oral, between the parties, with respect to the subject matter hereof.

6.13	Remedies

	Any person having rights under any provision of this Agreement shall be entitled to enforce such rights specifically, to recover damages caused by reason of any breach of any provision of this Agreement and to exercise all other rights granted by law.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date set forth in the first paragraph hereof.


LLOYDS BANKING GROUP PLC	)	By:
	)
	)
	)	Name:
	)

		Title:


THE COMMISSIONERS OF HER	)	By:
MAJESTY’S TREASURY	)
	)
	)	By:
	)

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date set forth in the first paragraph hereof.


LLOYDS BANKING GROUP PLC	)	By:
	)
	)
	)	Name:
	)

		Title:


THE COMMISSIONERS OF HER	)	By:
MAJESTY’S TREASURY	)
	)
	) )	By:

Exhibit 4(a)(vii)

Dated June 2009 and effective as of 11 June 2009

LLOYDS BANKING GROUP PLC

and

THE COMMISSIONERS OF HER MAJESTY’S TREASURY

RESALE RIGHTS AGREEMENT

Slaughter and May
One Bunhill Row
London EC1Y 8YY
(JAYP/PIRD)

CA090540022

EXECUTION VERSION

AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT, effective as of June 11,2009 (this “Agreement”) between Lloyds Banking Group Plc, a company incorporated in Scotland (the “Company’’) and The Commissioners of Her Majesty’s Treasury (the “Investor” ).

RECITALS

A. Ordinary Shares and other Securities . The Investor has purchased Ordinary Shares and other Securities;

B. Acquisition or subscription of further Securities . It is anticipated that the Investor will acquire or subscribe for further Securities; and

C. Registration Rights . Pursuant to the terms of the pre accession commitments given by the Company on March 7,2009 in connection with the asset protection scheme announced by the Investor on January 19,2009 and the Placing and Open Offer Agreement between the parties dated March 7,2009, as amended and restated on March 20,2009 and May 18,2009 (the “ Placing and Open Offer Agreement ”), the parties hereto wish to enter into this Agreement, which amends, restates and replaces in its entirety the Registration Rights Agreement between the parties dated as of January 12, 2009.

NOW, THEREFORE, in consideration of the premises and of the representations, warranties, covenants and agreements set forth herein, the parties agree as follows:

ARTICLE I

GENERAL

1.1. Definitions . As used in this Agreement, the following terms shall have the following respective meanings:

“Amended Shelf Registration Statement” has the meaning ascribed to it in Section 2.l(d).

“ADSs” means American Depositary Shares of the Company, each representing 20 Ordinary Shares.

“Board of Directors” has the meaning ascribed to it in Section 2.2(b).

“Close Period” means any close period as defined in Annex I to Chapter 9 of the Listing Rules made by the UK Financial Services Authority pursuant to Part V1 of the Financial Services and Markets Act 2000 in relation to the Company.

“Earliest Demand Registration Date” means July 22,2009.

“Exchange Act” means the Securities Exchange Act of 1934, as amended, or similar federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time.

“Holder” means the Investor and any other holder of Registrable Securities to whom the registration rights conferred by this Agreement have been transferred in compliance with Section 2.10 hereof.

“Holders’ Counsel” means one counsel for the Investor or selling Holders chosen by (i) Holders holding a majority interest in the Registrable Securities being registered, or (ii) agreement between them.

“Holder Shares” means (i) any Securities of the Company acquired, subscribed for or held by a Holder from time to time and (ii) any Securities issued or issuable with respect to or in exchange or replacement for any such Securities.

“Initiating Holder” has the meaning ascribed to it in Section 2.l(a).

“Notice of Demand” has the meaning ascribed to it in Section 2.l(a).

“Other Shareholder” has the meaning ascribed to it in Section 2.2(c).

“Ordinary Shares” means ordinary shares of 25 pence each (or such other nominal amount resulting from any merger, consolidation, share exchange, sub-division, reorganization, recapitalization or similar transaction resulting in a change in the nominal amount of the ordinary shares) in the capital of the Company, and includes ADSs.

“Person” means any individual, corporation, partnership, joint venture, wholly owned (whether directly or indirectly) entity, limited liability company, business trust, joint stock company, trust or unincorporated organization or any government or any agency or political subdivision thereof.

“Permitted Registration Rights” has the meaning ascribed to it in Section 2.13(a).

“Piggyback Registration” has the meaning ascribed to it in Section 2.2(a).

“Placing and Open Offer Agreement” has the meaning ascribed to it in Recital C.

“Register,” “registered,” and “registration” shall refer to a registration effected by preparing and (a) filing a registration statement in compliance with the Securities Act and applicable rules and regulations thereunder, and the declaration or ordering of effectiveness of such registration statement or (b) filing a prospectus and/or prospectus supplement in respect of an appropriate effective registration statement on Form F-3 (or any successor form).

“Registrable Securities” means any Holder Shares, including any Holder Shares required to be registered in connection with an offering or sale of Related Securities by any Holder. As to any particular Registrable Securities, once issued, such securities shall cease to be Registrable Securities when (i) they are sold pursuant to an effective registration statement under the Securities Act, (ii) they are sold pursuant to Rule 144 under the Securities Act, (iii) they shall have ceased to be outstanding or (iv) they have been sold, distributed or otherwise transferred in a transaction (including a sale over the London Stock Exchange or any other stock exchange on which the Company’s Securities are listed) in which the transferor’s rights under this Agreement are not assigned, transferred or novated to the transferee of the Registrable Securities. No

Registrable Securities may be registered under more than one registration statement at any one time.

“Registration Expenses” means all expenses incurred by the Company or any Holder in effecting any registration pursuant to this Agreement, including, without limitation, all registration and filing fees, printing expenses, fees and disbursements of counsel for the Company, blue sky fees and expenses, fees and disbursements of Holders’ Counsel, and expenses of the Company’s independent accountants in connection with any regular or special reviews or audits incidental to or required by any such registration, but shall not include (a) Selling Expenses and (b) the compensation of regular employees of the Company, which shall be paid in any event by the Company.

“Related Securities” means any securities of any description called by a Holder to be issued by any Person from time to time and which are exchangeable for, convertible into, give rights over or otherwise reference any Holder Shares.

“Relevant Shares” has the meaning ascribed to it in the Resale Rights Agreement.

“Resale Rights Agreement” means the agreement between the Investor and the Company effective as of the date hereof, in respect of the resale of Securities.

“SEC” or “Commission” means the U.S. Securities and Exchange Commission and any successor agency.

“Securities” means the Ordinary Shares and any shares in the capital of the Company and other securities of any description (including convertible or exchangeable securities) issued by the Company from time to time.

“Securities Act” shall mean the Securities Act of 1933, as amended, or similar federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time.

“Selling Expenses” means all underwriting discounts, selling commissions and stock transfer taxes applicable to the sale of Registrable Securities and the fees and expenses of any Holder’s financial advisers.

“Third Party Transferee” has the meaning ascribed to in Section 2.10(a).

“Wholly Owned Entity” has the meaning ascribed to it in Section 2.10(a).

ARTICLE II

REGISTRATION

2.1. Demand Registration .

(a) Subject to the conditions of this Section 2.1, if at any time the Company shall receive a written request from a Holder (the “Initiating Holder” ) that the Company register under the Securities Act Registrable Securities, which request shall include confirmation that

the amount of Registrable Securities proposed to be sold would cause the condition in Section 2.l(c)(ii) to be satisfied and the intended method of distribution thereof (a “ Notice of Demand ”), then the Company shall, subject to the limitations of this Section 2.1, effect, as promptly as reasonably practicable, the registration under the Securities Act of all Registrable Securities that the Initiating Holder requests to be registered.

(b) If the Initiating Holder intends to distribute the Registrable Securities covered by its Notice of Demand by means of an underwritten offering, (1) it shall so advise the Company as a part of its Notice of Demand made pursuant to this Section 2.1 and (2) it shall have the right, following consultation with the Company to appoint a managing underwriter or underwriters and/or bookrunners of recognized international standing, provided that to the extent appropriate and permitted under applicable law, such Initiating Holder shall consider the qualifications of any broker-dealer affiliate of the Company in selecting the managing underwriters in any such distribution.

(i) prior to the Earliest Demand Registration Date;

(ii) unless (a) the anticipated aggregate offering price to the public in the United States exceeds $100,000,000; or (b) the anticipated aggregate offering price to the public (aggregated to include sales within the United States and outside the United States) exceeds $200,000,000 and either (i) the proposed registration is intended in order to effect offers and sales of Registrable Securities to employees of the Company or (ii) in the reasonable belief of the Initiating Holder as stated in the Notice of Demand such registration is justified in the context of an offering made pursuant to the Resale Rights Agreement; provided , however , that if the Registrable Securities which are subject to a proposed registration constitute all the Registrable Securities of that class held by the Initiating Holder at that time, the Company shall be required to effect the registration for all such Registrable Securities, notwithstanding the provisions of 2. l (c)(ii)(a) and 2.l(c)(ii)(b) above;

(iii) more than four (4) times in any twelve (12) month period; provided that for the purposes of complying with this Section 2.l(c)(iii), (a) each of such registrations shall have been declared or ordered effective and kept effective by the Company as required by Section 2.5(a) of this Agreement, (b) any registrations declared or ordered effective contemporaneously shall be deemed to be the same registration, and (c) for so long as the Investor or a Wholly Owned Entity is a Holder, the prior written consent of the Investor shall be required in order to effect a registration pursuant to any Notice of Demand by a Third Party Transferee.

(iv) subject to Section 2.2, with respect to a registration of Registrable Securities during the period starting with the date thirty (30) calendar days prior to the Company’s good faith estimate of the launch date of, and ending on a date ninety (90) calendar days after the closing date of, a Company-initiated registered offering of Securities; provided that (a) the Company is actively employing in good faith all reasonable best efforts to launch such registered offering and (b) the Company notifies the Initiating Holder of any proposed Company-

initiated registered offering of Securities within such timescale as soon as possible following its receipt of the relevant Notice of Demand;

(v) during any Close Period, in which event the Company shall have the right to defer the filing of a registration statement (but not the preparation of any registration statement or the provision of assistance with customary confirmatory due diligence in relation to any registration) until the earlier of the end of such Close Period and the date falling forty-five (45) calendar days after receipt of Notice of Demand;

(vi) if the Company notifies the Initiating Holder that it anticipates, in good faith and in its reasonable business judgment, announcing a corporate transaction or event or state of affairs within thirty (30) calendar days of the date of the Notice of Demand which announcement, in the reasonable good faith business judgment of the Company, is or would be material in the context of the Company and does or would interfere with the registration referred to in the Notice of Demand. in which case the Company shall have the right to defer the filing of a registration statement (but not the preparation of any registration statement or the provision of assistance with customary confirmatory due diligence in relation to any registration) for a period of not more than thirty (30) calendar days after receipt of the Notice of Demand; provided that: (a) the Company is actively employing in good faith all reasonable endeavors to make such announcement as soon as practicable; (b)the Company notifies the Initiating Holder of any such anticipated announcement as soon as practicable following its receipt of the relevant Notice of Demand; (c) the Company keeps the Initiating Holder regularly updated as to the date on which such announcement is anticipated to be made and, in particular, informs the Initiating Holder without delay if the Company no longer proposes to make the anticipated announcement (in which case the restrictions in this Section 2.l(c)(vi) shall cease to apply); and (d) such right to defer a filing may not be exercised by the Company more than two (2) times in any twelve (12) month period and in any case for not more than thirty (30) calendar days in the aggregate in any twelve (12) month period.

(d) One registration pursuant to this Section 2.1 may be required by a Holder to be effected by means of a shelf registration statement (a “ Shelf Registration Statement ”) relating to any or all of the Registrable Securities in accordance with the methods and distribution set forth in the Shelf Registration Statement and Rule 415 under the Securities Act. The Company shall use its reasonable best efforts to cause any Shelf Registration Statement to remain effective, except during the periods described in Section 2.6, including by filing extensions of the Shelf Registration Statement; provided that (i) no provision of this Agreement shall prevent the Company from fulfilling its obligations under this Section 2.l(d) by amending the Company’s shelf registration statement on Form F-3 to allow the offer and sale of Registrable Securities (an “ Amended Shelf Registration Statement ”) and (ii) during any time when a Shelf Registration Statement (including an Amended Shelf Registration Statement) is effective, the Company’s obligations to effect the registration of Registrable Securities pursuant to Section 2.l(a) shall be deemed satisfied, and any underwritten offering of securities carried out pursuant to this Section 2.1 shall be effected by way of an offering under the Shelf Registration Statement (including an Amended Shelf Registration Statement) and otherwise in accordance with the terms, requirements and limitations set forth in this Agreement.

(e) The Company acknowledges and accepts that a Notice of Demand does not indicate or give rise to any commitment on the part of a Holder to proceed with an offering or

sale of Registrable Securities, nor is it intended to give any binding indication of the number of Registrable Securities which may be offered or sold or the terms, pricing or timing of any offering or sale of Registrable Securities.

2.2. Right to Piggyback .

(a) Whenever the Company proposes to register any of its Securities under the Securities Act (except (a) in the case of a routine offering or sale by the Company of a class of debt securities not previously issued to any Holder, under the terms of a customary debt issuance program, (including pursuant to a registration statement on Form F-3 or any successor thereto), (b) for any registration of Securities for offering and sale to employees or directors of the Company pursuant to any employee stock plan or other employee benefit plan arrangement, including pursuant to a registration statement on Form S-8 or any successor thereto, (c) pursuant to a demand registration effected in accordance with Section 2.1 or (d) for any registration of Securities on Form F-4 or any successor thereto and other than solely pursuant to a registration statement on Form F-6), the Company shall (i) as soon as practicable (but in no event less than thirty (30) calendar days prior to the proposed date of filing of the related registration statement), give written notice to the Holders of its intention to effect such a registration; and (ii) shall register under such registration statement (X) all Registrable Securities of the same class as the Securities the Company proposes to register and (y) any Related Securities in respect of which the Holder Shares are Securities of the same class as the Securities the Company proposes to register (in accordance with the priorities set forth in subsections (b) and (c) below) with respect to which the Company shall have received written requests therefor within fifteen (15) calendar days after delivery of the Company’s notice (each such registration, a “ Piggyback Registration ”).

(b) If a Piggyback Registration is an underwritten primary registration on behalf of the Company and the managing underwriters advise the Board of Directors of the Company (“the Board of Directors ”) in writing that in their opinion the total number of Securities (including the Registrable Securities of the same class as the Securities the Company proposes to register and any Related Securities in respect of which the Holder Shares are Securities of the same class as the Securities the Company proposes to register) requested to be included in the registration would prevent the underwriters from completing such offering, then the Company shall promptly provide the Holders with a copy of such advice and consult with the Holders with respect to such advice, and after such consultation shall include in such registration only such number of Securities (including the Registrable Securities of the same class as the Securities the Company proposes to register and any Related Securities in respect of which the Holder Shares are Securities of the same class as the Securities the Company proposes to register), if any, which the managing underwriters determine can be sold in such offering without preventing the underwriters from completing such offering. The Company shall include in such Piggyback Registration (i) first, 100% of the Securities that the Company proposes to sell as part of its initial registration and (ii) second, if the Holders participate in such registration, 100% of the Registrable Securities (of the same class as the Securities the Company proposes to register and any Related Securities in respect of which the Holder Shares are Securities of the same class as the Securities the Company proposes to register) that the Holders propose to sell, or such lesser amount determined by the managing underwriters pursuant to the preceding sentence, which shall be allocated pro rata between the participating Holders on the basis of the number of such Registrable Securities owned by each such person.

(c) If a Piggyback Registration is an underwritten secondary registration on behalf of any Person other than a Holder (the “ Other Shareholder ”) who has Permitted Registration Rights and the managing underwriters advise the Board of Directors in writing that in their opinion the total number of Securities (including the Registrable Securities of the same class as the Securities such Other Shareholder proposes to register and any Related Securities in respect of which the Holder Shares are Securities of the same class as the Securities such Other Shareholder proposes to register) requested to be included in the registration would prevent the underwriters from completing such offering, then the Company shall promptly provide the Holders with a copy of such advice and consult with the Holders with respect to such advice, and after such consultation shall include in such registration only such number of Securities (including the Registrable Securities of the same class as the Securities such Other Shareholder proposes to register and any Related Securities in respect of which the Holder Shares are Securities of the same class as the Securities such Other Shareholder proposes to register) which the managing underwriters determine can be sold in such offering without preventing the underwriters from completing such offering. The Company shall include in such registration (i) first, 100% of the Registrable Securities (of the same class as the Securities such Other Shareholder proposes to register and any Related Securities in respect of which the Holder Shares are Securities of the same class as the Securities such Other Shareholder proposes to register) that the Holders propose to sell and, 100% of Securities that such Other Shareholder proposes to sell, allocated, if necessary, pro rata between the Holders and such Other Shareholder on the basis of the number of such Registrable Securities owned by each such person; and (ii) second, only if all the Securities referred to in clause (i) have been included, any other Securities requested to be included therein that the managing underwriters have determined can be included pursuant to the preceding sentence.

(d) If a Piggyback Registration involves an underwritten primary registration on behalf of the Company or any Other Shareholder with Permitted Registration Rights, the managing underwriter or underwriters thereof shall be selected by the Company, provided , however , that (i) such managing underwriter or underwriters shall be of recognized international standing, (ii) the Company shall consult with the Investor prior to agreeing upon any fees, discounts or other amounts payable to such managing underwriter or underwriters and (iii) if the aggregate amount of Registrable Securities included by Holders in the underwritten offering for such Piggyback Registration exceeds 15% of the total amount of Securities to be included in such underwritten primary offering by the Company or such Other Shareholder, as applicable, such Holders shall be entitled to select an additional managing underwriter to act as a joint bookrunner.

(e) The Company will use its reasonable best efforts not to register any of its Securities for sale for its own account (other than Securities issued to employees of the Company under an employee benefit plan or Securities issued to effect a business combination pursuant to Rule 145 promulgated under the Securities Act) except as a firm commitment underwriting.

(f) No registration or designation of Registrable Securities effected pursuant to a request under this Section 2.2 shall be deemed to have been effected pursuant to Section 2.1 or shall relieve the Company of its obligations under Section 2.1.

2.3. Piggyback Rights in Respect of a Demand Registration .

(a) If an Initiating Holder has made a Notice of Demand pursuant to Section 2.1, the Company shall give written notice to each Holder (other than the Initiating Holder) at least thirty (30) calendar days prior to the initial filing of a demand registration statement filed pursuant to Section 2.1 informing such Holder of its intent to file such demand registration statement and of such Holder’s rights under this Section 2.3 to request, as part of such demand registration, the registration of the Registrable Securities held by such Holder. Upon written request of any Holder made within fifteen (15) calendar days after any such notice is given (which request must include the amount of Registrable Securities proposed to be sold by such Holder), then the Company shall effect, as promptly as reasonably practicable, the registration under the Securities Act of all Registrable Securities (of the same class as the Securities such Initiating Holder proposes to register and any Related Securities in respect of which the Holder Shares are Securities of the same class as the Securities such Initiating Holder proposes to register) that such Holder requests to be registered (in accordance with the priorities set forth in subsection (b) below).

(b) If a demand registration made pursuant to Section 2.1 is (i) an underwritten registration initiated by the Investor as an Initiating Holder or is an underwritten registration in which the Investor shall participate by exercise of its rights under Section. 2.3(a) and (ii) other Holders shall have given notice of the exercise of their rights pursuant to Section 2.3(a) in respect of such underwritten registration, and the managing underwriters advise representatives of the Investor that in their opinion the total number of shares of such Registrable Securities requested to be included in the registration would prevent the underwriters from completing such offering, then the Investor shall promptly provide the other Holders with a copy of such advice and consult with the other Holders with respect to such advice, and after such consultation shall communicate such advice to the Company. The Company shall include in such registration (i) first, 100% of the Registrable Securities that the Investor proposes to sell as part of its initial registration and (ii) second, if any other Holders participate in such registration, and only if all Securities referred to in clause (i) have been included, 100% of the Registrable Securities (of the same class as the Securities such Initiating Holder proposes to register and any Related Securities in respect of which the Holder Shares are Securities of the same class as the Securities such Initiating Holder proposes to register )that such other Holders propose to sell, or such lesser amount determined by the managing underwriters pursuant to the preceding sentence which shall be allocated pro rata between the participating Holders on the basis of the number of such Registrable Securities owned by each such person.

2.4. Expenses of Registration .

(a) Except as specifically provided herein, all Registration Expenses incurred in connection with any registration, qualification or compliance hereunder shall be borne by the Company. All Selling Expenses incurred in connection with any underwritten offering made in accordance with the terms set forth herein shall be borne by the Company and the Holders pro rata on the basis of the number of Registrable Securities of each party to be registered and sold under the applicable registration statement.

(b) The Company shall not, however, be required to pay for expenses of any registration proceeding begun pursuant to Section 2.1, the request of which has been subsequently withdrawn by the Investor or requesting Holder(s) unless (i) the withdrawal is based upon (a) any fact, circumstance, event, change, effect or occurrence that individually or

in the aggregate with all other facts or circumstances, events, changes, effects or occurrences has a material adverse effect on the Company, or (b) material adverse information concerning the Company that the Company had not publicly revealed at least forty-eight (48) hours prior to the request or that the Company had not otherwise notified the Investor or requesting Holders of at the time of such request or (ii) the Investor or the Holders of a majority of Registrable Securities, as the case may be, agree to forfeit their right to one requested registration pursuant to Section 2.1, as applicable, in which event such right shall be forfeited by all Holders.

(c) If the Investor and/or the Holders are required to pay Registration Expenses, such expenses shall be borne by the Investor or the Holders of Registrable Securities requesting such registration in proportion to the number of Registrable Securities for which registration was requested. If the Company is required to pay the Registration Expenses of a withdrawn offering pursuant to clause (b)(i) above, then the Investor or the Holders, as the case may be, shall not forfeit their rights pursuant to Section 2.1.

2.5. Obligations of the Company . Whenever required to effect the registration of any Registrable Securities, the Company shall, as expeditiously as reasonably practicable:

(a) Prepare and file with the SEC not later than forty-five (45) calendar days after the request a registration statement with respect to such Registrable Securities and use its reasonable best efforts to cause such registration statement to become effective, or prepare and file with the SEC a prospectus supplement with respect to such Registrable Securities pursuant to an effective registration statement and, upon the request of Holders of a majority of the Registrable Securities registered thereunder, keep such registration statement effective or such prospectus supplement current, for up to one hundred and twenty (120) calendar days other than a registration statement required by a Holder to be effected by means of a Shelf Registration Statement or Amended Shelf Registration Statement pursuant to Section 2.l(d) or, if earlier, until the Holder or Holders have completed the distribution related thereto; provided that before filing a registration statement or prospectus, or filing any amendment thereof or supplement thereto, the Company shall furnish copies of all such documents proposed to be filed to Holders’ Counsel.

(b) Prepare and file with the SEC such amendments and supplements to the applicable registration statement and the prospectus or prospectus supplement used in connection with such registration statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all Securities covered by such registration statement for the period set forth in paragraph (a) above.

(c) Furnish to the Holders such number of copies of the applicable registration statement and each such amendment and supplement thereto (including in each case all exhibits) and of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned by them.

(d) Use its reasonable best efforts to register and qualify the Securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions within the United States as shall be reasonably requested by the Holders, to keep such registration or qualification in effect for so long as such registration statement remains in effect,

and to take any other action which may be reasonably necessary to enable such seller to consummate the disposition in such jurisdictions within the United States of the Securities owned by such Holder; provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions within the United States.

(e) Enter into customary agreements (including if the method of distribution is by means of an underwriting and/or if a bookrunner or bookrunners are to be appointed by a Holder in relation to any Registrable Securities, a customary underwriting and/or bookrunners’ agreement in form and substance reasonably satisfactory to the Holders with the managing underwriter or underwriters and/or bookrunners (as the case may be) of such offering; provided that such underwriting and/or bookrunners’ agreement shall incorporate customary protections given to underwriters and/or bookrunners (as the case may be) by issuers for the type of securities offering contemplated, including customary warranties and covenants given in favor of, and indemnification of, such underwriters and/or bookrunners (as the case may be) by the Company in form and substance satisfactory to the Company, acting reasonably; and provided , further , that the Company shall consult with the Investor prior to agreeing upon any fees, discounts or other amounts payable to such managing underwriter or underwriters and/or bookrunners (as the case may be)), take such other actions (including participating in and making documents available for the due diligence review of underwriters and/or bookrunners if the method of distribution is by means of an underwriting and/or if a bookrunner or bookrunners are to be appointed) in accordance with customary market practice and make available appropriate members of management of the Company for assistance reasonably required in the selling effort relating to the Registrable Securities, including, but not limited to, participation in “road shows” to the extent customary in order to facilitate the disposition of such Registrable Securities. Each Holder participating in such distribution shall also enter into and perform its obligations under such underwriting and/or bookrunners’ agreement; provided , however , that no Holder shall be required to make any representations or warranties to or agreements with the Company or any underwriters and/or bookrunners (as the case may be) in connection with any registration statement other than such customary representations, warranties or agreements of a selling shareholder regarding such Holder, such Holder’s title to the Registrable Securities, such Holder’s intended method or methods of distribution and any other representation, warranty or agreement required by law.

(f) Notify each Holder of Registrable Securities at any time when a prospectus relating thereto is required to be delivered under the Securities Act of the happening of any event as a result of which the applicable prospectus, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing.

(g) Furnish, on the date that such Registrable Securities are delivered to the underwriters for sale, if such securities are being sold through underwriters, (i) an opinion, dated as of such date, of outside legal counsel representing the Company for the purposes of such registration, in form and substance as is customarily given to underwriters in an underwritten public offering, addressed to the underwriters, (ii) a letter dated as of such date, from the independent registered public accountants of the Company, in form and substance as is customarily given by independent registered public accountants to underwriters in an

underwritten public offering addressed to the underwriters and (iii) such other customary documents, certificates, resolutions or agreements as may reasonably be required by the underwriters.


(h)	Give written notice to the Holders:

	(i)	when any registration statement filed at the request of a Holder pursuant to Section 2.1 or any amendment thereto has been filed with the SEC (except any amendment effected by the filing of a document with the SEC pursuant to the Exchange Act) and when such registration statement or any post-effective amendment thereto has become effective;

	(ii)	of any request by the SEC for amendments or supplements to any registration statement filed at the request of the Investor pursuant to Section 2 or the prospectus included therein or for additional information;

	(iii)	of the issuance by the SEC of any stop order suspending the effectiveness of any registration statement filed at the request of the Investor pursuant to Section 2 the initiation of any proceedings for that purpose;

	(iv)	of the receipt by the Company or its legal counsel of any notification with respect to the suspension of the qualification of the Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose; and

	(v)	of the happening of any event that requires the Company to make changes in any effective registration statement filed at the request of a Holder pursuant to Section 2 or the prospectus related to the registration statement in order to make the statements therein not misleading (which notice shall be accompanied by an instruction to suspend the use of the prospectus until the requisite changes have been made).

(i) Use its reasonable best efforts to prevent the issuance or obtain the withdrawal of any order suspending the effectiveness of any registration statement referred to in Section 2.5(h)(iii) at the earliest practicable time.

(j) Upon the occurrence of any event contemplated by Section 2.5(h)(v) above, promptly prepare a post-effective amendment to such registration statement or a supplement to the related prospectus or file any other required document so that, as thereafter delivered to the Holders, the prospectus will not contain an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. If the Company notifies the Holders in accordance with Section 2.5(h)(v) above to suspend the use of the prospectus until the requisite changes to the

prospectus have been made, then the Holders shall suspend use of such prospectus and use their reasonable best efforts to return to the Company all copies of such prospectus (at the Company’s expense) other than permanent file copies then in such Holder’s possession, and the period of effectiveness of such registration statement provided for above shall be extended by the number of days from and including the date of the giving of such notice to the date Holders shall have received such amended or supplemented prospectus pursuant to this Section 2.50’).

(k) Provide a transfer agent and registrar for purposes of settling any offering or sale of Registrable Securities, including with respect to the transfer of physical stock certificates into book-entry form in accordance with any procedures reasonably requested by the Holders or the underwriters.

(1) Use its reasonable best efforts to cause all Registrable Securities to be listed, on or prior to the effective date of any registration statement, on each securities exchange or national market on which similar Securities issued by the Company are then listed.

(m) On or prior to the effective date of any registration statement, to take all steps reasonably necessary to permit the deposit of all Registrable Securities that are not then held in the form of ADSs into such depositary receipt facility as the Company may then sponsor, and to prepare and file with the SEC any amendment to an existing registration statement on Form F- 6, if necessary, to cover any ADSs held by any Holder or that will be held by any purchaser of Registrable Securities to be sold under any registration statement, it being understood that any customary fees, charges and taxes payable in connection with any deposit of Registrable Securities into a deposit agreement then sponsored by the Company shall be borne by the Holders pro rata on the basis of the number of Registrable Securities of each Holder to be deposited in accordance with this Section 2.5(m).

(n) Cooperate as reasonably required with each Holder and each underwriter and their counsel, if Registrable Securities are being sold through underwriters, in connection with any filings required to made with the Financial Industry Regulatory Authority.

2.6. Suspension of Sales: Effectiveness of Registration Statements .

(a) Upon receipt of written notice from the Company that a registration statement, prospectus or prospectus supplement contains or may contain an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that circumstances exist that make inadvisable use of such registration statement, prospectus or prospectus supplement, each Holder of Registrable Securities shall forthwith discontinue disposition of Registrable Securities until such Holder has received copies of a supplemented or amended prospectus or prospectus supplement, or until such Holder is advised in writing by the Company that the use of the prospectus and, if applicable, prospectus supplement may be resumed, and, if so directed by the Company, such Holder shall deliver to the Company (at the Company’s expense) all copies, other than permanent file copies then in such Holder’s possession, of the prospectus and, if applicable, prospectus supplement covering such Registrable Securities current at the time of receipt of such notice. The total number of days that any such suspension may be in effect in any twelve (12) month period shall not exceed the excess of forty-five (45) calendar days over the number

of days in such twelve-month period that the Company has delayed effecting a registration in reliance on Section 2.l(c)(iii).

(b) A registration statement filed pursuant to this Section 2 shall be deemed not to have become effective (and the related registration shall be deemed not to have been effected) unless it has been declared effective by the SEC; provided , however , that if, after it has been declared effective, the offering of any Registrable Securities pursuant to such registration statement is interfered with by any stop order, injunction or other order or requirement of the SEC or any other governmental agency or court (other than any such stop order or injunction issued as a result of the inclusion in such registration statement of any information supplied to the Company for inclusion therein by the Investor and/or the Holders) that is not subsequently remedied, such registration statement shall be deemed not to have become effective; provided , further , however , if any such stop order, injunction or other order or requirement of the SEC or any other governmental agency or court is subsequently remedied, such registration statement shall be deemed not to have been effective during the period of such interference.

2.7. Termination of Registration Rights . The registration rights granted under this Article II shall terminate with respect to any Holder as of the last day of the first calendar month in which the sum of the Registrable Securities held by such Holder (including any Registrable Securities issuable upon exchange of other securities held by such Holder) may be sold in a single transaction without registration pursuant to Rule 144 under the Securities Act without volume limitation or other restrictions on transfer thereunder.

2.8 . Furnishing Information .

(a) Neither the Investor nor any Holder shall use any “free writing prospectus” (as defined in Rule 405 under the Securities Act) in connection with the sale of Registrable Securities without the prior written consent of the Company, which consent shall not be unreasonably withheld or delayed.

(b) The Investor and/or Holders agree to furnish to the Company such customary information regarding themselves, the Registrable Securities held by them and the intended method of disposition of such securities as shall be required to effect the registration of their Registrable Securities.

2.9. Indemnification .

(a) The Company agrees to indemnify and hold harmless each Holder and, if a Holder is a person other than an individual, such Holder’s officers, directors, employees, agents, representatives and affiliates (which in the case of the Investor, means any governmental or quasi-governmental entity or Wholly Owned Entity), and each person or entity, if any, that controls a Holder within the meaning of the Securities Act (each, an “ Indemnitee ”), against any and all losses, claims, penalties, damages, actions, liabilities, costs and expenses (including without limitation reasonable fees, expenses and disbursements of attorneys and other professionals), joint or several, arising out of or based upon any untrue or alleged untrue statement of material fact contained in any registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto or contained in any “free writing prospectus” (as such term is defined in Rule 405 under

the Securities Act) prepared by the Company or authorized by it in writing for use by such Holder (or any amendment or supplement thereto); or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; provided , that the Company shall not be liable to such Indemnitee in any such case to the extent that any such loss, claim, penalty, damage, liability (or action or proceeding in respect thereof), cost or expense arises out of or is (i) based upon an untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement, including any such preliminary prospectus or final prospectus contained therein or any such amendments or supplements thereto or contained in any “free writing prospectus” (as such term is defined in Rule 405 under the Securities Act) prepared by the Company or authorized by it in writing for use by such Holder (or any amendment or supplement thereto), in reliance upon and in conformity with information regarding such Indemnitee or its plan of distribution or ownership interests which was furnished in writing to the Company for use in connection with such registration statement, including any such preliminary prospectus or final prospectus contained therein or any such amendments or supplements thereto; (ii) based upon offers or sales effected by or on behalf such Indemnitee “by means of’ (as defined in Securities Act Rule 159A) a “free writing prospectus” (as defined in Securities Act Rule 405) that was not authorized in writing by the Company; (iii) finally judicially determined to have arisen as a result of the fraud, bad faith or willful default of such Indemnitee; or (iv) based upon a decline in market value of the Holder Shares or, as the case may be, Related Securities or is incurred by such Indemnitee as a result of any offering or sale of Registrable Securities pursuant to this Agreement, except to the extent such decline is caused by or results from or is attributable to or would not have arisen but for (in each case directly or indirectly) the neglect or default of the Company in relation to the content, publication, issue or distribution of any prospectus or any amendments or supplements thereto or any Company-authorized “free writing prospectus” ( as defined in Securities Act Rule 405) or any breach by the Company of any of its obligations under this Agreement.

(b) If the indemnification provided for in Section 2.9(a) is unavailable to an Indemnitee with respect to any losses, claims, damages, actions, liabilities, costs or expenses referred to therein or is insufficient to hold the Indemnitee harmless as contemplated therein, then the Company, in lieu of indemnifying such Indemnitee, shall contribute to the amount paid or payable by such Indemnitee as a result of such losses, claims, damages, actions, liabilities, costs or expenses in such proportion as is appropriate to reflect the relative fault of the Indemnitee, on the one hand, and the Company, on the other hand, in connection with the statements or omissions which resulted in such losses, claims, damages, actions, liabilities, costs or expenses as well as any other relevant equitable considerations. The relative fault of the Company, on the one hand, and of the Indemnitee, on the other hand, shall be determined by reference to, among other factors, whether the untrue or alleged untrue statement of a material fact or omission to state a material fact relates to information supplied by the Company or by the Indemnitee and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission; the Company and each Holder aged that it would not be just and equitable if contribution pursuant to this Section 2.9(b) were determined by pro rata allocation or by any other method of allocation that does not take account of the equitable considerations referred to in Section 2.9(a). Notwithstanding the provisions of this Section 2.9, in connection with any registration statement filed by the Company, no Indemnitee shall be required to contribute any amount in excess of the net proceeds received by such Indemnitee from the sale of Registrable Securities registered under

such registration statement. No Indemnitee guilty of fraudulent misrepresentation (within the meaning of Section 1 l(ff of the Securities Act) shall be entitled to contribution from the Company if the Company was not guilty of such fraudulent misrepresentation.


(c)	Each Indemnitee shall:

	(i)	give notice as promptly as reasonably practicable to the Company of any action commenced against it after receipt of a written notice of any claim or the commencement of any action, claim, suit, investigation or proceeding in respect of which a claim for indemnification may be sought under this Section 2.9; and

	(ii)	as promptly as reasonably practicable notify the Company after any such action is formally commenced (by way of service with a summons or other legal process giving information as to the nature and basis of the claim),

and shall keep the Company informed of, and, to the extent reasonably practicable, consult with the Company in relation to, all material developments in respect thereof, but in each case, only insofar as may be consistent with the terms of any relevant insurance policy and provided (in each case) that to do so would not, in such Indemnitee’s view (acting in good faith), be prejudicial to it (or to any Indemnitee connected to it) or to any obligation of confidentiality or other legal or regulatory obligation which that Indemnitee owes to any third party or to any regulatory request that has been made of it. However, the failure to so notify the Company and keep the Company informed shall not relieve the Company from any liability hereunder to the extent it is not materially prejudiced as a result thereof and in any event shall not relieve the Company from any liability which it may have otherwise than on account of the indemnity set out in this Section 2.9.

(d) Legal advisers for Indemnitees shall be selected by the Investor in respect of the Investor’s Indemnitees, and each Holder in respect of its Indemnitees. The Company may participate at its own expense in the defense of any action commenced against it provided that legal advisers for the Company shall not (except with the consent of the relevant Indemnitee) also be legal advisers for the Indemnitee.

(e) In no event shall the Company be liable for fees and expenses of more than one legal adviser (in addition to any local legal advisers) separate from its own legal advisers for all Holders in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances.

(f) The Company shall not, without the prior written consent of the relevant Indemnitees (acting in good faith), settle or compromise or consent to the entry of any judgment with respect to any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever in respect of which indemnification or contribution could be sought under this Section 2.9 (whether or not the Indemnitees are actual or potential parties thereto), unless such settlement, compromise or consent: (i) includes an unconditional release of each Indemnitee from all liability arising out of such litigation, investigation, proceeding or claim; and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act by or on behalf of any Indemnitee.

2.10. Assignment or Novation of Registration Rights .

(a) The Investor (or a Holder to whom the Investor has transferred, assigned or novated rights pursuant to this Section 2.10) shall be permitted to transfer, assign or novate its rights and obligations under this Agreement to (i) any Person (other than a Wholly Owned Entity) to which the Investor or such Holder transfers or sells Registrable Securities or Related Securities, if the aggregate market value of the Registrable Securities or, in respect of Related Securities, the Registrable Securities in respect of which exchange, conversion or other rights may be exercised, transferred to such person is at the date of such transfer at least $500,000,000 (or the equivalent sum in any other currency) (each such person being a “ Third Party Transferee ”) and (ii) subject to 2.10(b), any entity which is wholly owned, directly or indirectly, by the Investor (a “ Wholly Owned Entity ”); provided that the Investor (or a Holder to whom the Investor has transferred, assigned or novated rights pursuant to this Section 2.10) shall consult with the Company prior to transferring, assigning or novating its rights and obligations to a Person pursuant to Section 2.10(a)(i); provided , further , that any such consultation or its outcome shall not be binding on the Investor or such Holder and shall in no way limit the Investor or such Holder’s right and ability to effect a transfer, assignment or novation in accordance with Section 2.10(a)(i).

(b) In the event of an assignment, transfer or novation made pursuant to Section 2.10(a)(ii), the Investor shall procure that, immediately prior to any such Wholly Owned Entity ceasing to be wholly owned directly or indirectly by the Investor, such rights and obligations under this Agreement shall be novated to the Investor or any other Wholly Owned Entity.

(c) Subject to Section 2.10(a), no party to this Agreement shall be permitted to assign or novate, or purport to assign or novate, all or any part of the benefit of, or its rights or benefits under, this Agreement to any other person without the prior written consent of the other party.

(d) Subject to the provisions of Section 2.3, nothing in this Agreement shall limit the ability of the Investor, any Wholly Owned Entity and any Third Part Transferee to participate in the offer or sale of Registrable Securities by means of any registration statement made pursuant to a single Notice of Demand by an Initiating Holder in accordance with Section 2.1 on such terms as they may agree with the relevant Initiating Holder. Any registration effected with respect to the offer or sale of Registrable Securities by more than one Holder initiated pursuant to a single Notice of Demand is, and shall for all purposes be deemed to be, the same registration.

2.1 1. “Market Stand-Off . In connection with any registered sale of Securities by the Company in which the Investor and/or the Holders shall participate by exercise of the rights provided hereunder, the Investor and/or such Holders hereby agree to discuss with the managing underwriter or underwriters of such registered sale entry by the Investor and/or such Holders into market stand-off or similar agreements in connection with the Investor and/or such Holders’ participation in such registered sale; provided that (i) no provision of this Agreement shall in any way be construed so at to require the Investor and/or such Holders to enter into any such market stand-off or similar agreement and (ii) the Investor and/or such Holders shall in any case not enter into any such market stand-off or similar agreement unless all executive officers and directors of the Company enter into similar agreements and only if such Persons remain subject

thereto (and are not released from such agreements) for the same period as may be applicable to the Investor and/or such Holders.

2.12. Rule 144 Reporting . With a view to making available to Holders the benefits of certain rules and regulations of the SEC which may permit the sale of the Registrable Securities to the public without registration, the Company agrees to use its reasonable best efforts to:

(a) make and keep public information available, as those terms are understood and defined in Rule 144 under the Securities Act or any similar or analogous rule promulgated under the Securities Act, at all times after the effective date of this Agreement;

(b) file with the SEC, in a timely manner, all reports and other documents required of the Company under the Exchange Act; and

(c) so long as a Holder owns any Registrable Securities, furnish to such Holder forthwith upon request: a written statement by the Company as to its compliance with the reporting requirements of Rule 144 under the Securities Act, and of the Exchange Act; a copy of the most recent annual report of the Company; and such other reports and documents as the Holder may reasonably request in availing itself of any rule or regulation of the SEC allowing it to sell any such Registrable Securities without registration.

2.13. Other Registration Rights . The Company shall not:

(a) grant to any Other Shareholder any rights to request the Company to register any Securities, unless (i) such rights are set forth in a written agreement with the Other Shareholder and such rights and the terms of such agreement are no more favorable to such Other Shareholder than the rights and terms set forth in this Agreement and (ii) such agreement stipulates that (A) in any demand registration made by the Investor or any Holder as the Initiating Holder (and pursuant to which any Holder may participate in accordance with Section 2.3 hereof), the Investor and/or any Holder participating therein shall (subject to the relative priorities between the Investor and other Holders set forth in Section 2.3 hereof) always have a first priority right over such Other Shareholder (or any Other Shareholder) to register and sell any Registrable Securities the Investor or such Holders propose to register and sell in any such registration ahead of any such Registrable Securities any such Other Shareholder may propose to register or sell in connection therewith, (B) in any piggyback registration effected in connection with an underwritten primary registration by the Company which is not a demand registration by the Investor and/or the Holders, the Investor and/or the Holders shall always have a first priority right over such Other Shareholder (or any Other Shareholder) to register and sell any Registrable Securities (of the same class as the Securities the Company proposes to register and any Related Securities in respect of which the Holder Shares are Securities of the same class as the Securities the Company proposes to register) the Investor or such Holders propose to register and sell in any such piggyback registration ahead of any Registrable Securities any such Other Shareholder may propose to register and sell in connection therewith and (C) in any piggyback registration effected in connection with an underwritten secondary registration by the Company on behalf of and/or in response to a demand from such Other Shareholder, the Investor and/or the Holders shall have the right to register and sell any Registrable Securities (of the same class as the Securities such Other Shareholder proposes to register and any Related Securities in respect of which the Holder Shares are Securities of the

same class as the Securities such Other Shareholder proposes to register) they propose to register and sell in any such piggyback registration, allocated, if necessary, pro rata between the Investor and/or the Holders and such Other Shareholder on the basis of the number of Securities owned by such Person ((i) and (ii) together, the “ Permitted Registration Rights ”); and

(b) effect any registration in the United States of its Securities for or on behalf of or in response to any demand from any Other Shareholder, except such Other Shareholder who has been granted Permitted Registration Rights in accordance with this Agreement.

ARTICLE III

MISCELLANEOUS

3.1. No Inconsistent Agreements . The Company shall not hereafter enter into any agreement with respect to its Securities that is inconsistent with the rights granted to the Investor and/or the Holders in this Agreement or otherwise conflicts with the provisions hereof.

3.2. Authority; Enforceability . Each entity that is a party hereto has the corporate power and each has the authority to enter into this Agreement and to carry out its obligations hereunder. Each entity that is a party hereto is duly organized and validly existing under the laws of its jurisdiction of organization, and the execution of this Agreement and the consummation of the transactions contemplated herein have been duly authorized by all necessary action, and no other act or proceeding, corporate or otherwise, on its part is necessary to authorize the execution of this Agreement or the consummation of any of the transactions contemplated hereby. This Agreement has been duly executed and delivered by each party.

3.3. Adjustments Affecting Registrable Securities . The Company shall not amend, or permit any amendment of, its articles of association, by-laws or similar organizational documents which would reasonably be expected to adversely affect the ability of Holders to include Registrable Securities in a registration undertaken pursuant to this Agreement or which would reasonably be expected to adversely affect the marketability of such Registrable Securities in any such registration.

3.4. Successors and Assigns . Except as otherwise provided herein, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties (including transferees of any shares of Registrable Securities to the extent set forth herein), and subject to the restrictions on assignments and novation set forth in Section 2.10. Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement.

3.5. Applicable Law and Submission to Jurisdiction .

(a) This Agreement will be governed by and construed in accordance with the laws of the State of New York applicable to contracts made and to be performed within the State of New York, regardless of the law that might be applied under principles of conflicts of laws.

(b) The Investor irrevocably submits to the nonexclusive jurisdiction of any New York State or United States Federal court sitting in the State of New York over any suit, action or proceeding arising out of or relating to this Agreement or the transactions contemplated thereby. The Investor irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of venue of any such suit, action or proceeding brought in such a court and any claim that any such suit, action or proceeding brought in such a court has been brought in an inconvenient forum. EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY WHICH MAY ARISE UNDER THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES, AND THEREFORE EACH SUCH PARTY HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT SUCH PARTY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT, OR THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT. EACH PARTY CERTIFIES AND ACKNOWLEDGES THAT (i) NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE. THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, (ii) EACH PARTY UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF THIS WAIVER, (iii) EACH PARTY MAKES THIS WAIVER VOLUNTARILY, AND (iv) EACH PARTY HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 3.6(b).

3.6. Counterparts and Facsimile . For the convenience of the parties hereto, this Agreement may be executed in any number of separate counterparts, each such counterpart being deemed to be an original instrument, and all such counterparts will together constitute the same agreement. Executed signature pages to this Agreement may be delivered by facsimile and such facsimiles will be deemed as sufficient as if actual signature pages had been delivered.

3.7. Titles and Subtitles . The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement.

3.8. Notices . Except as otherwise provided in this Agreement, all notices, requests, claims, demands, waivers and other communications hereunder shall be in writing and shall be deemed to have been duly given when delivered by hand or overnight courier service, or when received by facsimile transmission if promptly confirmed, as follows:


	(a)	if to the Company, to:

		Lloyds Banking Group Plc Henry Duncan House 120 George St Edinburgh EH2 4LH Attention: Company Secretary

		with copies to:

		Linklaters LLP


		One Silk Street
		London EC2Y 8HQ
		Attention: Thomas N. 0’ Neill III
		Fax: +44 (0) 20 7456 2222

	(b)	if to the Investor, to:

		The Commissioners of Her Majesty’s Treasury
		1 Horse Guards Road
		London SWlA 2HQ
		Attention: Nikhil Rathi (Team Leader, Financial Stability)
		Fax: + 44 (0) 20 7270 4844

		with copies to:

		UK Financial Investments Limited
		1 Horse Guards Road
		London SWlA 2HQ
		Attention: John Crompton (Head of Market Investments)
		Fax: 144 (0) 20 7270 6668

		Slaughter and May
		One Bunhill Row
		London EClY 8YY
		Attention: John Papanichola Paul Dickson
		Fax: +44 (0) 20 7090 5000

		Cravath, Swaine & Moore LLP
		One Ropemaker Street
		London EC2Y 9HR
		Attention: Philip J. Boeckman, Esq.
		Fax: +44 (0) 20 7860 1150

or to such other address, facsimile number or telephone as either party may, from time to time, designate in a written notice given in a like manner.

3.9. Amendments and Waivers . Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and the Holders of a majority of the Registrable Securities then outstanding. Any amendment or waiver effected in accordance with this paragraph shall be binding upon each Holder of any Registrable Securities then outstanding, each future Holder of all such Registrable Securities, and the Company.

3.10. Severability . If any provision of this Agreement or the application thereof to any person or circumstance is determined by a court of competent jurisdiction to be invalid, void or unenforceable, the remaining provisions hereof, or the application of such provision to persons

or circumstances other than those as to which it has been held invalid or unenforceable, will remain in full force and effect and shall in no way be affected, impaired or invalidated thereby, so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any party. Upon such determination, the parties shall negotiate in good faith in an effort to agree upon a suitable and equitable substitute provision to effect the original intent of the parties

3.1 1. Aggregation of Securities . All Registrable Securities held or acquired by any wholly- owned subsidiary or parent of, or any corporation or entity that is controlling, controlled by, or under common control with, the Investor shall be aggregated together for the purpose of determining the availability of any rights under this Agreement.

3.12. Entire Agreement, Etc . This Agreement constitutes the entire agreement, and supersedes all other prior agreements, understandings, representations and warranties, both written and oral, between the parties, with respect to the subject matter hereof.

3.13. Remedies . Any Person having rights under any provision of this Agreement shall be entitled to enforce such rights specifically, to recover damages caused by reason of any breach of any provision of this Agreement and to exercise all other rights granted by law.

3.14. Interpretation of Placing and Open Offer Agreement . The parties agree that if the Investor transfers any Registrable Securities to an affiliate or nominee of the Investor, such affiliate or nominee shall have all the rights and be bound by the obligations of the Investor under the Placing and Open Offer Agreement.

[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]

IN WITNESS WHEREOF, the parties hereto have executed this Agreement.


LLOYDS BANKING GROUP PLC


		Date:


Signed by two of THE COMMISSIONERS OF HER MAJESTY’S TREASURY


		Date:




		Date:

IN WITNESS WHEREOF, the parties hereto have executed this Agreement.


LLOYDS BANKING GROUP PLC


	Date:


Signed by two of THE COMMISSIONERS OF HER MAJESTY’S TREASURY


	Date:	P 18/6/09




	Date:	18/6/09

Exhibit 4(a)(viii)

The Commissioners of Her Majesty’s Treasury (the “ Treasury ”)
1 Horse Guards Road
London
SW1A 2HQ

The Secretary of State, Department for Business, Innovation and Skills (“ BIS “)
1 Victoria Street
London
SW1H 0ET

The Secretary of State, Department for Communities and Local Government (“ DCLG ”)
Eland House
Bressenden Place
London
SW1E 5DU

23 March 2010

Ladies and Gentlemen,

2010 LENDING COMMITMENTS


1.	Introduction

We refer to the deed poll entitled “Lending Commitments” dated 6 March 2009 executed by Lioyds Banking Group plc (the “Participating Institution”) in favour of the Treasury, BIS (then known as the Department for Business, Enterprise and Regulatory Reform) and DCLG (as amended, including pursuant to the Deed of Withdrawal dated 3 November 2009 between the Participating Institution and the Treasury) (the Lending Commitments Deed Poll, “LCDP”).

The LCDP specified: (i) the lending commitments given by the Participating Institution for itself and on behalf of its Group, comprising Business Lending Commitments and a Homeowner Lending Commitment; and (ii) certain associated undertakings being given by the Participating Institution in connection with the implementation and operation of the Lending Commitments.

The LCDP specified commitments for the 12 month period commencing 1 March 2009 (the “2009 commitment period) and the 12 month period commencing 1 March 2010 (the “2010 commitment period”). Pursuant to paragraph 6 of the LCDP, and in consequence of an ongoing dialogue between the Participating Institution and the Government Departments, the Government Departments consider that it is appropriate to change the Business Lending Commitments for the 2010 commitment period and to adjust the undertakings given in connection with the implementation and operation of the Homeowner Lending Commitment for that period.

The Participating Institution hereby amends the LCDP (pursuant to paragraph 12.6 of the LCDP) as follows. Such amendments shall take effect upon confirmation of the consent of the Government Departments to these amendments by their countersigning below. The remaining provisions of the LCDP shall in all other respects remain unamended and in full force and effect.


2.	Adjustment of the LCDP in respect of the 2010 commitment period

2.1 Introduction

This paragraph amends the LCDP in so far as it relates to the 2010 commitment period.

2.2 Business Lending Commitments: 2010 commitment

(A) In the heading to paragraph 4.2, at the end add “: 2009 commitment period”.

(B) In paragraph 4.2(A), omit “and the 12 month period commencing 1 March 2010 (“the “2010 commitment period”)” and for “4.8” substitute “4.7”.

“4.8 Aggregate Business Lending Commitment: 2010 commitment

In respect of the 12 month period commencing 1 March 2010 (the “2010 commitment period”), the Participating Institution undertakes subject to sufficient customer demand and the terms of this Deed Poll to provide gross new lending to Relevant Businesses of, in aggregate, £44.0 billion. In satisfying this aggregate lending commitment, the Participating Institution shall lend to each Relevant Business Category the targeted amount specified in paragraphs 4.8B and 4.8C.

Paragraph 8 imposes obligations on the Participating Institution to provide monthly reports to the Government Departments in relation to new lending to Relevant Businesses on both a net and gross basis.

In determining what is “gross new lending” for the purposes of this Deed Poll, the Participating Institution shall -


	(A) include the total amount of a facility, including bond and equity underwriting, made available to a person who is not a customer of the Participating Institution immediately before the facility is made available;

	(B) include the total amount of any new facility, including bond and equity underwriting. made available to a person who is a customer of the Participating Institution immediately before the facility is made available;

	(C) include any increase in a facility, including bond and equity underwriting, currently made available to a person who is a customer of the Participating Institution where that increase takes place by virtue of a decision of the Participating Institution and where no material changes to the terms of the facility are made;


	(D) include the total amount of any facility made available to a person who is a customer of the Participating Institution immediately before the facility is made available where the facility is made available in connection with or in consequence of the termination of an existing facility made available by the Participating lnstitution to that person;

	(E) not include repayments;

	(F) not include any increase or decrease in a facility made available to a person who is a customer of the Participating Institution where that increase or decrease takes place otherwise than by virtue of a decision of the Participating Institution;

	(G) only treat a “facility” as being “made available” for the purposes of any of the foregoing sub-paragraphs if it constitutes lending (as defined in paragraph 4.9); and

	(H) to the extent that paragraph 4.9 conflicts with the provisions in sub-paragraphs (A) to (F) above, not apply that paragraph.

4.8A Aggregate Business Lending Commitment: general principles for the 2010 commitment period

Without prejudice to paragraph 3, for the purposes of the 2010 commitments period the Business Lending Commitments are subject to:


	(A)	the Participating Institution’s commercial terms and conditions, including appropriate risk adjusted pricing and satisfaction of risk acceptance criteria, as defined by the Participating Institution for its potential or existing customers;

	(B)	through the best endeavours of the Participating Institution, the availability of the capital, liquidity and funding position on acceptable terms necessary to support the lending that the Participating Institution has committed to during the 2010 commitment period; and

	(C)	sufficient demand from customers who meet the above criteria.

4.8B SMEs: 2010 Commitment

The Participating Institution undertakes that, in respect of the 2010 commitment period, its gross new lending to SMEs will be at least ^***1 .

4.8C Mid-Corporates and Large Corporates: 2010 Commitment

The Participating Institution undertakes that, in respect of the 2010 commitment period, its gross new lending to Mid-Corporates and Large Corporates will be at least ^***1 .

2.3 Homeowner Lending Commitments

(A) In paragraph 5.6:



1	*** Indicates omission of material which has been separately filed pursuant to a request for confidential treatment.


	(i) after “actively participate”, insert “and support eligible borrowers’ applications”; and

	(ii) omit “(when the detail of this scheme is finalised)”.

(B) In paragraph 5.7, at the end of sub-paragraph (C) insert:

“; and

(D) help first time buyers by supporting their participation in Government-supported shared ownership and equity loan schemes including by:


	(i) offering interest rates to first time buyers participating in such schemes which are similar to interest rates offered to other first time buyers;

	(ii) for first time buyers participating in Government-supported equity loan schemes, seeking to maintain the minimum deposit requirement at 5% of the share purchased;

	(iii) providing prior notice to the Government Departments of any increase in the minimum deposit requirement, combined with an explanation of the rationale behind the intended increase;

	(iv) keeping the need for a minimum deposit requirement under review; and

	(v) in recognition of the reduced risk to lenders offered by the protections built into Government-supported shared ownership schemes, the Participating Institution will minimise the deposit requirements currently associated with this type of lending, subject to appropriate adjustments for the risks presented by the property type and shared ownership lease characteristics”.

2.4 Business Lending Commitments: monitoring of net lending

In paragraph 8.2, for sub-paragraph (A) substitute:

“(A) a segmental analysis showing gross new lending divided by both size of business (corresponding to the Relevant Business Categories) and industry sector;

(AB) a segmental analysis showing new lending on a net basis divided by both size of business (corresponding to the Relevant Business Categories) and industry sector;”.


3.	Incorporation of terms of this Deed Poll Into the LCDP

This Deed Poll shall form part of and be read together with the LCDP. References in the LCDP to “this Deed Poll” or any similar references shall be deemed to refer to the LCDP as amended by this Deed Poll.

This Deed Poll and any non-contractual obligations arising out of or in connection with it shall be governed by and construed in accordance with the laws of England.

IN WITNESS WHEREOF this Deed Poll has been executed and delivered as a deed on March 2010.


Executed and delivered as a deed by LLOYDS BANKING GROUP PLC acting by two directors / one director and its secretary	)
	)
	)	By:

	)		Director
	)
	)
	)
	)
	)	By:

	)
	)		Secretary

Consented to by

(SIGNATURE)

for and on behalf of

The Commissioners of Her Majesty’s Treasury

(SIGNATURE)

for and on behalf of

The Secretary of State, Department for Business, Innovation and Skills

(SIGNATURE)

for and on behalf of

The Secretary of State, Department for Communities and Local Government

Conformed copy (redacted)

The Commissioners of Her Majesty’s Treasury (the “ Treasury ”)
1 Horse Guards Road
London
SW1A2HQ

The Secretary of State, Department for Business, Enterprise and Regulatory Reform (“ BERR ”)
1 Victoria Street
London
SW1H 0ET

The Secretary of State, Department for Communities and Local Government (“ DCLG ”)
Eland House
Bressenden Place
London
SW1E 5DU

6 March 2009

Ladies and Gentlemen,

LENDING COMMITMENTS


1.	Introduction

Lloyds Banking Group plc (the “Participating Institution”) notes that:

(A)	the Asset Protection Scheme (the “APS”) and the extension to the Credit Guarantee Scheme (the “CGS” and, together with the APS, the “Schemes”) announced by the Government on 19 January 2009 are part of a comprehensive package of measures the objective of which is to reinforce the stability of the financial system, and together with the Working Capital Scheme announced by the Government on 14 January 2009 (the “WCS”), to increase confidence and capacity to lend, and in turn to support the recovery of the economy;

(B)	participation in either or both of the Schemes by an institution having eligible liabilities (as determined by the Bank of England) above a threshold to be specified by the Treasury is subject to a verifiable commitment to be agreed between each participating institution and the Government to support lending to creditworthy borrowers in the real economy in a commercial manner; and

(C)	in determining the requisite lending commitments, the Treasury, BERR and DCLG (together, the “Government Departments”) have consulted closely with each other in relation to sectors of the economy for which they have responsibilities, and will continue

Conformed copy (redacted)


	to consult closely with each other as appropriate in relation to the implementation and operation of the lending commitments given or to be given by certain institutions which participate in either or both of the Schemes.

In connection with the above, this document is being entered into by the Participating institution by way of a deed poll in favour of the Government Departments and specifies: (i) the lending commitments given by the Participating Institution for itself and on behalf of its Group, in connection with its proposed participation in the Schemes, comprising Business Lending Commitments and a Homeowner Lending Commitment (each as defined in paragraph 3(A) and together, the “Lending Commitments”); and (ii) certain associated undertakings being given by the Participating Institution in connection with the implementation and operation of the Lending Commitments.

The Participating Institution agrees that the undertakings given in this Deed Poll (including the Lending Commitments) are intended to be binding on it and the provision of such undertakings is a pre-requisite to the Participating Institution’s proposed participation in the Schemes.

References in this Deed Poll to the “Participating Institution” mean (where appropriate) the Participating Institution and the members of the Participating Institution’s Group forming part of its UK banking operations.


2.	Commencement of Lending Commitments

The Participating Institution undertakes (for itself and on behalf of its Group) to commence the implementation of the Lending Commitments with effect from 1 March 2009 and in doing so, to act in good faith, having regard to the purpose of the Lending Commitments to support lending to creditworthy borrowers in the real economy in a commercial manner. The implementation of the Lending Commitments is subject to the terms and conditions of this Deed Poll.


3.	The Lending Commitments: General

The Participating Institution undertakes on the terms and subject to the provisions of this Deed Poll:


(A)	to increase the supply of lending by the UK banking operations of the Participating Institution to UK businesses (as further described in paragraph 4 below) (the “Business Lending Commitments”) and to homeowners (including first time buyers) (as further described in paragraph 5 below) (the “Homeowner Lending Commitment”); and

(B)	to implement the Business Lending Commitments and the Homeowner Lending Commitment without distortion to its lending activities to other sectors of the real economy (including unsecured consumer lending) in the UK and, in doing so, to pay due regard to the level of demand and the normal distribution of maturities of lending to other sectors of the real economy.

Notwithstanding the foregoing, the Participating Institution notes that the Lending Commitments are not intended to require or cause the Participating Institution to do anything that would constitute a breach by it of the Financial Services and Markets Act 2000 (“FSMA”), the rules

Conformed copy (redacted)

made by the Financial Services Authority (“FSA”) or the FSA’s supervisory framework (together, the “FSA Requirements”), to lend in excess of its single name or sectoral risk concentration limits or otherwise to engage in uncommercial practices.

In Implementing the Lending Commitments, the Participating Institution will adhere to Principle 6 of the FSA’s Principles for Business (“a firm must pay due regard to the interests of its customers and treat them fairly”) in respect of its lending activities.

The Lending Commitments will be subject to the Participating Institution’s prevailing commercial terms and conditions, including pricing, and risk assessment; and, additionally, residential mortgage lending will be subject to the applicants meeting the Participating Institution’s standard credit and other acceptance criteria which must be reasonable for a prudent banking institution.


4.	The Business Lending Commitments

4.1	Scope of Business Lending Commitments

The Business Lending Commitments apply to lending by the UK banking operations of the Participating Institution to the following UK business categories (each, a “Relevant Business Category” and together, “Relevant Businesses”):

(A)	small and medium sized enterprises (or “SMEs”), which means UK businesses which are categorised by the Participating Institution as being small or medium sized enterprises by reference to their turnover being £15 million or less;

(B)	“Mid-Corporates”, which means UK businesses with a turnover of £500 million or less, excluding SMEs; and

(C)	“Large Corporates”, which means UK businesses with a turnover in excess of £500 million.

For the purposes of this Deed Poll: (i) “UK businesses” refers to firms, companies, partnerships, joint ventures, associations and other undertakings engaged in economic activity in the UK (including subsidiaries and branches of overseas entities conducting such economic activities); and (ii) “turnover” refers to the relevant UK business’s turnover, as stated in its most recent annual accounts or, where the UK business is part of a group, the consolidated annual turnover of the group.

As stated in paragraph 3, lending pursuant to the Business Lending Commitments will be subject to the Participating Institution’s prevailing commercial terms and conditions, including pricing, and risk assessment.


4.2	Baseline for determining compliance with Business Lending Commitments

The Participating institution undertakes:


(A)	in respect of the 12 month period commencing 1 March 2009 (the “2009 commitment period”) and the 12 month period commencing 1 March 2010 (the “2010 commitment

Conformed copy (redacted)


	period”), to increase lending (as defined in paragraph 4.9) above the lending figure specified in the baseline plan by the amounts specified in paragraphs 4.3 to 4.8 inclusive; and

(B)	to implement the Business Lending Commitments in line with demand from different industry sectors operating in the real economy and, subject to demand, in line with the normal distribution of maturities of loans to each Relevant Business Category.

For the purposes of this Deed Poll, the “baseline plan” means the Participating Institution’s forecast as at 31 December 2009 (before the impact of the Lending Commitments) that the Participating Institution has shared with the Government Departments.


4.3	Aggregate Business Lending Commitment

In respect of the 2009 commitment period, the Participating Institution undertakes to increase its lending to Relevant Businesses by, in aggregate, an additional £11.0 billion above the amount shown in the baseline plan. In satisfying this aggregate lending commitment, the Participating Institution shall increase its lending to each Relevant Business Category by (at a minimum) the amount specified in paragraphs 4.4 to 4.6 inclusive.


4.4	SMEs: 2009 commitment

The Participating Institution undertakes that, in respect of the 2009 commitment period, its lending to SMEs will be at least ^***1 above the amount shown in the baseline plan.


4.5	Mid-Corporates: 2009 commitment

The Participating institution undertakes that, in respect of the 2009 commitment period, its lending to Mid-Corporates will be at least ^***1 , above the amount shown in the baseline plan.


4.6	Large Corporates: 2009 commitment

The Participating institution undertakes that, in respect of the 2009 commitment period, its lending to Large Corporates will be at least ^***1 above the amount shown in the baseline plan.

The Participating Institution will work constructively by: (i) participating in forums established or supported by the Government or the Bank of England; (ii) working with the Government and the Bank of England to develop guidelines for lenders; and (iii) continuing its ordinary course



1	*** Indicates omission of material, which has been separately filed, pursuant to a request for confidential treatment.

Conformed copy (redacted)

activities and processes (including with respect to the syndication of facilities), to address or reduce any risk concentrations arising from this Business Lending Commitment.


4.7	Inter-relationships between WCS and Business Lending Commitments

The Participating Institution has agreed to participate in the WCS and undertakes that the capital released by its participation in the Scheme will be redeployed in support of lending to SMEs and Mid-Corporates for all forms of finance. This release of capital will enable the Participating Institution to provide *** ¹ of the £11.0 billion increase in lending referred to in paragraph 4.3 and, as such, the Participating Institution notes that the commitment given in respect of capital released by its participation in the WCS: (i) is incorporated within the Business Lending Commitment for the Relevant Business Categories; and (ii) will be subject to the monitoring, reporting and compliance arrangements described in paragraphs 8, 9 and 11.


4.8	Lending to business: 2010 commitment

In respect of the 2010 commitment period, the Participating Institution undertakes to maintain similar levels of lending to each of the Relevant Business Categories as in the 2009 commitment period, subject to adjustment of the commitments (pursuant to paragraph 6) by agreement with the Treasury and BERR to reflect circumstances at the start of the 2010 commitment period.


4.9	Application of Business Lending Commitments

For the purpose of the Business Lending Commitments “lending” means financing facilities granted (whether drawn or undrawn), in each case to real economy UK businesses, including (without limitation) loans, overdrafts, hire purchase and leasing of business assets, invoice discounting and export finance, but excluding (without limitation) derivatives and interbank financing and which are outstanding as at the end of the 2009 commitment period or the 2010 commitment period (as appropriate).

For the purposes of the above: (i) debt which is exchanged for equity in a restructuring of a borrower, and impairments and write-offs of outstanding lending (save to the extent such impairments and write-offs are already reflected in the baseline plan), shall be treated as if it was still lending, except to the extent that such adjustments to the quantum of outstanding lending are recovered or are recoverable through the APS; and (ii) debt which is repaid by a borrower as a consequence of that borrower raising capital through other means, including (without limitation) through disposals, equity issuance and bond issuance, shall be treated as if it was still lending.



¹	*** Indicates omission of material, which has been separately filed, pursuant to a request for confidential treatment.

Conformed copy (redacted)


4.10	Marketing relating to Business Lending Commitments

The Participating Institution undertakes that it will promptly ensure that its staff are aware of the Business Lending Commitments and actively seek to implement such commitments through sales and marketing activities which are targeted at Relevant Businesses, which shall include both existing borrowers and new potential borrowers. These activities will, where reasonably appropriate, make specific provision for UK businesses that would be categorised by the Participating Institution as Mid-Corporates or Large Corporates and whose borrowings were financed, or are financed, by financial institutions that have reduced, or are in the process of, reducing their lending activities to UK businesses.


4.11		General provisions about lending to business

In relation to lending to Relevant Businesses, the Participating Institution will:

(A)	commit to its lending allocation under the Enterprise Finance Guarantee Scheme, subject to the Participating Institution’s ordinary course pricing and other terms;

(B)	apply for and, if approved, use the European Investment Bank’s intermediated financing schemes aimed specifically at SMEs and “Midcaps” (as defined by the European Investment Bank);

(C)	actively and constructively participate in the funding of UK export credits where such funding is subject to the Export Credits Guarantee Department guarantee arrangements;

(D)	abide by the revised British Bankers’ Association statement of principles for small business lending released on 12 December 2008 (as agreed at the Small Business Finance Forum held on 11 November 2008);

(E)	not reduce or withdraw, or increase its charges on, working capital lines when credit insurance covering the borrower’s suppliers has been reduced or withdrawn, without due and careful consideration and unless it is satisfied, through the application of its ordinary course commercial and risk assessment, that there has been a material adverse change in the credit risk associated with the relevant business that justifies such an action;

(F)	continue to apply ordinary course commercial practices as a prudent banking institution in determining whether to call a default against a business to which it has made a loan; and


(G)	work constructively with other lenders and, where appropriate, the Government in exploring the full range of restructuring possibilities for corporate borrowers, and to do so in compliance with the International Association of Restructuring, Insolvency and Bankruptcy Professionals’ (INSOL) “Statement of Principles for a Global Approach to Multi-creditor Workouts”.

Conformed copy (redacted)

The Participating Institution notes that it has already committed to, and is making, funding of £6.25 million available through the Capital for Enterprise Fund (announced by BERR on 14 January 2009), which is a fund to provide long term finance for businesses which have exhausted their normal lending facilities and which is part of Government’s commitment to support the de-leveraging of commercially viable over-leveraged businesses.


5.	Homeowner Lending Commitment

5.1	Scope of Homeowner Lending Commitment

The Homeowner Lending Commitment applies to residential mortgage lending by the UK banking operations of the Participating Institution to residential homeowners, including first time buyers and buy-to-let mortgage lending, in respect of properties in the UK. Residential and buy-to-let mortgage lending which involves the Participating Institution lending by way of remortgage in circumstances where no property purchase is involved shall be disregarded for these purposes.


5.2	Homeowner Lending Commitment: 2009 commitment

The Participating Institution undertakes that, in respect of the 2009 commitment period, its gross residential mortgage lending will be at least £3.0 billion above the amount shown in the baseline plan.

As stated in paragraph 3, residential mortgage lending will be subject to the Participating Institution’s prevailing commercial terms and conditions, including pricing, and risk assessment; and, additionally, the applicants meeting the Participating Institution’s standard credit and other acceptance criteria which must be reasonable for a prudent banking institution.


5.3	Homeowner Lending Commitment: 2010 commitment

In the 2010 commitment period, the Participating Institution undertakes to maintain similar levels of gross residential mortgage lending as in the 2009 commitment period, subject to adjustment of the commitment (pursuant to paragraph 6) by agreement with the Government Departments to reflect circumstances at the start of the 2010 commitment period.


5.4	Application of Homeowner Lending Commitment

For the purposes of the Homeowner Lending Commitment, the Participating Institution will ensure that:


(A)	a range of residential mortgage products are available for residential mortgage applicants for residential mortgages across the loan-to-value (“LTV”) bands and up to at least 90% LTV;

(B)	applications for residential mortgage products are promptly processed and granted, subject to applicants meeting the Participating Institution’s standard credit and other acceptance criteria which must be reasonable for a prudent banking institution and pay due regard to the obligation to sell appropriate products to applicants; and

Conformed copy (redacted)


(C)	additional residential mortgage lending is offered across a normal distribution of LTV bands and in accordance with ordinary course commercial practices as a prudent banking institution.

5.5	Marketing relating to Homeowner Lending Commitment

The Participating Institution undertakes that it will promptly ensure that its staff are aware of the Homeowner Lending Commitment and actively seek to implement such commitment through sales and marketing activities targeted at residential homeowners (including first time buyers). The communication of the Homeowner Lending Commitment to staff, and the marketing of such commitment to residential homeowners shall, in particular, address the specific obligations undertaken by the Participating Institution pursuant to paragraph 5.4.


5.6	General provisions about lending to homeowners

The Participating Institution will:


(A)	actively participate in the Government’s Homeowners Mortgage Support Scheme (when the detail of this scheme is finalised), Mortgage Rescue Scheme and Support for Mortgage Interest and work to ensure that its eligible borrowers have the opportunity to benefit from these Schemes (where appropriate) and avoid repossession; and

(B)	abide by the principles established by, and actively and constructively participate in, the Home Finance Forum (including policies for supporting individual borrowers in difficulty).

5.7	Other provisions

The Participating Institution will:


(A)	actively and constructively participate in the Consumer Finance Forum;

(B)	abide by the principles agreed as part of the Credit Card Summit on 28 November 2008; and

(C)	work closely with registered social landlords with a view to continuing the supply of appropriate finance.

Conformed copy (redacted)


6.	Adjustment of Lending Commitments

The Participating Institution acknowledges that, as a consequence of its ongoing dialogue with the Government Departments regarding the operation and implementation of the Lending Commitments, it may be appropriate for the Government Departments (in their discretion but acting reasonably and in consultation with the Participating Institution) to: (i) reduce the quantum of the Homeowner Lending Commitment and/or one or more of the Business Lending Commitments; or (ii) allow the Participating Institution to increase its lending to one or more Relevant Business Categories by the amount of any shortfall in residential mortgage lending (any such increase and shortfall being calculated as an equivalent amount on a risk-weighted asset basis) (a “Commitment Adjustment”).

The circumstances in which the Government Departments may make such an adjustment to the Lending Commitments include, but are not confined to, the following:


(A)	changes to economic conditions, the competitive market landscape and/or the economic assumptions of the Participating Institution which have been shared with the Government Departments and underlie the baseline plan (including, without limitation, the level of demand for business and residential mortgage lending at the Participating Institution’s ordinary course pricing and terms and the level of availability within the market of other forms of debt and equity finance to UK businesses);

(B)	significant changes to the utilisation and drawdown rates of lending UK businesses assumed in the baseline plan;

(C)	changes to the Government Departments’ expectations as to the amount of lending needed to maintain economic activity; and

(D)	updated assessments of the extent to which the Participating Institution has relied on Government support and the nature of the support utilised by the Participating Institution.

In determining whether to make a Commitment Adjustment, the Participating Institution understands that the Government Departments will have regard to (and act reasonably in considering) any submissions made by the Participating Institution as part of its ongoing dialogue with the Government Departments regarding the operation and implementation of the Lending Commitments (including (without limitation) with respect to the Homeowner Lending Commitment and Business Lending Commitments applicable in respect of the 2010 commitment period).

If the Government Departments are satisfied that the Lending Commitments are no longer necessary to address the Government’s objectives of reinforcing the stability of the financial system, increasing confidence and capacity to lend, and in turn supporting the recovery of the economy, they may agree that they should cease to apply.

The Participating Institution will comply with the Lending Commitments in accordance with the provisions of this Deed Poll on the understanding that: (i) the Schemes will be established by the Government; and (ii) the Participating Institution will participate in either or both of the

Conformed copy (redacted)

Schemes on terms to be agreed with the Government. It is understood that the Government will, in consultation with the Participating Institution and acting reasonably, make an appropriate Commitment Adjustment if the APS is not implemented within the timeframes anticipated for such implementation; and that if the APS is not implemented within the timeframes anticipated for such implementation and the Participating Institution only participates in the CGS, that the Government will, in consultation with the Participating Institution and acting reasonably, make an appropriate Commitment Adjustment having regard to the quantum of financial support being provided by the Government to the Participating Institution pursuant to the CGS.

If any preference shares held by the Treasury in the capital of the Participating Institution are exchanged for ordinary shares, the Participating institution agrees that it shall increase the lending being made available to support creditworthy borrowers in the real economy The quantum of such increased lending shall be determined by reference to the increased lending capacity of the Participating Institution after taking account of the long term effects of the exchange of the preference shares. Such increased lending will take account of demand for business and residential mortgage lending at the Participating Institution’s prevailing terms and conditions, including pricing, and risk assessment; and, additionally, any increased residential mortgage lending will be subject to the applicants meeting the Participating Institution’s standard credit and other acceptance criteria.


7.	Interaction of Lending Commitments with previous commitments

The Participating Institution notes that the Lending Commitments supersede the lending commitments given by the Participating Institution in October 2008 in connection with its participation in the Government’s Recapitalisation Scheme.


8.	Monitoring and Reporting

8.1	General requirements

The Participating Institution agrees that:


(A)	compliance with the Lending Commitments will be subject to a monitoring and reporting process between the Participating Institution and the Government Departments which will be detailed, transparent and determined by the Government Departments (acting reasonably) in consultation with the Participating Institution;

(B)	It will report to the Government Departments:

	(i)	on a monthly basis in a format, with content and within timescales, to be determined by the Government Departments (acting reasonably) in consultation with the Participating Institution (the “monthly reports”) and that: (a) In respect of the Business Lending Commitments, the monthly report will include (without limitation) the information and data described in paragraph 8.2; and (b) in respect of the Homeowner Lending Commitment, each monthly report will include (without limitation) the information and data described in paragraph 8.3; and

Conformed copy (redacted)


	(ii)	on an annual basis in a format, with content and within timescales, to be determined by the Government Departments (acting reasonably) in consultation with the Participating institution (the “annual reports”) to facilitate the reporting by the Government Departments envisaged in paragraph 8.5(B) and that each annual report will include (without limitation) the information and data described in paragraph 8.4; and

(C)	the monthly reports and annual reports will be submitted to the board of directors of the Participating Institution (the “Board”) prior to delivery to the Government Departments and, upon delivery to the Government Departments, will be accompanied by a certificate from a Board director that, to the best of his or her knowledge and belief, having made reasonable enquiries, the report fairly presents the relevant data and is not misleading for the purpose of assessing compliance with the Lending Commitments or the achievement of their purpose.

Without prejudice to the specific requirements set out in this paragraph 8, the Participating institution undertakes to be open and honest in its dealings with the Government Departments in relation to the implementation and operation of the Lending Commitments and will promptly provide each Government Department with such other information as it reasonably requires in connection with the Lending Commitments.


8.2	Business Lending Commitments: monthly reports

In relation to the Business Lending Commitments, the monthly reports will include:


(A)	a segmental analysis showing new and outstanding lending and commitments divided by both size of business (corresponding to the Relevant Business Categories) and industry sector;

(B)	(in respect of SMEs) application numbers and acceptance rates by type of financing, together with the credit risk rating of businesses;

(C)	a summary of the distributions of the pricing and terms on which lending is being made available and details of the credit and risk assessment methodology;

(D)	a narrative commentary on new lending activities in respect of new and existing borrowers; and

(E)	a narrative commentary on the data, explaining the reasons for any significant variances in the amount of outstanding loans and availability of credit by size of business or sector from the baseline plan.

8.3	Homeowner Lending Commitment: monthly reports

In relation to the Homeowner Lending Commitment, the monthly reports will include:


(A)	a segmental analysis showing new loans (gross new residential mortgage lending), credit availability and end of month stock of loans (net outstanding residential mortgage

Conformed copy (redacted)


	lending) divided by transaction type (Including LTV and Loan to Disposable Income (“LDI”) ratios);

(B)	application numbers and acceptance rates by product, together with the bureau credit rating scores of applicants, against the corresponding numbers for 2008;

(C)	a summary of the distributions of the pricing and terms on which lending is being made available and of the credit and risk assessment methodology; and

(D)	a narrative commentary on the data, explaining the reasons for any significant variances in the amount of outstanding loans and availability of credit by transaction type from the baseline plan.

8.4	Lending Commitments: annual reports

The annual reports will include information of a type which is broadly equivalent to the data and information to be contained in the monthly reports.


8.5	Public disclosure

The Participating institution agrees that:

(A)	the Government Departments may publicly announce details of the Lending Commitments and the associated obligations and undertakings of the Participating institution as described in this Deed Poll; and

(B)	each of the Government Departments may report to Parliament and Parliamentary committees (including the Public Accounts Committee and the House of Commons Treasury Select Committee) on implementation of, and compliance with, the Lending Commitments, with such reporting expected to be undertaken on an annual basis.

8.6	Confidentiality

Certain data and information to be included within the monthly reports, or otherwise provided to the Government Departments by the Participating institution pursuant to this Deed Poll, will be anonymised to preserve customer confidentiality and will constitute confidential, commercially sensitive data.

This Deed Poll (including the baseline plan), and confidential information provided to Government Departments pursuant to this Deed Poll (including the monthly and annual reports), is or will be (without prejudice to the rights of the Government Departments described in paragraph 8.5(A)) subject to confidentiality and freedom of information arrangements between the Participating institution and each of the Government Departments on the terms set out in the confidentiality agreements between the Particlpating institution and each of the Government Departments dated 27 February 2009).

Conformed copy (redacted)


9.	Implementation plan

The Participating institution undertakes that, as soon as practicable after the Lending Commitments take effect, it will prepare and present to the Government Departments a plan which will address how the Lending Commitments are to be implemented. Such implementation plan will include the Participating institution’s proposals regarding the marketing and sales activities to be undertaken pursuant to paragraphs 4.10 and 5.5.


10.	lncentivisation

The Participating institution will, in applying its balanced scorecard approach to remuneration, ensure that the performance assessment for staff employed in business units responsible for delivery of the Lending Commitments will include an assessment of new lending arising from the marketing and sales activities undertaken pursuant to the Participating institution’s obligations under paragraphs 4.10 and 5.5.


11.	Compliance

Any failure to comply with the Lending Commitments or the other obligations of, or undertakings given by, the Participating Institution under this Deed Poll will initially be addressed through the reporting mechanism which will provide the Government Departments with a framework to discuss with the Participating institution the background to and reasons for such failure.

In addition, failure to comply with the Lending Commitments may result in the withdrawal or restriction of the Participating institution’s eligibility to roll over coverage under the CGS from three to five years.


12.	Miscellaneous

12.1	Representations and warranties

The Participating Institution represents and warrants that:


(A)	it has the corporate power and the authority to enter into this Deed Poll and to carry out its obligations, and the undertakings given by it, hereunder;

(B)	it is duly organised and validly existing under the laws of its jurisdiction of organisation, and the execution of this Deed Poll and the consummation of the transactions contemplated herein have been duly authorised by all necessary action, and no other act or proceeding, corporate or otherwise, on its part is necessary to authorise the execution of this Deed Poll or the consummation of any of the transactions contemplated hereby; and

(C)	it has duly executed and delivered this Deed Poll.

Conformed copy (redacted)


12.2	Costs

The Participating Institution agrees that it shall pay its own costs and expenses in relation to the negotiation, preparation, execution and carrying into effect of this Deed Poll.


12.3	Remedies

The Participating Institution agrees that:


(A)	(without prejudice to any other rights or remedies which any Government Department may have) damages would not be an adequate remedy for any breach by the Participating Institution of the provisions of this Deed Poll and each Government Department shall be entitled to seek the remedies of injunction, specific performance and other equitable relief for any threatened or actual breach of any such provision by the Participating Institution and no proof of special damages shall be necessary for the enforcement by any Government Department of its rights under this Deed Poll;

(B)	no failure of any Government Department to exercise, and no delay by any Government Department in exercising, any right, power or remedy in connection with this Deed Poll will operate as a waiver thereof, nor will any single or partial exercise of any such right preclude any other or further exercise of such right or the exercise of any other right; and

(C)	the rights provided in this Deed Poll are cumulative and not exclusive of any rights (whether provided by law or otherwise).

12.4	Invalidity

If any provision of this Deed Poll shall be held to be illegal, invalid or unenforceable, in whole or in part, under any enactment or rule of law, such provision or part shall to that extent be deemed not to form part of this Deed Poll but the legality, validity and enforceability of the remainder of this Deed Poll shall not be affected.


12.5	Assignment

The Participating Institution agrees that each of the Government Departments may assign their respective rights under this Deed Poll to: (i) a governmental, quasi-governmental or regulatory body; or (ii) a body or entity established by, or owned by, one or more of the Government Departments (including any body or entity established to monitor and administer the APS).


12.6	Variation

Any term of this Deed Poll may be amended, and the observance of any term of this Deed Poll may be waived; (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Government Departments.

Conformed copy (redacted)


12.7	Governing law

This Deed Poll and any non-contractual obligations arising out of or in connection with it shall be governed by and construed in accordance with the laws of England.

Conformed copy (redacted)

IN WITNESS WHEREOF this Deed Poll has been executed and delivered as a deed on 6 March 2009.


Executed and delivered as a deed by	)
LLOYDS BANKING GROUP PLC	)
acting by two directors / one director and its	)	By:	Sir Victor Blank
secretary	)
	)		Chairman
	)
	)
	)
	)	By:	J. Eric Daniels
	)
	)		Group Chief Executive

Exhibit 4(a)(ix)


DATED 3 November 2009

THE LORDS COMMISSIONERS OF HER MAJESTY’S TREASURY

and

LLOYDS BANKING GROUP PLC



	DEED OF WITHDRAWAL
	relating to the UK Asset
	Protection Scheme



	Slaughter and May
	One Bunhill Row
	London - EC1Y 8YY
	(TP/JGZW)
	CA093050005

CONTENTS


1.	DEFINITIONS AND INTERPRETATION	5

2.	CONDITIONS AND EFFECTIVENESS	7

3.	WITHDRAWAL; WITHDRAWAL FEE	7

4.	STATE AID COMMITMENTS; CO-OPERATION	8

5.	REMUNERATION	9

6.	LENDING COMMITMENTS	9

7.	NATIONAL INVESTMENT CORPORATION	10

8.	PRE-ACCESSION COMMITMENTS	10

9.	PUBLIC DISCLOSURE	10

10.	FUNDING ACTIONS	11

11.	BANK CHARGES	11

12.	WARRANTIES	12

13.	RECOVERY OF STATE AID	12

14.	PAYMENTS	13

15.	TAX MATTERS	13

16.	ANNOUNCEMENTS AND PUBLICITY	14

17.	CONFIDENTIALITY; FREEDOM OF INFORMATION	15

18.	ASSIGNMENT	18

19.	REMEDIES	19

20.	FURTHER ASSURANCE	19

21.	INVALIDITY	20

22.	NOTICES	20

23.	CONTRACTS (RIGHTS OF THIRD PARTIES) ACT 1999	21

24.	COUNTERPARTS	21


25.	VARIATION	21

26.	AGENT FOR SERVICE OF PROCESS	22

27.	GOVERNING LAW	22

28.	JURISDICTION	22

THIS DEED OF WITHDRAWAL is made on 3 November 2009

BETWEEN:


(1)	THE LORDS COMMISSIONERS OF HER MAJESTY’S TREASURY of 1 Horse Guards Road, London SW1A 2HQ (the “ Treasury ”); and

(2)	LLOYDS BANKING GROUP PLC , a public company incorporated in Scotland with registered number 095000 and whose registered office is at Henry Duncan House, 120 George Street, Edinburgh, Scotland EH2 4LH (“ LBG ”).

WHEREAS:

(A)	On 19 January 2009, Her Majesty’s Government of the United Kingdom (the “ Government ”) announced its intention to offer the Asset Protection Scheme (the “ Scheme ”) to protect certain eligible financial institutions against exceptional future credit losses on certain portfolios of assets and exposures.

(B)	On 7 March 2009, LBG announced its intention to participate in the Scheme and entered into discussions with the Treasury regarding the terms of the Scheme and the accession of Bank of Scotland plc to it.

(C)	LBG entered into: (i) a Pre-Accession Commitments Deed Poll on 7 March 2009 in which it made certain undertakings to the Treasury in connection with its proposed participation in the Scheme; and (ii) a Lending Commitments Deed Poll on 6 March 2009 in which it made certain undertakings to the Treasury, the Department for Business, Enterprise and Regulatory Reform (now the Department for Business, Innovation and Skills) and the Department for Communities and Local Government in connection with its participation in the credit guarantee scheme announced by the Government on 8 October 2008 and its proposed participation in the Scheme.

(D)	On 3 November 2009, LBG announced its intention not to participate in the Scheme.

(E)	LBG intends to effect the Rights Issue in lieu of its proposed participation in the Scheme and wishes to withdraw from its proposed participation in the Scheme. The implementation of the Rights Issue is to be conditional on the approval by LBG’s shareholders of the Withdrawal Resolution.

(F)	The commitments and undertakings contained in this Deed (including with respect to the Withdrawal Fee) incorporate commitments from LBG to the Treasury that are designed to ensure that the Treasury is able to comply with the commitments or conditions (the “ State Aid Conditions ”) subject to which the European Commission has approved (or it is anticipated will approve) the aid provided by the Treasury to LBG: (i) under the recapitalisation scheme announced by the Government on 8 October 2008; (ii) in connection with LBG’s (or a member of the Group’s) proposed participation in the Scheme; and (iii) in connection with the Rights Issue (together, the “ State Aid ”) as aid compatible with article 87 of the EC Treaty.

NOW THIS DEED WITNESSES AS FOLLOWS:


1.	DEFINITIONS AND INTERPRETATION

1.1	In this Deed (including the Recitals):

	“ Authority ” means: (i) any government; (ii) any governmental or quasi-governmental authority, body, agency or association; (iii) any supranational, federal, state or local government; (iv) any statutory or regulatory body, agency or association; (v) any body, agency or association having the power to impose, collect or administer any Tax; and (vi) any court, tribunal or other judicial body;

	“ Business Day ” means a day (other than a Saturday or a Sunday) on which banks are open for business in London;

	“ Circular ” means the shareholder circular to be published in connection with, amongst other things, the Rights Issue in accordance with the Listing Rules;

	“ Conditions ” has the meaning given in clause 2.2;

	“ EC Treaty ” means the consolidated version of the Treaty establishing the European Community;

	“ FSA ” means the Financial Services Authority including when acting in its capacity as the competent authority for the purposes of Part VI of the FSMA (and any successor authority);

	“ FSMA ” means the Financial Services and Markets Act 2000;

	“ Group ” means LBG and all of its group undertakings (as defined in section 1161(5) of the Companies Act 2006);

	“ Lending Commitments Deed Poll ” means the document entitled “Lending Commitments” referred to in Recital (C)(ii) above;

	“ Listing Rules ” means the listing rules made by the FSA under Part VI of the FSMA;

	“ OFT ” means the Office of Fair Trading (and any successor authority);

	“ Pre-Accession Commitments Deed Poll ” means the document entitled “Asset Protection Scheme: Pre-Accession Commitments” referred to in Recital (C) (i) above;

	“ Proceedings ” means any proceeding, suit or action arising out of or in connection with this Deed, whether contractual or non-contractual;

	“ Representatives ” means: (i) in the context of the Treasury, the Treasury Solicitor, any of Her Majesty’s Secretaries of State (and any other Minister of the Crown), UK Financial Investments Limited, the Asset Protection Agency, and any and all directors,


	officers, officials, employees, agents, professional advisers and contractors of the foregoing; and (ii) in the context of LBG and the Group, directors, officers, employees, agents, professional advisers and contractors;

	“ Rights Issue ” means the rights issue of up to 90,000,000,000 new ordinary shares in LBG expected to be announced on or about the date of this Deed;

	“ Scheme ” has the meaning given to it in Recital (A);

	“ Service Document ” means a claim form, application notice, order, judgment or other document relating to any Proceedings;

	“ State Aid ” has the meaning given to it in Recital (F);

	“ State Aid Approval ” means any state aid approval for the State Aid in its original terms, as supplemented, modified or replaced subject to and in accordance with this Deed;

	“ State Aid Commitments ” means: (i) the commitments set out in the paper entitled “State Aid Commitments” as initialled by or on behalf of both the Treasury and LBG on or before the date of this Deed; and (ii) such other commitments given by LBG to the European Commission in connection with the State Aid Approval, each as supplemented, modified or replaced from time to time subject to and in accordance with this Deed;

	“ State Aid Conditions ” has the meaning given to it in Recital (F);

	“ Tax ” means any tax and any levy, impost, duty or other charge in the nature of taxation (whether of the United Kingdom or elsewhere in the world) and any fine, penalty, charge, cost or interest relating to any of the foregoing;

	“ Treasury Solicitor ” means the Solicitor for the Affairs of Her Majesty’s Treasury;

	“ Withdrawal Fee ” has the meaning given to it in clause 3;

	“ Withdrawal Resolution ” means resolution 4, as set out in the notice of general meeting of LBG contained in the Circular, to approve (amongst other things) the payment of the Withdrawal Fee to the Treasury; and

	“ Working Hours ” means 9.30 a.m. to 5.30 p.m. on a Business Day.

1.2	In this Deed, unless otherwise specified:

	(A)	references to clauses and paragraphs are to clauses and paragraphs of this Deed;

	(B)	the State Aid Commitments, the Remuneration Commitments (as defined in clause 5.1) and the Customer Charter (as defined in clause 6.3) form part of this


		Deed and shall have the same force and effect as if expressly set out in the body of this Deed, and references to this Deed shall include those documents;

	(C)	the words “ include ” and “ including ” shall be deemed to be followed by the phrase “without limitation”;

	(D)	headings and sub-headings in this Deed are included for ease of reference only and shall not affect the interpretation of this Deed;

	(E)	any reference to a “ person ” shall be construed so as to include any individual, firm, company, corporation, body corporate, government, state or agency of a state, local or municipal authority or governmental body or any joint venture, association or partnership (whether or not having separate legal personality);

	(F)	any reference to any statute, statutory provision or rules or regulations made thereunder shall be construed as a reference to the same as it may have been, or may from time to time be, amended, modified, re-enacted or replaced; and

	(G)	a reference to any other document is a reference to that other document as amended, varied or supplemented at any time.

1.3	This Deed is being entered into, amongst other things, in order to implement the State Aid Conditions. If there is: (i) any ambiguity or inconsistency in the provisions of this Deed; or (ii) any dispute as to the interpretation or intended effect of this Deed or any provision contained in it, such ambiguity, inconsistency or dispute shall be resolved, to the extent possible, by reference to the terms of the State Aid Approval.

2.	CONDITIONS AND EFFECTIVENESS

2.1	Subject to clause 2.2, all provisions of this Deed shall have full force and effect upon execution and delivery of this Deed by the parties to it.

2.2	Clauses 3.2, 3. 3 and 4.2 are in all respects conditional on the satisfaction of the following conditions:

	(A)	approval by the shareholders of LBG of the Withdrawal Resolution (the “ Shareholder Approval CP ”); and

	(B)	the State Aid Approval having been obtained (the “ State Aid CP ” and, together with the Shareholder Approval CP, the “ Conditions ”).

3.	WITHDRAWAL; WITHDRAWAL FEE

3.1	LBG acknowledges and agrees that the Treasury shall have no responsibilities, duties, obligations or liabilities to LBG (or any member of the Group) under or in connection with: (i) the Scheme; or (ii) the withdrawal of LBG (or any member of the Group) from its proposed participation in the Scheme, in either case whether in contract, tort (including negligence or breach of statutory duty) or otherwise.


3.2	LBG undertakes to pay (or procure that a member of the Group pays) a fee to the Treasury of £2.5 billion (the “ Withdrawal Fee ”) for the benefits to the Group’s trading operations arising as a result of the Treasury proposing to make the Scheme available to LBG (or a member of the Group).

3.3	The Withdrawal Fee shall be payable within five Business Days of the date on which the last of the Conditions is satisfied.

4.	STATE AID COMMITMENTS; CO-OPERATION

4.1	The Treasury:

	(A)	confirms that it has not submitted to the European Commission a restructuring plan or any commitments in relation to the State Aid that are significantly more onerous for LBG than the State Aid Commitments (as contained in the paper referred to in the definition of that expression) or in any other restructuring plan or submission prepared by or on behalf of LBG that the Treasury has forwarded to the European Commission; and

	(B)	undertakes that it will not submit any such restructuring plan or commitments without first discussing the corresponding submission in good faith with LBG.

4.2	Save to the extent that the State Aid Approval has been annulled or suspended by the Court of First Instance or the European Court of Justice, LBG undertakes to do all acts and things necessary to ensure that the Treasury is able to comply with the State Aid Approval, including:

	(A)	complying (or procuring compliance) with the State Aid Commitments;

	(B)	complying with (or procuring compliance with) the terms of any restructuring plan submitted to and accepted by the European Commission in connection with the State Aid Approval and the State Aid Commitments; and

	(C)	promptly complying with (or procuring compliance with) any and all requests from the Treasury for information, documentation or explanations, and doing all such other acts and things requested in writing by the Treasury, which are in the Treasury’s opinion (acting reasonably):

		(i)	required in order to enable the Treasury or the European Commission to monitor compliance with the State Aid Approval or this Deed; or

		(ii)	required to respond to requests for information, documentation or explanations from the European Commission in relation to the State Aid Approval or monitoring compliance with the State Aid Approval.


5.	REMUNERATION

5.1	LBG undertakes to comply (or procure compliance) with the remuneration constraints and requirements (for 2009) ^*1 ( the “ Remuneration Commitments** ”).

5.2	LBG acknowledges its commitment to the principle that, from 2010, it should be at the leading edge of implementing the G20 principles, the FSA Remuneration Code and any remuneration provisions accepted by the Government from the Walker Review, and that UK Financial Investments Limited, on the Government’s behalf, will engage in proactive consultations with LBG’s board of directors to ensure that these future remuneration arrangements reflect a rigorous assessment of LBG’s performance and support the creation of sustainable value for shareholders (including UK Financial Investments Limited), provided that this principle shall always be applied in such a way as to allow LBG to operate on a level playing field with its competitors.

5.3	For the purpose of clause 5.2, “ FSA Remuneration Code ” means the Remuneration Code of the FSA as published and defined in the FSA’s Senior Management Arrangements, Systems and Controls (Remuneration Code) Instrument 2009 (FSA 2009/48), or any supplementary, replacement or successor code for remuneration policies and practices relating to banking institutions as may be published by the FSA from time to time, whether constituted by rules, guidance or other regulatory provisions made by the FSA or otherwise, provided such supplementary, replacement or successor code applies to both LBG and its competitors.

6.	LENDING COMMITMENTS

6.1	In accordance with paragraph 12.6 of the Lending Commitments Deed Poll the following sub-paragraphs of paragraph 6 of the Lending Commitments Deed Poll are hereby deleted:

	“The Participating Institution will comply with the Lending Commitments in accordance with the provisions of this Deed Poll on the understanding that: (i) the Schemes will be established by the Government; and (ii) the Participating Institution will participate in either or both of the Schemes on terms to be agreed with the Government. It is understood that the Government will, in consultation with the Participating Institution and acting reasonably, make an appropriate Commitment Adjustment if the APS is not implemented within the timeframes anticipated for such implementation; and that if the APS is not implemented within the timeframes anticipated for such implementation and the Participating Institution only participates in the CGS, that the Government will, in consultation with the Participating Institution and acting reasonably, make an appropriate Commitment Adjustment having regard to the quantum of financial support being provided by the Government to the Participating Institution pursuant to the CGS.

	If any preference shares held by the Treasury in the capital of the Participating Institution are exchanged for ordinary shares, the Participating Institution agrees that it shall increase the lending being made available to support creditworthy borrowers in the



¹	*** Indicates omission of material which has been separately filed pursuant to a request for confidential treatment.


	real economy. The quantum of such increased lending shall be determined by reference to the increased lending capacity of the Participating Institution after taking account of the long term effects of the exchange of the preference shares. Such increased lending will take account of demand for business and residential mortgage lending at the Participating Institution’s prevailing terms and conditions, including pricing, and risk assessment; and, additionally, any increased residential mortgage lending will be subject to the applicants meeting the Participating Institution’s standard credit and other acceptance criteria.”.

6.2	Subject to clause 6.1, the provisions of the Lending Commitments Deed Poll shall in all other respects remain unamended and in full force and effect, notwithstanding LBG’s withdrawal from the Scheme.

6.3	LBG undertakes to implement (by no later than 27 November 2009) the customer charter for lending to businesses in the United Kingdom in the form agreed with the Treasury. The customer charter is set out in the paper entitled “Customer Charter for Lending to Businesses” as initialled by or on behalf of both the Treasury and LBG on or before the date of this Deed (the “ Customer Charter ”).

7.	NATIONAL INVESTMENT CORPORATION

7.1	LBG undertakes to contribute to a fund managed by the National Investment Corporation (“ NIC ”) the lower of: (i) £100mn (one hundred million pounds); and (ii) such amount as equals 10% of the total sums invested in such fund.

7.2	Any amount contributed by LBG to NIC in the “2009 commitment period” or the “2010 commitment period” (each as defined in the Lending Commitments Deed Poll) shall be deemed to constitute “lending” for the purposes of the Business Lending Commitments (as defined in the Lending Commitments Deed Poll).

8.	PRE-ACCESSION COMMITMENTS

	The Pre-Accession Commitments Deed Poll is hereby terminated, with the exception of paragraph 9 thereof (and any interpretation provisions necessary for its construction).

9.	PUBLIC DISCLOSURE

9.1	LBG shall ensure that any public financial statements published by it or any other bank in the Group shall: (i) comply with Best Industry Practice in relation to the public financial statements of banking institutions; and (ii) implement and be consistent with any code or statement of best practice on public disclosure for authorised deposit-takers and other banking institutions that may be published by the FSA from time to time.

9.2	LBG shall enter into discussions with the Treasury, each acting in good faith, for the purposes of establishing whether and in what way processes and procedures can be developed in relation to the public financial statements of banking institutions to ensure that such public financial statements, so far as possible:


	(A)	enable investors to assess:

		(i)	the quality of the assets and liabilities of banking institutions and their groups;

		(ii)	the financial position and performance of banking institutions and their groups; and

		(iii)	the nature and extent of risks arising from financial instruments to which banking institutions and their groups are exposed and the manner in which such risks are managed; and

	(B)	are comparable as between similar banking institutions.

9.3	For the purpose of clause 9.1, “ Best Industry Practice ” means the level of skill, care, diligence, prudence, foresight, expertise and experience consistent with the standards which would ordinarily be adhered to by a prudent banking institution in the ordinary course of its business, taking account of: (A) applicable corporate governance and corporate responsibility principles; (B) any published guidance or recommendations (including guidance or recommendations from any Authority in the United Kingdom) relating to good industry practice in the banking and financial sectors as may be published from time to time; and (C) other guidelines, recommendations, methods, practices or procedures which would be adopted or complied with from time to time by a prudent banking institution in the ordinary course of its business.

10.	FUNDING ACTIONS

10.1	LBG undertakes to implement, and give effect to, a detailed medium term funding plan agreed, or to be agreed, with the FSA (the “ Funding Plan ”) and acknowledges that the Funding Plan shall reflect funding actions agreed with the FSA on or prior to the date of this Deed.

10.2	LBG acknowledges and agrees that compliance with the Funding Plan will be monitored by the FSA through its close and continuous supervisory relationship with the Group and through regular regulatory reporting requirements to be determined by the FSA in consultation with LBG.

11.	BANK CHARGES

	LBG undertakes, in relation to personal current accounts (“ PCAs ”) provided by LBG or any member of the Group to:

	(A)	implement in full any agreements that the OFT may make with the banking industry as detailed in the OFT’s report – “Personal current accounts in the UK – A follow up report, October 2009”, relating to the transparency of costs to consumers and the process of switching accounts to another bank and, subject to conflicting demands of integration, LBG commits to adhere to the implementation dates agreed between the OFT and the banking industry and


		will endeavour to effect such implementation as quickly as practicalities and systems allow;

	(B)	implement in full any agreements that the OFT may make with the banking industry (within the scope of the current negotiations with respect thereto) relating to fees and charges, and the terms and conditions of PCAs and, subject to conflicting demands of integration, LBG commits to adhere to the implementation dates agreed between the OFT and the banking industry and will endeavour to effect such implementation as quickly as practicalities and systems allow;

	(C)	play a constructive role in any discussions between the banking industry and the OFT about fees and charges, and the terms and conditions of PCAs; and

	(D)	take reasonable steps to provide such information as is necessary to enable the Treasury or the OFT to monitor LBG’s compliance with paragraphs (A) and (B) above.

12.	WARRANTIES

	LBG represents and warrants to the Treasury on the date of this Deed that:

	(A)	it is duly organised and validly existing under the laws of its jurisdiction of organisation;

	(B)	it has the corporate power and the authority to execute and deliver this Deed and to perform its obligations under this Deed, and no additional act or proceeding, corporate or otherwise, on its part is necessary to authorise the execution and delivery of this Deed or the performance of any of its obligations under this Deed;

	(C)	subject to any principles of law affecting the rights of creditors generally and the provisions of section 117 of the Stamp Act 1891, the obligations expressed to be assumed by LBG under this Deed are legal, valid, binding and enforceable obligations; and

	(D)	it has duly executed and delivered this Deed.

13.	RECOVERY OF STATE AID

13.1	If the European Commission adopts a decision that the United Kingdom must recover any State Aid (a “ Repayment Decision ”) and the recovery order of the Repayment Decision has not been annulled or suspended by the Court of First Instance or the European Court of Justice, then LBG shall repay to the Treasury any aid ordered to be recovered under the Repayment Decision.

13.2	The amount which LBG is obliged to repay to the Treasury under clause 13.1 shall be calculated by the Treasury and shall be calculated in accordance with Council


	Regulation No 659/1999 and Commission Regulation 794/2004 (including with respect to the calculation of payable interest).

14.	PAYMENTS

14.1	Any payment due to the Treasury under this Deed shall be made in pounds sterling to such account as may be notified to LBG in writing by the Treasury from time to time.

14.2	All payments required to be made by LBG (or any member of the Group) under this Deed shall be made in full. They will be free and clear of any right of set-off and from any restriction, condition or deduction because of any counterclaim.

15.	TAX MATTERS

15.1	All payments by LBG (or any member of the Group) pursuant to this Deed shall be paid without any deduction or withholding, unless required by law. If any Tax is required by law to be deducted or withheld from or in connection with any such payment, the amount payable shall be increased so as to ensure that the amount received by the Treasury after such deduction or withholding (including any additional deduction or withholding required as a result of such increase) is equal to the amount which the Treasury would have received if no such deduction or withholding had been required.

15.2	If the Treasury is subject to Tax in respect of any sum payable pursuant to this Deed, or if any such sum is taken into account in computing the profits, income or gains of the Treasury for Tax purposes, the sum payable shall be increased so as to ensure that the amount retained by the Treasury after the payment of such Tax (including any additional Tax payable as a result of such increase) is equal to the amount which the Treasury would have retained in the absence of such Tax. This clause 15.2 shall not apply to the Withdrawal Fee.

15.3	Each sum payable by LBG (or any member of the Group) pursuant to this Deed is expressed exclusive of any amount in respect of VAT which is chargeable on any supply or supplies for which such sum (or any part thereof) is the whole or part of the consideration for VAT purposes. If the Treasury makes (or is deemed to make) any supply for VAT purposes in consideration for such sum (or any part thereof) and VAT is or becomes chargeable in respect of such supply, LBG shall pay (or shall procure that a member of the Group pays) to the Treasury (within 14 days of the receipt of a valid VAT invoice) an additional sum equal to the amount of such VAT.

15.4	If LBG (or any member of the Group) is obliged to pay any sum under or in connection with this Deed by way of indemnity, reimbursement, damages or compensation for or in respect of any liability, damage, cost, demand, charge or expense (the “ Relevant Cost ”), the calculation of such sum shall include an amount determined as follows:

	(A)	If the Relevant Cost is, for VAT purposes, the consideration for a supply of goods or services made to the Treasury (including where such supply is made to the Treasury as agent for LBG (or a member of the Group) within the terms of section 47 of the Value Added Tax Act 1994), such additional amount shall be


		equal to any input VAT which was incurred by the Treasury in respect of that supply and which it is not able to recover from the relevant Tax authority; and

	(B)	if the Relevant Cost is, for VAT purposes, a disbursement incurred by the Treasury as agent on behalf of LBG (or a member of the Group) and the relevant supply is made to LBG (or a member of the Group) for VAT purposes, such additional amount shall be equal to any amount in respect of VAT which was paid in respect of the Relevant Cost by the Treasury, and the Treasury shall use reasonable endeavours to procure that the relevant third party issues a valid VAT invoice in respect of the Relevant Cost to LBG (or the relevant member of the Group).


15.5	LBG shall pay and bear, and shall indemnify the Treasury on demand against, any Stamp Duty which is payable or paid in connection with the execution, delivery, performance or enforcement of this Deed.

15.6	The Treasury shall co-operate in completing any treaty forms or other procedural formalities reasonably requested by LBG for the purpose of enabling LBG (or the relevant member of the Group) to make any payment pursuant to this Deed without any deduction or withholding in respect of Tax.

15.7	For the purposes of this clause 15:

	(A)	“ Stamp Duty ” means any stamp, documentary, registration or capital duty (including stamp duty, stamp duty reserve tax and any other similar duty or similar tax) and any fine, penalty, charge, cost or interest relating thereto; and

	(B)	“ VAT ” means (i) any Tax imposed in conformity with the council directive of 28 November 2006 on the common system of value added tax (EC Directive 2006/112) (including, in relation to the United Kingdom, any value added tax imposed by the Value Added Tax Act 1994 and/or any legislation or regulations supplemental thereto); and (ii) any other Tax of a similar nature (whether imposed in a member state of the European Union in substitution for or in addition to the Tax mentioned above or imposed elsewhere).

16.	ANNOUNCEMENTS AND PUBLICITY

16.1	Subject to this clause 16, LBG shall ensure that no member of the Group nor any of their respective Representatives, shall make, publish, issue or release any announcement or public statement in relation to, or which refers to (i) the Scheme (including LBG’s proposed withdrawal from the Scheme), (ii) this Deed (or any ancillary matter), (iii) the Treasury in connection with the Scheme or this Deed, or (iv) the State Aid Approval, the State Aid or the State Aid Commitments (each, a “ Restricted Statement ”).

16.2	Notwithstanding clause 16.1, each member of the Group may (and each such member’s Representatives may on its behalf) make, publish, issue or release a Restricted Statement provided that such Restricted Statement is made, published, issued or


	released only after giving as much prior notification as is reasonably practicable to, and consulting in good faith to the fullest extent reasonably practicable with, the Treasury with a view to giving the Treasury as much time as is reasonably practicable, in all the circumstances, to review and comment on such Restricted Statement.

16.3	If, in respect of any Restricted Statement, any member of the Group (or any of its Representatives) proposes not to adopt, or does not adopt, any amendment proposed by the Treasury pursuant to clause 16.2, LBG shall procure that such member of the Group or Representative shall (to the extent reasonably practicable, prior to the making, publication, issuance or release of the relevant Restricted Statement or, if not reasonably practicable, promptly thereafter) provide to the Treasury reasons explaining why such amendments are not proposed to be, or were not, adopted.

16.4	If any member of the Group (or any of its Representatives) proposes to make, publish, issue or release a Restricted Statement and either:

	(A)	notification to, and consultation with, the Treasury prior to the making, publication, issuance or release of such Restricted Statement is not permissible under: (i) applicable law; or (ii) the rules of the Bank of England or of any securities exchange, clearing system or Authority (including the FSA) to which it is subject or submits; or

	(B)	the Restricted Statement must be made urgently such that prior notification to or consultation with the Treasury is not reasonably practicable,

	then LBG shall ensure that the relevant member of the Group or Representative shall, as soon as permissible and reasonably practicable, provide a copy of such Restricted Statement to the Treasury, together with a notification providing reasonable details of the circumstances giving rise to the Restricted Statement.

16.5	Notwithstanding clause 16.1, the Representatives of each member of the Group may make on behalf of such member Restricted Statements which are unscripted oral public statements, provided that LBG shall use all reasonable endeavours to ensure that processes are in place with a view to ensuring that any such unscripted oral public statements are consistent with any other Restricted Statements made in accordance with this clause 16 by or on behalf of any member of the Group.

17.	CONFIDENTIALITY; FREEDOM OF INFORMATION

17.1	Each party (the “ first party ”) shall treat as confidential any information that: (i) the Treasury has indicated to the European Commission is covered by the obligation of professional secrecy pursuant to articles 24 and 25 of Council Regulation No 659/1999; and (ii) the other party (or its Representatives) has provided to the first party (or its Representatives) with respect to the matters referred to in this Deed and which each party has agreed should be designated as being confidential (“ Confidential Information ”).

17.2	Each party shall:


	(A)	not disclose any Confidential Information to any person other than to its respective Representatives:

		(i)	in the case of disclosure by the Treasury, to enable or assist the Treasury to fulfil any of the Treasury Permitted Purposes; and

		(ii)	in the case of disclosure by LBG, to the extent that such Representatives require the Confidential Information to enable or assist LBG to comply with its responsibilities and obligations, or exercise its rights, under this Deed;

	(B)	procure that any person to whom any Confidential Information is so disclosed by it complies with the restrictions contained in this clause 17 as if such person were a party to this Deed; and

	(C)	have in place and maintain security measures and procedures to protect the confidentiality of Confidential Information.

17.3	The Treasury shall use (and shall ensure that its Representatives will use) Confidential Information only for the Treasury Permitted Purposes (or, in the case of any person referred to in clause 17.5(B), for the purposes of enabling or assisting such person to fulfil its functions).

17.4	LBG shall use (and shall ensure that its Representatives will use) Confidential Information only to enable or assist LBG to comply with its responsibilities and obligations, and exercise its rights, under this Deed.

17.5	The restrictions in clauses 17.1 and 17.2 shall not prevent the Treasury from disclosing Confidential Information:

	(A)	to the European Commission, if and to the extent that the Treasury considers such disclosure is necessary in connection with (i) the application of the state aid rules of the EC Treaty, (ii) any European Commission decision relating to those rules or (iii) compliance with any of the United Kingdom’s reporting requirements under the State Aid Approval;

	(B)	to the FSA, the Bank of England, the National Audit Office, the Cabinet Office or any successor organisation of any of the foregoing to the extent that the Treasury considers that such disclosure is required to enable or assist: (i) the Treasury to fulfil any of the Treasury Permitted Purposes; or (ii) the FSA, the Bank of England, the National Audit Office and the Cabinet Office (or any of their respective successors) to fulfil their respective functions;

	(C)	to Parliament or to any Parliamentary committee (including the Public Accounts Committee, the House of Commons Treasury Select Committee and any Select Committee of the Parliament of the United Kingdom), in each case if and to the extent that the Treasury considers it appropriate to do so, provided that (where lawful and considered reasonably practicable by the Treasury (but excluding


		any disclosure comprised in any unscripted oral statement)) the Treasury shall use reasonable endeavours to notify LBG of the Confidential Information to be disclosed;

	(D)	in order to comply with the Treasury’s responsibilities and obligations, and exercising the Treasury’s rights, powers and discretions, under or in connection with the State Aid Approval;

	(E)	to assist with providing or enabling the provision of financial support to LBG or protecting or enhancing the stability of the financial system of the United Kingdom; and

	(F)	discharging the Treasury’s responsibilities and functions.

17.6	The restrictions in clauses 17.1 and 17.2 shall not prevent the Treasury or LBG from disclosing Confidential Information:

	(A)	which is required by: (i) applicable law; (ii) the rules of the Bank of England or of any securities exchange, clearing system or Authority (including the FSA) to which it is subject or submits; (iii) the FSA with respect to the matters described in clause 10; or (iv) the OFT with respect to the matters described in clause 11;

	(B)	if and to the extent required for the purpose of any judicial proceedings; or

	(C)	if and to the extent the information has come into the public domain through no fault of that party.

17.7	If the Treasury is requested to disclose any Confidential Information pursuant to the provisions of the Freedom of Information Act (the “ FOI Act ”, and such a request, an “ FOI Request ”), the Treasury shall (to the extent practicable and permissible under the FOI Act and consistent with the Code of Practice of the Secretary of State for Constitutional Affairs on discharge of public authorities’ functions under Part 1 of the FOI Act):

	(A)	notify LBG in writing of the nature and content of such FOI Request as soon as practicable;

	(B)	prior to the making of a disclosure pursuant to an FOI Request, for a period of no less than 5 Business Days consult with LBG as to: (i) whether such FOI Request is valid; (ii) whether or not disclosure pursuant to the FOI Act is required; and (iii) (if the Treasury determines that disclosure pursuant to the FOI Act is required) the scope and content of any proposed disclosure; and

	(C)	(if the Treasury determines that disclosure pursuant to the FOI Act is required and LBG has objected to such disclosure or the extent of the proposed disclosure) give LBG as much prior notice as is reasonably practicable prior to such disclosure being made.


17.8	LBG acknowledges that the provision of information to the Treasury as provided for in this Deed is important, amongst other things, to enable the Treasury to monitor the performance by LBG of its responsibilities, duties and obligations under this Deed (including, in particular, with respect to compliance with the State Aid Approval). If LBG considers (having taken appropriate external legal advice) that applicable law, or pre-existing contractual restrictions, prevent or restrict the disclosure of any such information to the Treasury, it shall:

	(A)	notify the Treasury of the information to which such restrictions relate together with reasonable details of the legal or contractual restrictions which prevent or restrict such disclosure; and

	(B)	in determining whether to disclose such information, consider in good faith whether: (i) the balance of public interest; (ii) the nature of its responsibilities, duties and obligations under this Deed; and (iii) any duties of confidentiality owed by the Treasury to it, are such that the information should nevertheless be disclosed to the Treasury.

17.9	No provision in this Deed shall require LBG (or any member of the Group) to provide any information protected by legal professional privilege or litigation privilege.

17.10	For the purposes of this clause 17, “ Treasury Permitted Purposes ” means: (i) complying with the Treasury’s responsibilities and obligations, and exercising its rights, powers and discretions, under or in connection with this Deed (including with respect to the State Aid Approval); (ii) providing or enabling the provision of financial support to LBG or protecting or enhancing the stability of the financial system of the United Kingdom; (iii) reporting on compliance with this Deed by LBG (including with respect to the State Aid Approval); and (iv) discharging the Treasury’s responsibilities and functions.

18.	ASSIGNMENT

18.1	The Treasury may effect a Transfer to any Government Entity on such terms as it considers appropriate.

18.2	The Treasury shall effect a Transfer by giving not less than 10 Business Days prior written notice to LBG specifying the identity of the transferee and the rights, powers, discretions or obligations under this Deed that are to be the subject of the Transfer (the “ Substituted Rights and Obligations ”).

18.3	If a notification is given by the Treasury pursuant to clause 18.2, LBG shall enter into such further agreements as are necessary in order to substitute the relevant transferee for the Treasury in respect of the Substituted Rights and Obligations.

18.4	For the purpose of this clause 18:

	(A)	“ Transfer ” means: (i) the assignment of all or any part of the Treasury’s rights and benefits of or under this Deed; (ii) the declaration of a trust in respect of or


		the entry into of any arrangement whereby the Treasury agrees to hold in trust for any person all or any part of the benefit of, or its rights or benefits under, this Deed; or (iii) the transfer (whether by way of novation, sub-contract, delegation or otherwise), or the entry into an arrangement whereby any person is to perform, any or all of the Treasury’s obligations under this Deed; and

	(B)	“ Government Entity ” means: (i) any department, non-departmental public body, authority or agency of Her Majesty’s Government of the United Kingdom or the Crown; (ii) any of Her Majesty’s Secretaries of State and any other Minister of the Crown; (iii) the Treasury Solicitor; (iv) any body corporate established by statute some or all of the members of which are appointed by a Secretary of State or Minister of the Crown; (v) UK Financial Investments Limited; (vi) any quasi-governmental or regulatory body; and (vii) any other entity or person directly or indirectly owned or established by, or held on trust for, any of the foregoing.

19.	REMEDIES

19.1	No delay or omission by the Treasury or LBG (as the case may be) in exercising any right, power or remedy provided by law or under or pursuant to the Deed shall: (i) affect that right, power or remedy; or (ii) operate as a waiver of it.

19.2	The single or partial exercise by the Treasury of any right, power or remedy provided by law or under or pursuant to this Deed shall not, unless otherwise expressly stated, preclude any other or further exercise of it or the exercise of any other right, power or remedy.

19.3	Any right of the Treasury is cumulative and not exclusive of any other right (whether provided by law or otherwise).

19.4	LBG acknowledges and agrees that: (i) breaches by it of this Deed may result in injury to the public and/or third parties rather than injury specific to the Treasury; and/or (ii) damages may not be an adequate remedy for any breach of any of this Deed, and further acknowledges and agrees that, without prejudice to any other rights or remedies which the Treasury may have, whether pursuant to a provision of this Deed or otherwise equitable relief (including specific performance and injunction) for any such breach (or potential breach) will normally be appropriate. LBG agrees not to raise any objection to any application by the Treasury for any such remedies.

20.	FURTHER ASSURANCE

	LBG shall, at its own cost, from time to time on request, do or procure the doing of all acts and/or execute or procure the execution of all documents in a form satisfactory to the Treasury for giving full effect to this Deed and securing the full benefit of the rights, powers and remedies conferred upon the Treasury in this Deed.


21.	INVALIDITY

	If any provision of this Deed shall be held to be illegal, invalid or unenforceable, in whole or in part, under any enactment or rule of law, such provision or part shall to that extent be deemed not to form part of this Deed but the legality, validity and enforceability of the remainder of this Deed shall not be affected.

22.	NOTICES

22.1	Except as otherwise provided in this Deed, a notice under this Deed shall only be effective if it is in writing. Facsimile transmissions are permitted but email is not.

22.2	Notices under this Deed shall be sent to a party to this Deed at its address or number and for the attention of the individual set out below:


Party and title of individual	Address	Facsimile no.


LBG	Henry Duncan House
	120 George St
	Edinburgh
	Scotland EH2 4LH

	Attention: Company Secretary

Treasury	1 Horse Guards Road	0207 270 4844
	London SW1A 2HQ

	Attention: Nikhil Rathi (team leader,
	financial stability)


	provided that a party may change its notice details on giving notice to the other party of the change in accordance with this clause 22. That notice shall only be effective on the day falling five clear Business Days after the notification has been received or such later date as may be specified in the notice.

22.3	Any notice given under this Deed shall, in the absence of earlier receipt, be deemed to have been duly given as follows:

	(A)	if delivered personally, on delivery;

	(B)	if sent by first class post, two clear Business Days after the date of posting; and

	(C)	if sent by facsimile, when despatched.

22.4	Any notice given under this Deed outside Working Hours in the place to which it is addressed shall be deemed not to have been given until the start of the next period of Working Hours in such place.


22.5	The provisions of this clause 22 shall not apply in relation to the service of Service Documents.

23.	CONTRACTS (RIGHTS OF THIRD PARTIES) ACT 1999

23.1	Clauses 10 and 11 (the “ Third Party Provisions ”) confer a benefit on certain persons named therein who are not a party to this Deed (each, a “ Third Party ”). The Third Party Provisions are intended to be enforceable by each Third Party by virtue of the Contract (Rights of Third Parties) Act 1999.

23.2	Other than the Third Party Provisions, the parties to this Deed do not intend that any term of this Deed should be enforceable, by virtue of the Contracts (Rights of Third Parties) Act 1999, by any person who is not a party to this Deed.

23.3	Notwithstanding clause 23.1, any amendment to this Deed may be effected without the consent of any Third Party.

24.	COUNTERPARTS

	This Deed may be executed in any number of counterparts, and by the parties on separate counterparts, but shall not be effective until each party has executed at least one counterpart. Each counterpart shall constitute an original of this Deed, but all the counterparts together shall constitute one and the same instrument.

25.	VARIATION

25.1	Any term of this Deed may be amended, and the observance of any term of this Deed may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Treasury.

25.2	Subject to clause 25.3, and except where a State Aid Approval has been annulled or suspended by the Court of First Instance or the European Court of Justice, if the Treasury considers at any time that it is necessary to modify the State Aid Commitments: (i) in order to reflect that the conditions subject to which it was anticipated the European Commission would give the State Aid Approval are different from the conditions subject to which the European Commission ultimately does give the State Aid Approval; or (ii) to reflect a change to the State Aid Approval, then, in either case, the Treasury may by notice (but subject to its obligation to consult in good faith with LBG pursuant to clause 4.1) supplement, modify, replace or delete any part of the State Aid Commitments in such a manner as the Treasury considers necessary (acting reasonably).

25.3	If, at any time following receipt of State Aid Approval, the Treasury or the European Commission seeks to supplement, modify or replace any part of the State Aid Conditions or a State Aid Approval, then LBG and the Treasury will each cooperate in good faith with a view to agreeing an appropriate response to such proposals. However, the Treasury will not, without the consent of LBG (acting reasonably) agree to any such supplement, modification or replacement that would have the effect of making


	any of the State Aid Conditions or a State Aid Approval significantly more onerous to LBG.

26.	AGENT FOR SERVICE OF PROCESS

26.1	LBG irrevocably appoints Lloyds TSB Bank plc of 25 Gresham Street, London EC2V 7HN to be its agent for the receipt of Service Documents. It agrees that any Service Document may be effectively served on it in connection with Proceedings in England and Wales by service on its agent effected in any manner permitted by the Civil Procedure Rules.

26.2	If the agent at any time ceases for any reason to act as such, LBG shall appoint a replacement agent having an address for service in England or Wales and shall notify the Treasury of the name and address of the replacement agent. Failing such appointment and notification, the Treasury shall be entitled by notice to LBG to appoint a replacement agent to act on behalf of LBG. The provisions of this clause 26 applying to service on an agent apply equally to service on a replacement agent.

26.3	A copy of any Service Document served on an agent shall be sent by post to LBG. Failure or delay in so doing shall not prejudice the effectiveness of service of the Service Document.

27.	GOVERNING LAW

	This Deed shall be governed by and construed in accordance with the laws of England.

28.	JURISDICTION

28.1	The courts of England are to have exclusive jurisdiction to settle any Proceedings arising out of or in connection with this Deed.

28.2	Each party waives (and agrees not to raise) any objection, on the ground of forum non conveniens or on any other ground, to the taking of Proceedings by another party in the courts of England. Each party to this Deed also agrees that a judgment against it in Proceedings brought in England in accordance with this clause 28 shall be conclusive and binding upon it and may be enforced in any other jurisdiction.

28.3	Each party irrevocably submits and agrees to submit to the jurisdiction of the English courts.

IN WITNESS WHEREOF this document has been executed and delivered as a deed the day and year first before written.


Executed as a deed by two of	)
THE LORDS COMMISSIONERS OF HER	)
MAJESTY’S TREASURY	)	By:
	)
	) ) )
	) ) )	By:


Executed as a deed by	)
LLOYDS BANKING GROUP PLC	)
acting by a director and its secretary/two	)	By:
directors:	)
	)
	)		Director
	)
	)	By:
	)
	)
			Director/Secretary

CA093050005

IN WITNESS WHEREOF this document has been executed and delivered as a deed the day and year first before written.


Executed as a deed by two of	)
THE LORDS COMMISSIONERS OF HER	)
MAJESTY’S TREASURY	)	By:
	)
	) ) )
	) ) )	By:


Executed as a deed by LLOYDS BANKING GROUP PLC acting by a director and its secretary/two directors:	)
	)
	) ) )	By:
	) ) )
	)
	)		Director
	) ) )

		By:


			Director/Secretary

CA093050005

Exhibit 4(a)(x)

Dated: 3 November 2009

THE LORDS COMMISSIONERS OF HER MAJESTY’S TREASURY

and

LLOYDS BANKING GROUP PLC

UNDERTAKING TO SUBSCRIBE
and related matters

Slaughter and May
One Bunhill Row
London EC1Y 8YY
(JAYP/MDSC)

CD093010014

CONTENTS


		Page

1.	DEFINITIONS AND INTERPRETATION	1

2.	EFFECTIVENESS	7

3.	UNDERTAKING TO SUBSCRIBE	7

4.	WARRANTIES	11

5.	TAX MATTERS	11

6.	ANNOUNCEMENTS AND PUBLICITY	14

7.	CONFIDENTIALITY; FREEDOM OF INFORMATION	15

8.	ASSIGNMENT	17

9.	REMEDIES	18

10.	INVALIDITY	18

11.	NOTICES	19

12.	CONTRACTS (RIGHTS OF THIRD PARTIES) ACT 1999	20

13.	COUNTERPARTS	20

14.	VARIATION	20

15.	TERMINATION	20

16.	AGENT FOR SERVICE OF PROCESS	20

17.	GOVERNING LAW	21

18.	JURISDICTION	21


THIS DEED is made on 3 November 2009

BETWEEN:

(1)	THE LORDS COMMISSIONERS OF HER MAJESTY’S TREASURY of 1 Horse Guards Road, London SW1A 2HQ (the “ Treasury ”); and

(2)	LLOYDS BANKING GROUP PLC , a public company incorporated in Scotland with registered number 095000 and whose registered office is at Henry Duncan House, 120 George Street, Edinburgh, Scotland EH2 4LH (“ LBG ”).

WHEREAS:

(A)	LBG intends to effect the Rights Issue (as defined below).

(B)	The Treasury Solicitor (as nominee of the Treasury) is, at the date of this Deed, the registered owner of 11,798,531,471 Ordinary Shares (each as defined below).

(C)	Subject to the terms and conditions set out in this Deed, the Treasury has agreed to procure that the Treasury Solicitor (i) votes in favour of all of the Resolutions in accordance with the recommendation of the board of LBG (except for the HMT Resolution); and (ii) takes up (as nominee of the Treasury) the Treasury’s rights to subscribe for all of the HMT Rights Issue Shares to be issued under the Rights Issue, in consideration, inter alia, for which LBG has agreed to pay to the Treasury the HMT Commitment Commission (each as defined below).

NOW THIS DEED WITNESSES AS FOLLOWS:

1.	DEFINITIONS AND INTERPRETATION

1.1	In this Deed (including the Recitals):

	“ Acceptance ” has the meaning given in clause 3.2(A);

	“ Acceptance Date ” has the meaning given in clause 3.2(A);

	“ Admission ” means the admission of the HMT Rights Issue Shares (nil paid) to the Official List of the UK Listing Authority becoming effective and the admission of such shares (nil paid) to trading on the main market for listed securities of the London Stock Exchange plc becoming effective;

	“ Authority ” means: (i) any government; (ii) any governmental or quasi-governmental authority, body, agency or association; (iii) any supranational, federal, state or local government; (iv) any statutory or regulatory body, agency or association; (v) any body, agency or association having the power to impose, collect or administer any Tax; and (vi) any court, tribunal or other judicial body;

	“ Base Fee ” means 2.25 per cent. of the Issue Price;


	“ Business Day ” means a day (other than a Saturday or a Sunday) on which banks are open for business in London;

	“ Circular ” means the shareholder circular to be published in connection with, amongst other things, the Rights Issue in accordance with the Listing Rules;

	“ Claims ” means any and all claims, actions, liabilities, demands, proceedings, regulatory or governmental investigations, judgments or awards whatsoever (and, in each case, whether or not successful, compromised or settled and whether joint or several) threatened, asserted, established or instituted against or otherwise involving any person, and “ Claim ” shall be construed accordingly;

	“ Confidential Information ” has the meaning given in clause 7.1;

	“ EC Treaty ” means the consolidated version of the Treaty establishing the European Community;

	“ Exchange Offer Memoranda ” has the meaning given in the Underwriting Agreement;

	“ HMT Commitment Commission ” has the meaning given in clause 3.3;

	“ FOI Act ” has the meaning given in clause 7.7;

	“ FOI Request ” has the meaning given in clause 7.7;

	“ FSA ” means the Financial Services Authority including when acting in its capacity as the competent authority for the purposes of Part VI of the FSMA (and any successor authority);

	“ FSMA ” means the Financial Services and Markets Act 2000;

	“ GM ” means the general meeting of LBG at which the Resolutions are proposed;

	“ Government Entity ” has the meaning given in clause 8.4(B);

	“ Group ” means LBG and all of its group undertakings (as defined in section 1161(5) of the Companies Act 2006);

	“ HMT Resolution ” means resolution 4, as set out in the notice of GM contained in the Circular, regarding certain transactions involving the Treasury;

	“ HMT Rights Issue Shares ” means the new Ordinary Shares which are to be offered in respect of the Relevant Shares pursuant to the Rights Issue;

	“ Issue Price ” means the higher of (i) 15 pence per HMT Rights Issue Share; and (ii) such other issue price per HMT Rights Issue Share as shall be determined in accordance with clause 2.5 of the Underwriting Agreement, in which case this term shall mean such revised price;


	“ Joint Global Co-ordinators ” means Citigroup Global Markets U.K. Equity Limited, Merrill Lynch International and UBS Limited, as appointed by LBG pursuant to the terms of the Underwriting Agreement in relation to the Rights Issue;

	“ Listing Rules ” means the listing rules made by the FSA under Part VI of the FSMA;

	“ Losses ” means any and all loss, damage, cost, liability, demand, charge or expense (including legal fees) which any person may suffer or incur (including, but not limited to, all Losses suffered or incurred in investigating, preparing for or disputing or defending or settling any Claim and/or in establishing its right to be indemnified pursuant to clause 3.6 and/or in seeking advice regarding any Claim or in any way related to or in connection with the indemnity contained in clause 3.6), and “Loss” shall be construed accordingly;

	“ Ordinary Shares ” means the ordinary shares of 25 pence each in the capital of LBG, or following the Share Capital Subdivision becoming effective, ordinary shares of 10 pence each in the capital of LBG;

	“ PALs ” means the renounceable provisional allotment letters expected to be sent to certain shareholders of LBG in connection with the Rights Issue;

	“ Per Share Discretionary Fee ” means the aggregate pounds sterling amount (if any) paid by LBG to any and all of the Joint Bookrunners as a discretionary fee, pursuant to and in accordance with clauses 10.2 and 10.6 of the Underwriting Agreement, divided by the aggregate number of Underwritten Shares (each as defined in the Underwriting Agreement);

	“ Pre-Marketing ” means any and all contacts, presentations, discussions, road-shows, conversations and other marketing or investor-education activities effected by or on behalf of LBG in relation to the Rights Issue or other associated transactions prior to the release of the Press Announcement, including the disclosure of information in respect of (amongst other things) the Scheme, the “stress test” analysis performed by the FSA in relation to the capital of LBG, the State Aid Approval, the prospective terms of the Rights Issue and other transactions contemplated by the Prospectus, and the possible intentions of the Treasury, the European Commission and the FSA in relation to those and other associated matters;

	“ Press Announcement ” means the press announcement to be released by LBG giving details of, amongst other things, the Rights Issue;

	“ Proceedings ” means any proceeding, suit or action arising out of or in connection with this Deed, whether contractual or non-contractual;

	“ Proposals Resolutions ” means Resolutions 1, 2, 4, 6, 7, 8, 9 and 11 as set out in the notice of general meeting of LBG contained in the Circular;

	“ Prospectus ” means the prospectus to be issued by LBG in respect of the Rights Issue in accordance with the Prospectus Rules;


	“ Prospectus Rules ” means the prospectus rules made by the FSA under Part VI of the FSMA;

	“ Relevant Cost ” has the meaning given in clause 5.4;

	“ Relevant Documents ” has the meaning given in the Underwriting Agreement;

	“ Relevant Person ” means the Treasury, the Treasury Solicitor, any of Her Majesty’s Secretaries of State (and any other Minister of the Crown), UK Financial Investments Limited, the Asset Protection Agency, and any and all directors, officers, officials, employees and agents of the foregoing;

	“ Relevant Shares ” means the Ordinary Shares which are held by the Treasury Solicitor (as nominee of the Treasury) from time to time;

	“ Representatives ” means: (i) in the context of the Treasury, the Treasury Solicitor, any of Her Majesty’s Secretaries of State (and any other Minister of the Crown), UK Financial Investments Limited, the Asset Protection Agency, and any and all directors, officers, officials, employees, agents, professional advisers and contractors of the foregoing; and (ii) in the context of LBG and the Group, directors, officers, employees, agents, professional advisers and contractors;

	“ Resolutions ” means all of the resolutions set out in the notice of general meeting of LBG contained in the Circular, to approve (amongst other things): (i) the payment of the HMT Commitment Commission by LBG to the Treasury; and (ii) the Rights Issue;

	“ Restricted Statement ” has the meaning given In clause 6.1;

	“ Rights Issue ” means the rights issue of up to 90,000,000,000 new Ordinary Shares expected to be announced on or about the date of this Deed;

	“ Scheme ” means the Asset Protection Scheme, announced by the Government of the United Kingdom on 19 January 2009;

	“ Securities Act ” means the US Securities Act of 1933, as amended, and the rules promulgated thereunder;

	“ Service Document ” means a claim form, application notice, order, judgment or other document relating to any Proceedings;

	“ Share Capital Subdivision ” means the proposed subdivision and conversion of the Company’s ordinary share capital described in the Circular and the Prospectus;

	“ Stamp Tax ” means any stamp, documentary, registration or capital duty or tax (including stamp duty, stamp duty reserve tax and any other similar duty or similar tax) and any fine, penalty, charge, cost or interest relating thereto;


	“ State Aid Approval ” means the approval or anticipated approval, subject to certain conditions, by the European Commission of the aid provided by the Treasury to LBG: (i) under the recapitalisation scheme, announced by the Government on 8 October 2008; (ii) in connection with LBG’s (or a member of the Group’s) proposed participation in the Scheme; and (iii) in connection with any aspect of the Rights Issue as aid compatible with article 87 of the EC Treaty;

	“ Subscription Proceeds ” has the meaning given in clause 3.2(B);

	“ Substituted Rights and Obligations ” has the meaning given in clause 8.2;

	“ Tax ” or “ Taxation ” means all forms of taxation and statutory, governmental, state, provincial, local governmental or municipal impositions, duties, contributions and levies (including, for the avoidance of doubt, Stamp Tax), in each case in the nature of taxation, duty, contribution or levy, whether of the United Kingdom or elsewhere in the world whenever imposed and whether chargeable directly or primarily against or attributable directly or primarily to any member of the Group or any other person and all penalties, charges, costs and interest relating thereto;

	“ Transfer ” has the meaning given in clause 8.4(A);

	“ Treasury Permitted Purposes ” means: (i) complying with the Treasury’s responsibilities and obligations, and exercising its rights, powers and discretions, under or in connection with this Deed; (ii) providing or enabling the provision of financial support to LBG or protecting or enhancing the stability of the financial system of the United Kingdom; and (iii) discharging the Treasury’s responsibilities and functions;

	“ Treasury Solicitor ” means the Solicitor for the Affairs of Her Majesty’s Treasury;

	“ Undertakings ” means the undertakings given by the Treasury provided for in clauses 3.1 and 3.2;

	“ Underwriting Agreement ” means the underwriting agreement between, inter alia, LBG, Merrill Lynch International, UBS Limited, Citigroup Global Markets U.K. Equity Limited, Goldman Sachs International, HSBC Bank plc, J.P. Morgan Securities Ltd and J.P. Morgan Cazenove Limited, of even date hereof, in relation to the proposed Rights Issue;

	“ Underwriting Warranties ” has the meaning given in clause 3.5;

	“ VAT ” means (i) any Tax imposed in conformity with the council directive of 28 November 2006 on the common system of value added tax (EC Directive 2006/112) (including, in relation to the United Kingdom, any value added tax imposed by the Value Added Tax Act 1994 and/or any legislation or regulations supplemental thereto); and (ii) any other Tax of a similar nature (whether imposed in a member state of the European Union in substitution for or in addition to the Tax mentioned above or imposed elsewhere); and


	“ Working Hours ” means 9.30 a.m. to 5.30 p.m. on a Business Day.

1.2	In this Deed, unless otherwise specified:

	(A)	references to clauses and paragraphs are to clauses and paragraphs of this Deed;

	(B)	the words “ include ” and “ including ” shall be deemed to be followed by the phrase “without limitation”;

	(C)	headings and sub-headings in this Deed are included for ease of reference only and shall not affect the interpretation of this Deed;

	(D)	any reference to a “ person ” shall be construed so as to include any individual, firm, company, corporation, body corporate, government, state or agency of a state, local or municipal authority or governmental body or any joint venture, association or partnership (whether or not having separate legal personality);

	(E)	any reference to any statute, statutory provision or rules or regulations made thereunder shall be construed as a reference to the same as it may have been, or may from time to time be, amended, modified, re-enacted or replaced; and

	(F)	a reference to any other document to which both the Treasury and LBG are party is a reference to that other document as amended, varied or supplemented at any time.

1.3	Any reference to any indemnity, covenant to pay or payment (a “ Payment Obligation ”) being given or made on an “after-Tax basis” or expressed to be calculated on an “after-Tax basis” means that, in calculating the amount payable pursuant to such Payment Obligation (the “ Payment ”), there shall be taken into account (if and to the extent that the same has not already been taken into account in the calculation of the Payment):

	(A)	any Tax suffered by the person entitled to receive the Payment to the extent that it arises as a result of the matter giving rise to the Payment Obligation or as a result of receiving, or being entitled to receive, the Payment; and

	(B)	any relief, exemption, allowance or credit which is available to set against any Tax otherwise payable or against any income, profits or gains for Tax purposes, and any right to any refund or reimbursement of any Tax, which in each case is available to the person entitled to receive the Payment if and to the extent that the same arises as a result of the matter giving rise to the Payment Obligation or as a result of receiving, or being entitled to receive, the Payment,

	such that the person entitled to receive the Payment is in the same economic position after Tax that it would have been in if the matter giving rise to the Payment Obligation had not occurred.


2.	EFFECTIVENESS

2.1	All provisions of this Deed shall have full force and effect upon execution and delivery of this Deed by the parties to it.

2.2	The Treasury shall cease to be bound by the Undertakings if:

	(A)	the Press Announcement is not released through a regulatory information service at or before 7.00 a.m. on the date of this Deed, or such later time and/or date as LBG and the Joint Global Co-ordinators may agree in writing pursuant to, and in accordance with, the Underwriting Agreement;

	(B)	the Prospectus is not published in accordance with the Prospectus Rules at or before 7.00 a.m. on the date of this Deed, or such later time and/or date as LBG and the Joint Global Co-ordinators may agree in writing pursuant to, and in accordance with, the Underwriting Agreement;

	(C)	a new Issue Price in excess of 15 pence is determined in accordance with clause 2.5 of the Underwriting Agreement, and the press announcement and pricing statement giving details of the revised Issue Price is not released through a regulatory information service at or before 7.00 a.m. on 24 November 2009;

	(D)	any of the Proposal Resolutions is not passed at the GM on the date for which it has been convened (or, to the extent as LBG and the Joint Global Co-ordinators may agree in writing pursuant to, and in accordance with, the Underwriting Agreement, any adjournment thereof); or

	(E)	Admission does not occur at or before 8.00 a.m. on 27 November 2009, or such later time and/or date as LBG and the Joint Global Co-ordinators may agree in writing pursuant to, and in accordance with, the Underwriting Agreement.

3.	UNDERTAKING TO SUBSCRIBE

3.1	Subject to clauses 2.2(A), (B) and (C), the Treasury hereby irrevocably undertakes to LBG to procure that the Treasury Solicitor shall exercise, or procure the exercise of, all voting rights attaching to the Relevant Shares on all of the Resolutions in accordance with the recommendation of the board of LBG (except for Resolution 4, as set out in the notice of general meeting of LBG contained in the Circular).

3.2	Subject to clause 2.2, the Treasury hereby irrevocably undertakes to LBG to procure that the Treasury Solicitor shall:

	(A)	prior to the latest time and date for acceptance under the Rights Issue (the “ Acceptance Date ”), apply and subscribe (as nominee for the Treasury) (unless otherwise agreed in this Deed, on the terms set out in the Prospectus, any pricing statement published by LBG and, where relevant, the terms of the PALs)


		for all of the HMT Rights Issue Shares under the Rights Issue each at the Issue Price (the “ Acceptance ”);

	(B)	ensure that payment in cash consideration (within the meaning given by section 583 of the Companies Act 2006), in pounds sterling and in a manner which is not prohibited by section 587 of the Companies Act 2006, is made to LBG (or as otherwise directed by LBG) in respect of the aggregate subscription price for the HMT Rights Issue Shares subscribed by the Treasury, being the Issue Price multiplied by the number of HMT Rights Issue Shares, (the “ Subscription Proceeds ”) at or prior to 11.00 a.m. on the Acceptance Date; and

	(C)	unless otherwise agreed with LBG, not dispose of the Relevant Shares, any other Ordinary Shares or any interest (as such term is defined in Section 820 of the Companies Act 2006) therein or any right relating to the HMT Rights Issue Shares prior to the earliest to occur of: (i) the Rights Issue closing; (ii) the Rights Issue lapsing or being terminated in accordance with its terms; (iii) LBG confirming in writing that it has no further intention to proceed with the Rights Issue; and (iv) 31 December 2009.

3.3	Conditional upon the Acceptance and the receipt by LBG of the Subscription Proceeds, LBG shall pay, or procure that one of its subsidiaries shall pay, to the Treasury (or to such other person as the Treasury may direct) in cash, in pounds sterling, a fee equal to:

	(A)	the Base Fee multiplied by the aggregate number of HMT Rights Issue Shares (the “ Base Fee Amount ”); plus

	(B)	the Per Share Discretionary Fee multiplied by the aggregate number of HMT Rights Issue Shares,

	in consideration, inter alia, for the Treasury giving the Undertakings (the “ HMT Commitment Commission ”).

3.4	LBG shall pay, or procure that one of its subsidiaries shall pay, the HMT Commitment Commission to the Treasury not later than the fifth Business Days following the Acceptance Date (provided that payment of the Subscription Proceeds has been made in accordance with clause 3.2(B)). Without prejudice to its right to receive payment of the HMT Commitment Commission directly from LBG, or one of its subsidiaries, pursuant to this Clause 3.4, the Treasury shall be entitled and is authorised to set-off the Base Fee Amount (or any portion thereof) against its obligation to pay the Subscription Proceeds. In the event that the Base Fee Amount (or any portion thereof) is set-off against the Treasury’s obligation to pay the Subscription Proceeds, then such Base Fee Amount (or such portion thereof) shall be deducted from the Subscription Proceeds in full satisfaction of LBG’s obligation to pay the Base Fee Amount (or such portion thereof) pursuant to this Deed and in full satisfaction of the Treasury’s obligation to pay that portion of the Subscription Proceeds.


9

3.5	Without prejudice to the provisions of clause 4, LBG represents, warrants and undertakes to the Treasury that each statement set out in Schedule 3 to the Underwriting Agreement (together, the “ Underwriting Warranties ”) is true and accurate and not misleading on the date of this Deed and shall remain true and accurate and not misleading and shall be repeated at any Re-Pricing Date (as defined in the Underwriting Agreement), at Admission, at the Acceptance Date, at any Time of Sale (as defined in the Underwriting Agreement), at the Settlement Date (as defined in the Underwriting Agreement) and on the date of publication of any supplementary prospectus, in each case, by reference to the facts and circumstances then existing (subject to any such matters and facts fairly disclosed in any supplementary prospectus published prior to the relevant date). The provisions of clauses 12.2, 12.4, 12.5, 12.6, 12.7, 12.8 and 12.14 of the Underwriting Agreement shall apply, mutatis mutandis, to this clause 3.5 as if such provisions were repeated herein (and all references in such provisions to: (i) the “Banks”, the “Underwriters” or “Joint Global Co-ordinators” shall be deemed to be references to the Treasury; and (ii) the “Underwritten Shares” shall be deemed to be references to the HMT Rights Issue Shares).

3.6	Without restricting the rights of the Treasury or its ability to claim damages on any basis, LBG agrees to fully and effectively indemnify and hold harmless each Relevant Person on an after-Tax basis (whether or not the relevant Loss or Claim is suffered or incurred or arises in respect of circumstances or events existing or occurring before, on or after the date of this Deed and regardless of the jurisdiction in which such Loss or Claim is suffered or incurred) from and against any and all Losses or Claims whatsoever, as incurred, if such Losses or Claims arise directly or indirectly out of, or are attributable to, or connected with, anything done or omitted to be done by any person (including by the applicable Relevant Person) in connection with the Pre-Marketing, the Share Capital Subdivision, the Rights Issue, Admission, or the arrangements contemplated by the Prospectus, the Circular, the PALs, the Press Announcement, any other Relevant Document and/or either of the Exchange Offer Memoranda (or any amendment or supplement to any of them), or this Deed or any other agreement relating to the Rights Issue, including any and all Losses or Claims whatsoever, as incurred, in connection with or arising out of:

	(A)	the Prospectus, the Circular, the PALs, the Press Announcement, any other Relevant Document, either of the Exchange Offer Memoranda and/or any materials used for the purposes of the Pre-Marketing (or any amendment or supplement to any of them) not containing or fairly presenting, or being alleged not to contain or not to fairly present, all information required to be contained therein, or arising out of any untrue or inaccurate statement or alleged untrue or inaccurate statement of a material fact contained in any such documents or materials (or any amendment or supplement to any of them), or the omission or alleged omission therefrom of a fact necessary in order to make the statements therein not misleading in any material respect, or any statement therein being or alleged to be in any respect not based on reasonable grounds, in the light of the circumstances in which they were made; and/or

	(B)	any breach or alleged breach by LBG of any of the Underwriting Warranties,


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	PROVIDED THAT, the indemnity contained in this clause 3.6 shall not apply to any Losses or Claims: (i) if and to the extent arising out of a decline in market value of the HMT Rights Issue Shares suffered or incurred by any Relevant Person as a result of HM Treasury having subscribed for the HMT Rights Issue Shares pursuant to this Deed save to the extent such decline is caused by or results from or is attributable to or would not have arisen but for (in each case directly or indirectly) (aa) the neglect or default of LBG in relation to the content, publication, issue or distribution of the Prospectus, the Circular, the PALs, the Press Announcement, any other Relevant Document, either of the Exchange Offer Memoranda and/or any materials used for the purposes of the Pre-Marketing or (bb) any of the matters referred to in clause 3.6(A); and/or (ii) if and to the extent that they are Losses or Claims in respect of Tax which are covered by clause 5 (or which would have been so covered but for any exclusion contained in clause 5).

3.7	The provisions of clause 18.10 of the Underwriting Agreement shall apply, mutatis mutandis, to clause 3.6 as if such provisions were repeated therein (and all references in such provisions to: (i) the “Banks” or any “Underwriter” shall be deemed to be references to the Treasury; (ii) any “Indemnified Person” shall be deemed to be references to any Relevant Person; and (iii) the “Underwritten Shares” shall be deemed to be references to the HMT Rights Issue Shares).

3.8	The provisions of clause 15 of the Underwriting Agreement (Contribution), except clause 15.7 of the Underwriting Agreement, shall apply, mutatis mutandis, to this Deed as if such provisions were repeated therein (and all references in such provisions to: (i) Clause 14 shall be deemed to be references to clause 3.6, above; (ii) the “Company” shall be deemed to be references to LBG; (iii) the “Joint Bookrunners”, “Banks” or any “Underwriter” shall be deemed to be references to the Treasury; (iv) any “Indemnified Person” shall be deemed to be references to any Relevant Person; (v) the “Rights Issue (excluding the HMT Shares)” shall be deemed to be references to the subscription by the Treasury of the HMT Rights Issue Shares; and (vi) the “Underwritten Shares” shall be deemed to be references to the HMT Rights Issue Shares). For the purposes of this clause 3.8, each Relevant Person shall have the same rights to contribution as the Treasury.

3.9	LBG acknowledges and agrees that: (i) no Relevant Person accepts any responsibility for the contents of, or makes any representation or warranty as to the accuracy, completeness or fairness of any information in, the Prospectus, either of the Exchange Offer Memoranda or the Circular (or any supplement or amendment to either of them); and (ii) no Relevant Person has authorised or will authorise the contents of the Prospectus, either of the Exchange Offer Memoranda or the Circular. LBG shall include a disclaimer to the above effect in the Prospectus, both of the Exchange Offer Memoranda and the Circular.

3.10	Each of the Treasury and the Treasury Solicitor hereby irrevocably waives any statutory right to withdraw any acceptance which may arise pursuant to section 87Q(4) of the FSMA on the publication of a supplementary prospectus in connection with the Rights Issue. For the avoidance of doubt, this clause 3.10 shall be without prejudice to the Treasury’s rights under clause 2.2 and 15.


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4.	WARRANTIES

4.1	LBG represents and warrants to the Treasury on the date of this Deed that:

	(A)	it is duly organised and validly existing under the laws of its jurisdiction of organisation;

	(B)	it has the corporate power and the authority to execute and deliver this Deed and to perform its obligations under this Deed, and no additional act or proceeding, corporate or otherwise, on its part is necessary to authorise the execution and delivery of this Deed or the performance of any of its obligations under this Deed;

	(C)	subject to any principles of law affecting the rights of creditors generally and the provisions of section 117 of the Stamp Act 1891, the obligations expressed to be assumed by LBG under this Deed are legal, valid, binding and enforceable obligations; and

	(D)	it has duly executed and delivered this Deed.

4.2	The Treasury represents and warrants to LBG on the date of this Deed that:

	(A)	neither the Treasury, UK Financial Investments Limited nor any person acting on its or their behalf (other than any party to the Underwriting Agreement or any of their respective affiliates, as to whom the Treasury gives no undertaking) has engaged or will engage in any “directed selling efforts” (within the meaning of Rule 902(c) of Regulation S under the Securities Act) with respect to the HMT Rights Issue Shares, the PALs, the nil paid rights or the fully paid rights to the HMT Rights Issue Shares; and

	(B)	neither the Treasury, UK Financial Investments Limited nor any person acting on its or their behalf (other than any party to the Underwriting Agreement or any of their respective affiliates, as to whom the Treasury gives no undertaking) has engaged or will engage in any form of “general solicitation” or “general advertising” (within the meaning of Rule 502(c) of Regulation D under the Securities Act) in the United States in connection with any offer or sale of the HMT Rights Issue Shares, the PALs, the nil paid rights or the fully paid rights to the HMT Rights Issue Shares or has offered or will offer to sell or solicited or will solicit offers to buy any of the HMT Rights Issue Shares, the PALs, the nil paid rights or the fully paid rights to the HMT Rights Issue Shares in any manner involving a public offering in the United States within the meaning of Section 4(2) of the Securities Act.

5.	TAX MATTERS

5.1	All payments by LBG (or any member of the Group) pursuant to this Deed shall be paid without any deduction or withholding, unless required by law. If any Tax is required by law to be deducted or withheld from or in connection with any such payment, the


12

	amount payable shall be increased so as to ensure that the amount received by the Treasury (or any other Relevant Person) after such deduction or withholding (including, for the avoidance of doubt, any additional deduction or withholding required as a result of such increase) is equal to the amount which the Treasury (or such Relevant Person) would have received if no such deduction or withholding had been required.

5.2	If the Treasury (or any other Relevant Person) is subject to Tax in respect of any sum payable pursuant to this Deed, or if any such sum is taken into account in computing the profits, income or gains of the Treasury (or any other Relevant Person) for Tax purposes, the sum payable shall be increased so as to ensure that the amount retained by the Treasury (or such other Relevant Person) after the payment of such Tax (including, for the avoidance of doubt, any additional Tax payable as a result of such increase) is equal to the amount which the Treasury (or such other Relevant Person) would have retained in the absence of such Tax. This clause 5.2 shall not apply to the HMT Commitment Commission or to the extent that any such Tax has been taken into account as a result of the application of clause 1.3.

5.3	Each sum payable by LBG (or any member of the Group) pursuant to this Deed is expressed exclusive of any amount in respect of VAT which is chargeable on any supply or supplies for which such sum (or any part thereof) is the whole or part of the consideration for VAT purposes. If the Treasury (or any other Relevant Person) makes (or is deemed to make) any supply for VAT purposes in consideration for such sum (or any part thereof) and VAT is or becomes chargeable in respect of such supply, LBG shall pay (or shall procure that a member of the Group pays) to the Treasury (or such other Relevant Person), within 14 days of the receipt of a valid VAT invoice, an additional sum equal to the amount of such VAT.

5,4	If LBG (or any member of the Group) is obliged to pay any sum under or in connection with this Deed by way of indemnity (including under clause 3.6), reimbursement, damages or compensation for or in respect of any liability, damage, cost, demand, charge or expense (the “ Relevant Cost ”), the calculation of such sum shall include an amount determined as follows:

	(A)	if the Relevant Cost is, for VAT purposes, the consideration for a supply of goods or services made to the Treasury (or any other Relevant Person) (including where such supply is made to the Treasury as agent for LBG (or a member of the Group) within the terms of section 47 of the Value Added Tax Act 1994), such additional amount shall be equal to any input VAT which was incurred by the Treasury (or such other Relevant Person) in respect of that supply and which it is not able to recover from the relevant Tax authority; and

	(B)	if the Relevant Cost is, for VAT purposes, a disbursement incurred by the Treasury (or any other Relevant Person) as agent on behalf of LBG (or a member of the Group) and the relevant supply is made to LBG (or a member of the Group) for VAT purposes, such additional amount shall be equal to any amount in respect of VAT which was paid in respect of the Relevant Cost by the Treasury (or such other Relevant Person), and the Treasury shall use reasonable endeavours to procure that the relevant third party issues a valid


13

		VAT invoice in respect of the Relevant Cost to LBG (or the relevant member of the Group).

5.5	LBG shall pay and bear any Stamp Tax which is payable or paid (whether by the Treasury, any other Relevant Person or otherwise) in connection with the allotment and issue of the HMT Rights Issue Shares, the delivery of the HMT Rights Issue Shares and/or the acquisition of the HMT Rights Issue Shares in the manner contemplated by this Deed or the Underwriting Agreement or the execution, delivery, performance or enforcement of this Deed, and LBG shall indemnify the Treasury and each other Relevant Person on demand on an after-Tax basis in respect of such Stamp Tax, provided that this clause 5.5 shall not apply to:

	(A)	any Stamp Tax payable in respect of transfers of, or agreements to transfer, HMT Rights Issue Shares subsequent to any such HMT Rights Issue Shares having been acquired by the Treasury in the manner contemplated by this Deed; or

	(B)	any stamp duty chargeable at a rate determined under section 67 or 70 of the Finance Act 1986 or stamp duty reserve tax chargeable under section 93 or 96 of the Finance Act 1986.

	References in this clause 5.5 to HMT Rights Issue Shares include any interest in or rights to allotment of HMT Rights Issue Shares.

5.6	If LBG (or any member of the Group) makes an increased payment to the Treasury or any other Relevant Person in accordance with clause 5.1 or 5.2 and the Treasury or such other Relevant Person (as the case may be) determines in good faith that it has obtained, utilised and retained a relief from Tax or a refund of Tax which is attributable to such increased payment made by LBG (or any member of the Group), then the Treasury or such other Relevant Person (as the case may be) shall reimburse to LBG (for itself or on behalf of the relevant member of the Group) as soon as reasonably practicable an amount equal to such proportion of the Tax so saved or refunded as will leave the Treasury or such other Relevant Person (as the case may be), after such reimbursement, in the same after-Tax position (having regard to the time value of money) that it would have been in if the circumstances giving rise to such additional payment had not arisen. For the avoidance of doubt, nothing in this Deed shall require the Treasury or any other Relevant Person to disclose any information in relation to its Tax affairs to LBG (or any other member of the Group) or any person acting for or on behalf of LBG (or any other member of the Group).

5.7	The Treasury shall co-operate in completing any treaty forms or other procedural formalities reasonably requested by LBG for the purpose of enabling LBG (or the relevant member of the Group) to make any payment pursuant to this Deed without any deduction or withholding in respect of Tax.


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6.	ANNOUNCEMENTS AND PUBLICITY

6.1	Subject to the other provisions of this clause 6, LBG shall ensure that no member of the Group nor any of their respective Representatives, shall make, publish, issue or release any announcement or public statement in relation to, or which refers to: (i) this Deed (or any ancillary matter); or (ii) the Treasury in connection with this Deed (each, a “ Restricted Statement ”), save for such Restricted Statements as are contained in the Press Announcement, the Prospectus or any supplement thereto.

6.2	Notwithstanding clause 6.1, each member of the Group may (and each such member’s Representatives may on its behalf) make, publish, issue or release a Restricted Statement provided that such Restricted Statement is made, published, issued or released only after giving as much prior notification as is reasonably practicable to, and consulting in good faith to the fullest extent reasonably practicable with, the Treasury with a view to giving the Treasury as much time as is reasonably practicable, in all the circumstances, to review and comment on such Restricted Statement.

6.3	If, in respect of any Restricted Statement, any member of the Group (or any of its Representatives) proposes not to adopt, or does not adopt, any amendment proposed by the Treasury pursuant to clause 6.2, LBG shall procure that such member of the Group or Representative shall (to the extent reasonably practicable, prior to the making, publication, issuance or release of the relevant Restricted Statement or, if not reasonably practicable, promptly thereafter) provide to the Treasury reasons explaining why such amendments are not proposed to be, or were not, adopted.

6.4	If any member of the Group (or any of its Representatives) proposes to make, publish, issue or release a Restricted Statement and either:

	(A)	notification to, and consultation with, the Treasury prior to the making, publication, issuance or release of such Restricted Statement is not permissible under: (i) applicable law; or (ii) the rules of the Bank of England or of any securities exchange, clearing system or Authority (including the FSA) to which it is subject or submits; or

	(B)	the Restricted Statement must be made urgently such that prior notification to or consultation with the Treasury is not reasonably practicable,

	then LBG shall ensure that the relevant member of the Group or Representative shall, as soon as permissible and reasonably practicable, provide a copy of such Restricted Statement to the Treasury, together with a notification providing reasonable details of the circumstances giving rise to the Restricted Statement.

6.5	Notwithstanding clause 6.1, the Representatives of each member of the Group may make on behalf of such member Restricted Statements which are unscripted oral public statements, provided that LBG shall use all reasonable endeavours to ensure that processes are in place with a view to ensuring that any such unscripted oral public statements are consistent with any other Restricted Statements made in accordance with this clause 6 by or on behalf of any member of the Group.


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7.	CONFIDENTIALITY; FREEDOM OF INFORMATION

7.1	Each party (the “ first party ”) shall treat as confidential any information that the other party (or its Representatives) has provided to the first party (or its Representatives) with respect to the matters referred to in this Deed and which each party has agreed should be designated as being confidential (“ Confidential Information ”).

7.2	Each party shall:

	(A)	not disclose any Confidential Information to any person other than to its respective Representatives:

		(i)	in the case of disclosure by the Treasury, to enable or assist the Treasury to fulfil any of the Treasury Permitted Purposes; and

		(ii)	in the case of disclosure by LBG, to the extent that such Representatives require the Confidential Information to enable or assist LBG to effect the Rights Issue or to comply with its responsibilities and obligations, or exercise its rights, under this Deed;

	(B)	procure that any person to whom any Confidential Information is so disclosed by it complies with the restrictions contained in this clause 7 as if such person were a party to this Deed; and

	(C)	have in place and maintain security measures and procedures to protect the confidentiality of Confidential Information.

7.3	The Treasury shall use (and shall ensure that its Representatives will use) Confidential Information only for the Treasury Permitted Purposes (or, in the case of any person referred to in clause 7.5(B), for the purposes of enabling or assisting such person to fulfil its functions).

7.4	LBG shall use (and shall ensure that its Representatives will use) Confidential Information only to effect the Rights Issue or to enable or assist LBG to comply with its responsibilities and obligations, and exercise its rights, under this Deed.

7.5	The restrictions in clauses 7.1 and 7.2 shall not prevent the Treasury from disclosing Confidential Information:

	(A)	to the European Commission, if and to the extent that the Treasury considers such disclosure is necessary in connection with (i) the application of the state aid rules of the EC Treaty, (ii) any European Commission decision relating to those rules or (iii) compliance with any of the United Kingdom’s reporting requirements under the State Aid Approval;

	(B)	to the FSA, the Bank of England, the National Audit Office, the Cabinet Office or any successor organisation of any of the foregoing to the extent that the Treasury considers that such disclosure is required to enable or assist: (i) the


16

		Treasury to fulfil any of the Treasury Permitted Purposes; or (ii) the FSA, the Bank Of England, the National Audit Office and the Cabinet Office (or any of their respective successors) to fulfil their respective functions;

	(C)	to Parliament or to any Parliamentary committee (including the Public Accounts Committee, the House of Commons Treasury Select Committee and any Select Committee of the Parliament of the United Kingdom), in each case if and to the extent that the Treasury considers it appropriate to do so, provided that (where lawful and considered reasonably practicable by the Treasury (but excluding any disclosure comprised in any unscripted oral statement)) the Treasury shall use reasonable endeavours to notify LBG of the Confidential Information to be disclosed;

	(D)	in order to comply with the Treasury’s responsibilities and obligations, and exercising the Treasury’s rights, powers and discretions, under or in connection with the State Aid Approval;

	(E)	to assist with providing or enabling the provision of financial support to LBG or protecting or enhancing the stability of the financial system of the United Kingdom; and

	(F)	discharging the Treasury’s responsibilities and functions.

7.6	The restrictions in clauses 7.1 and 7.2 shall not prevent the Treasury or LBG from disclosing Confidential Information:

	(A)	which is required by: (i) applicable law; or (ii) the rules of the Bank of England or of any securities exchange, clearing system or Authority (including the FSA) to which it is subject or submits;

	(B)	if and to the extent required for the purpose of any judicial proceedings; or

	(C)	if and to the extent the information has come into the public domain through no fault of that party.

7.7	If the Treasury is requested to disclose any Confidential Information pursuant to the provisions of the Freedom of Information Act (the “ FOI Act ”, and such a request, an “ FOI Request ”), the Treasury shall (to the extent practicable and permissible under the FOI Act and consistent with the Code of Practice of the Secretary of State for Constitutional Affairs on discharge of public authorities’ functions under Part 1 of the FOI Act):

	(A)	notify LBG in writing of the nature and content of such FOI Request as soon as practicable;

	(B)	prior to the making of a disclosure pursuant to an FOI Request, for a period of no less than five Business Days consult with LBG as to: (i) whether such FOI Request is valid; (ii) whether or not disclosure pursuant to the FOI Act is


17

		required; and (iii) (if the Treasury determines that disclosure pursuant to the FOI Act is required) the scope and content of any proposed disclosure; and

	(C)	(if the Treasury determines that disclosure pursuant to the FOI Act is required and LBG has objected to such disclosure or the extent of the proposed disclosure) give LBG as much prior notice as is reasonably practicable prior to such disclosure being made.

7.8	LBG acknowledges that the provision of information to the Treasury as provided for in this Deed is important, amongst other things, to enable the Treasury to monitor the performance by LBG of its responsibilities, duties and obligations under this Deed (including, in particular, with respect to compliance with the State Aid Approval). If LBG considers (having taken appropriate external legal advice) that applicable law, or pre-existing contractual restrictions, prevent or restrict the disclosure of any such information to the Treasury, it shall:

	(A)	notify the Treasury of the information to which such restrictions relate together with reasonable details of the legal or contractual restrictions which prevent or restrict such disclosure; and

	(B)	in determining whether to disclose such information, consider in good faith whether: (i) the balance of public interest, (ii) the nature of its responsibilities, duties and obligations under this Deed; and (iii) any duties of confidentiality owed by the Treasury to it, are such that the information should nevertheless be disclosed to the Treasury.

7.9	No provision in this Deed shall require LBG (or any member of the Group) to provide any information protected by legal professional privilege or litigation privilege.

8.	ASSIGNMENT

8.1	Following the Acceptance Date, the Treasury may effect a Transfer to any Government Entity on such terms as it considers appropriate.

8.2	The Treasury shall effect a Transfer by giving not less than 10 Business Days’ prior written notice to LBG specifying the identity of the transferee and the rights, powers, discretions or obligations under this Deed that are to be the subject of the Transfer (the “ Substituted Rights and Obligations ”).

8.3	If a notification is given by the Treasury pursuant to clause 8.2, LBG shall enter into such further agreements as are necessary in order to substitute the relevant transferee for the Treasury in respect of the Substituted Rights and Obligations.

8.4	For the purpose of this clause 8:

	(A)	“ Transfer ” means: (i) the assignment of all or any part of the Treasury’s rights and benefits of or under this Deed; (ii) the declaration of a trust in respect of or the entry into of any arrangement whereby the Treasury agrees to hold in trust


18

		for any person all or any part of the benefit of, or its rights or benefits under, this Deed; or (iii) the transfer (whether by way of novation, sub-contract, delegation or otherwise), or the entry into an arrangement whereby any person is to perform, any or all of the Treasury’s obligations under this Deed; and

	(B)	“ Government Entity ” means: (i) any department, non-departmental public body, authority or agency of Her Majesty’s Government of the United Kingdom or the Crown; (ii) any of Her Majesty’s Secretaries of State and any other Minister of the Crown; (iii) the Treasury Solicitor; (iv) any body corporate established by statute some or all of the members of which are appointed by a Secretary of State or Minister of the Crown; (v) UK Financial Investments Limited; (vi) any quasi-governmental or regulatory body; and (vi) any other entity or person directly or indirectly owned or established by, or held on trust for, any of the foregoing.

9.	REMEDIES

9.1	No delay or omission by the Treasury or LBG (as the case may be) in exercising any right, power or remedy provided by law or under or pursuant to the Deed shall: (i) affect that right, power or remedy; or (ii) operate as a waiver of it.

9.2	The single or partial exercise by the Treasury of any right, power or remedy provided by law or under or pursuant to this Deed shall not, unless otherwise expressly stated, preclude any other or further exercise of it or the exercise of any other right, power or remedy.

9.3	Any right of the Treasury is cumulative and not exclusive of any other right (whether provided by law or otherwise).

9.4	LBG acknowledges and agrees that: (i) breaches by it of this Deed may result in injury to the public and/or third parties rather than injury specific to the Treasury; and/or (ii) damages may not be an adequate remedy for any breach of any of this Deed, and further acknowledges and agrees that, without prejudice to any other rights or remedies which the Treasury may have, whether pursuant to a provision of this Deed or otherwise, equitable relief (including specific performance and injunction) for any such breach (or potential breach) will normally be appropriate. LBG agrees not to raise any objection to any application by the Treasury for any such remedies.

10.	INVALIDITY

	If any provision of this Deed shall be held to be illegal, invalid or unenforceable, in whole or in part, under any enactment or rule of law, such provision or part shall to that extent be deemed not to form part of this Deed but the legality, validity and enforceability of the remainder of this Deed shall not be affected.


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11.	NOTICES

11.1	Except as otherwise provided in this Deed, a notice under this Deed shall only be effective if it is in writing. Facsimile transmissions are permitted but email is not.

11.2	Notices under this Deed shall be sent to a party to this Deed at its address or number and for the attention of the individual set out below:


Party and title of individual	Address	Facsimile no.


LBG	Henry Duncan House	020 7356 2168
	120 George St
	Edinburgh
	Scotland EH2 4LH

	Attention: Company Secretary

Treasury	1 Horse Guards Road	020 7270 4844
	London SW1A 2HQ

	Attention: Nikhil Rathi (team
	leader, financial stability)


	provided that a party may change its notice details on giving notice to the other party of the change in accordance with this clause 11. That notice shall only be effective on the day falling five clear Business Days after the notification has been received or such later date as may be specified in the notice.

11.3	Any notice given under this Deed shall, in the absence of earlier receipt, be deemed to have been duly given as follows:

	(A)	if delivered personally, on delivery;

	(B)	if sent by first class post, two clear Business Days after the date of posting; and

	(C)	if sent by facsimile, when despatched.

11.4	Any notice given under this Deed outside Working Hours in the place to which it is addressed shall be deemed not to have been given until the start of the next period of Working Hours in such place.

11.5	The provisions of this clause 11 shall not apply in relation to the service of Service Documents.


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12.	CONTRACTS (RIGHTS OF THIRD PARTIES) ACT 1999

12.1	Clauses 3.6, 3.8 and 3.9 confer benefits on certain persons named therein who are not a party to this Deed (each, a “ Third Party ”). Clauses 3.6, 3.8 and 3.9 are intended to be enforceable by each Third Party by virtue of the Contract (Rights of Third Parties) Act 1999.

12.2	Other than in respect of clauses 3.6, 3.8 and 3.9, the parties to this Deed do not intend that any term of this Deed should be enforceable, by virtue of the Contracts (Rights of Third Parties) Act 1999, by any person who is not a party to this Deed.

12.3	No Third Party may enforce, or take any step to enforce, the provisions of clauses 3.6, 3.8 or 3.9 without the prior written consent of the Treasury, which may, if given, be given on and subject to such terms as the Treasury may determine.

12.4	Notwithstanding clause 12.1, any amendment to this Deed may be effected without the consent of any Third Party.

13.	COUNTERPARTS

	This Deed may be executed in any number of counterparts, and by the parties on separate counterparts, but shall not be effective until each party has executed at least one counterpart. Each counterpart shall constitute an original of this Deed, but all the counterparts together shall constitute one and the same instrument.

14.	VARIATION

14.1	Any term of this Deed may be amended, and the observance of any term of this Deed may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Treasury.

14.2	LBG agrees with HM Treasury that it shall not amend, vary or supplement any term of the Underwriting Agreement at any time (except with regard to execution of any Re-Pricing Memorandum as contemplated by clause 2.5 of the Underwriting Agreement), without the prior written consent of the Treasury.

15.	TERMINATION

15.1	The Treasury shall be entitled to terminate this Deed if any of the conditions in clause 2 have not been satisfied by 31 December 2009.

15.2	Any right of rescission is hereby expressly waived and excluded by the Treasury.

16.	AGENT FOR SERVICE OF PROCESS

16.1	LBG irrevocably appoints Lloyds TSB Bank plc of 25 Gresham Street, London EC2V 7HN to be its agent for the receipt of Service Documents. It agrees that any Service Document may be effectively served on it in connection with Proceedings in England


21

	and Wales by service on its agent effected in any manner permitted by the Civil Procedure Rules.

16.2	If the agent at any time ceases for any reason to act as such, LBG shall appoint a replacement agent having an address for service in England or Wales and shall notify the Treasury of the name and address of the replacement agent. Failing such appointment and notification, the Treasury shall be entitled by notice to LBG to appoint a replacement agent to act on behalf of LBG. The provisions of this clause 16 applying to service on an agent apply equally to service on a replacement agent.

16.3	A copy of any Service Document served on an agent shall be sent by post to LBG. Failure or delay in so doing shall not prejudice the effectiveness of service of the Service Document.

17.	GOVERNING LAW

	This Deed shall be governed by and construed in accordance with the laws of England.

18.	JURISDICTION

18.1	The courts of England are to have exclusive jurisdiction to settle any Proceedings arising out of or in connection with this Deed.

18.2	Each party waives (and agrees not to raise) any objection, on the ground of forum non conveniens or on any other ground, to the taking of Proceedings by another party in the courts of England. Each party to this Deed also agrees that a judgment against it in Proceedings brought in England in accordance with this clause 18 shall be conclusive and binding upon it and may be enforced in any other jurisdiction.

18.3	Each party irrevocably submits and agrees to submit to the jurisdiction of the English courts.

IN WITNESS WHEREOF this document has been executed and delivered as a deed the day and year first before written.


Executed as a deed by two of	)
THE LORDS COMMISSIONERS OF HER	)
MAJESTY’S TREASURY	)	By:
	)
	) )
	) )	By:


Executed as a deed by two of	)
LLOYDS BANKING GROUP PLC	)
acting by a director and its secretary/two	)	By:
directors	)
	)		Director
	)
		By:

			Director/Secretary

IN WITNESS WHEREOF this document has been executed and delivered as a deed the day and year first before written.


Executed as a deed by two of	)
THE LORDS COMMISSIONERS OF HER	)
MAJESTY’S TREASURY	)	By:
	)
	) )
	) )	By:


Executed as a deed by two of LLOYDS BANKING GROUP PLC acting by a director and its secretary/two directors	)
	)
	) ) )	By:
	) ) )

	)		Director


		By:

			Director/Secretary

Exhibit 4(a)(xi)

DATED 2 November 2009

THE LORDS COMMISSIONERS OF HER MAJESTY’S TREASURY

and

LLOYDS BANKING GROUP PLC

COSTS REIMBURSEMENT DEED

relating to the UK Asset

Protection Scheme

Slaughter and May

One Bunhill Row

London EC1Y 8YY

(TP/JGZW)

CA093060014

CONTENTS


1.	DEFINITIONS AND INTERPRETATION	3

2.	FEES, COSTS AND EXPENSES	4

3.	PAYMENTS	6

4.	TAX MATTERS	6

5.	ANNOUNCEMENTS AND PUBLICITY	8

6.	WARRANTIES	9

7.	NOTICES	9

8.	MISCELLANEOUS	10

9.	GOVERNING LAW; JURISDICTION	11


THIS DEED OF WITHDRAWAL is made on 2 November 2009

BETWEEN:

(1)	THE LORDS COMMISSIONERS OF HER MAJESTY’S TREASURY of 1 Horse Guards Road, London SW1A 2HQ (the “ Treasury ”); and

(2)	LLOYDS BANKING GROUP PLC , a public company incorporated in Scotland with registered number 095000 and whose registered office is at Henry Duncan House, 120 George Street, Edinburgh, Scotland EH2 4LH (“ LBG ”).

WHEREAS:

(A)	On 19 January 2009, Her Majesty’s Government of the United Kingdom (the “ Government ”) announced its intention to offer the Asset Protection Scheme (the “ Scheme” ) to protect certain eligible financial institutions against exceptional future credit losses on certain portfolios of assets and exposures.

(B)	On 7 March 2009, LBG announced its intention to participate in the Scheme and entered into discussions with the Treasury regarding the terms of the Scheme and the accession of Bank of Scotland plc to it. On 3 November 2009, LBG expects, subject to agreeing final documentation, to announce its intention not to participate in the Scheme.

(C)	Pursuant to this Deed, and in connection with (amongst other things) its withdrawal from the Scheme, LBG has undertaken to reimburse the Treasury for certain fees, costs and expenses associated with the Scheme and certain ancillary matters.

NOW THIS DEED WITNESSES AS FOLLOWS:

1.	DEFINITIONS AND INTERPRETATION

1.1	In this Deed (including the Recitals):

	“ Business Day ” means a day (other than a Saturday or a Sunday) on which banks are open for business in London;

	“ Deed of Withdrawal ” means the deed so entitled which is proposed to be entered into between LBG and the Treasury in connection with (amongst other things) LBG’s proposed withdrawal from the Scheme;

	“ Group ” means LBG and all of its group undertakings (as defined in section 1161(5) of the Companies Act 2006);

	“ Representatives ” means: (i) in the context of the Treasury, the Treasury Solicitor, any of Her Majesty’s Secretaries of State (and any other Minister of the Crown), UK Financial Investments Limited, the Asset Protection Agency, and any and all directors, officers, officials, employees, agents, professional advisers and contractors of the foregoing; and (ii) in the context of LBG and the Group, directors, officers, employees, agents, professional advisers and contractors;


	“ State Aid ” means the aid provided by the Treasury to LBG: (i) under the recapitalisation scheme announced by the Government on 8 October 2008; (ii) in connection with LBG’s (or a member of the Group’s) proposed participation in the Scheme; and (iii) in connection with LBG’s proposed capital raising by way of a rights issue;

	“ State Aid Approval ” means any state aid approval for the State Aid in its original terms and as supplemented, modified or replaced from time to time in accordance with the Deed of Withdrawal;

	“ State Aid Commitments ” means the commitments given by LBG to the European Commission in connection with the State Aid Approval as supplemented, modified or replaced from time to time in accordance with the Deed of Withdrawal;

	“ Tax ” means any tax and any levy, impost, duty or other charge in the nature of taxation (whether of the United Kingdom or elsewhere in the world) and any fine, penalty, charge, cost or interest relating to any of the foregoing; and

	“ Treasury Solicitor ” means the Solicitor for the Affairs of Her Majesty’s Treasury.

1.2	In this Deed, unless otherwise specified:

	(A)	references to clauses are to clauses of this Deed;

	(B)	the words “ include ” and “ including ” shall be deemed to be followed by the phrase “without limitation”;

	(C)	headings and sub-headings in this Deed are included for ease of reference only and shall not affect the interpretation of this Deed;

	(D)	any reference to a “ person ” shall be construed so as to include any individual, firm, company, corporation, body corporate, government, state or agency of a state, local or municipal authority or governmental body or any joint venture, association or partnership (whether or not having separate legal personality);

	(E)	any reference to any statute, statutory provision or rules or regulations made thereunder shall be construed as a reference to the same as it may have been, or may from time to time be, amended, modified, re-enacted or replaced; and

	(F)	a reference to any other document is a reference to that other document as amended, varied or supplemented at any time.

2.	FEES, COSTS AND EXPENSES

2.1	LBG shall procure that it and the members of the Group shall bear all costs and expenses incurred by it and the other members of the Group arising out of or in connection with: (i) the proposed participation of LBG (or any member of the Group) in, and withdrawal from, the Scheme; and (ii) the performance of its duties and obligations


	under this Deed and the Deed of Withdrawal (including with respect to the State Aid Commitments).

2.2	LBG shall pay (or shall procure that the members of the Group shall pay) to the Treasury the costs and expenses calculated by the Treasury as being incurred by the Treasury, the Treasury Solicitor, UK Financial Investments Limited and the Asset Protection Agency in connection with:

	(A)	the proposed participation of LBG (or any member of the Group) in, and withdrawal from, the Scheme (including: (i) the preparation and negotiation of the documentation associated with the Scheme; (ii) the preparation, negotiation, execution and carrying into effect of the documentation associated with LBG’s, and any member of the Group’s, withdrawal from the Scheme; (iii) due diligence and valuation associated with LBG’s, and any member of the Group’s, proposed participation in, and withdrawal from, the Scheme; and (iv) the establishment of the Asset Protection Agency and any winding-down of functions of the Asset Protection Agency resulting from the withdrawal of LBG and each member of the Group from the Scheme);

	(B)	discussions and negotiations with the European Commission in relation to the State Aid Approval; and

	(C)	the exercise by the Treasury of its rights and powers under, and the performance of the Treasury’s duties and obligations in connection with the matters contemplated by, this Deed and the Deed of Withdrawal (including with respect to: (i) the preparation, negotiation, execution and carrying into effect of this Deed and the Deed of Withdrawal; (ii) the Treasury’s compliance with the State Aid Approval; and (iii) monitoring and ensuring LBG’s compliance with the State Aid Commitments and any other duties or obligations of LBG’s in connection with the State Aid Approval as set out in the Deed of Withdrawal),

	regardless of whether or not such costs and expenses are incurred before or after the date of this Deed (the “ Support Measure Costs ” ). Support Measure Costs shall, in any event, exclude any cost or expense relating to Tax which is borne by LBG (or any member of the Group) under clause 4 (or which would have been borne by LBG (or any member of the Group) under clause 4 but for any exception specifically provided for in clause 4).

2.3	LBG shall pay (or shall procure that the members of the Group shall pay) to the Treasury £26,000,000 (twenty-six million pounds), being the Treasury’s current estimate of the Support Measure Costs, within five Business Days of the date of this Deed.

2.4	The Treasury may deliver an invoice to LBG in respect of Support Measure Costs (other than any Support Measure Costs which shall be reimbursed pursuant to clause 2.3) at any time following the date of this Deed, but shall not deliver more than one invoice for Support Measure Costs to LBG in anyone calendar month.


2.5	LBG shall pay, or shall procure the payment of, all invoices delivered to it in respect of Support Measure Costs pursuant to clause 2.4 within 30 days of the date on which such invoice is delivered.

2.6	The Treasury shall provide with any invoice delivered pursuant to clause 2.4 a breakdown of the costs and expenses covered by such invoice, provided that such breakdown need not contain any more information than the Treasury intends at that time to disclose to the public in respect of such costs and expenses.

2.7	LBG’s obligations to reimburse costs and expenses pursuant to clauses 2.2 to 2.6 (inclusive) shall be limited to such amount as is equal to 0.25% of the aggregate value of all of the ordinary shares (excluding treasury shares) of LBG as at market close on the date of this Deed.

2.8	For the purposes of this clause 2, “ costs and expenses ” shall include:

	(A)	the costs and expenses incurred by a person: (i) in respect of the employment of its employees (including the gross emoluments and all “Pay As You Earn” and employer national insurance contributions paid in respect of those employees, and the out-of-pocket expenses of those employees incurred in the course of their employment); and (ii) in relation to any other person seconded to it;

	(B)	administration and other general overhead costs; and

	(C)	all legal, accounting, investment banking and other third party advisory fees and expenses Incurred by that person.

3.	PAYMENTS

3.1	Any payment due to the Treasury under this Deed shall be made in pounds sterling to such account as may be notified to LBG in writing by the Treasury from time to time.

3.2	All payments required to be made by LBG (or any member of the Group) under this Deed shall be made in full. They will be free and clear of any right of set-off and from any restriction, condition or deduction because of any counterclaim.

4.	TAX MATTERS

4.1	All payments by LBG (or any member of the Group) pursuant to this Deed shall be paid without any deduction or withholding, unless required by law. If any Tax is required by law to be deducted or withheld from or in connection with any such payment, the amount payable shall be increased so as to ensure that the amount received by the Treasury after such deduction or withholding (including any additional deduction or withholding required as a result of such increase) is equal to the amount which the Treasury would have received if no such deduction or withholding had been required.


4.2	If the Treasury is subject to Tax in respect of any sum payable pursuant to this Deed, or if any such sum is taken into account in computing the profits, income or gains of the Treasury for Tax purposes, the sum payable shall be increased so as to ensure that the amount retained by the Treasury after the payment of such Tax (including any additional Tax payable as a result of such increase) is equal to the amount which the Treasury would have retained in the absence of such Tax.

4.3	Each sum payable by LBG (or any member of the Group) pursuant to this Deed is expressed exclusive of any amount in respect of VAT which is chargeable on any supply or supplies for which such sum (or any part thereof) is the whole or part of the consideration for VAT purposes. If the Treasury makes (or is deemed to make) any supply for VAT purposes in consideration for such sum (or any part thereof) and VAT is or becomes chargeable in respect of such supply, LBG shall pay (or shall procure that a member of the Group pays) to the Treasury (within 14 days of the receipt of a valid VAT invoice) an additional sum equal to the amount of such VAT.

4.4	If LBG (or any member of the Group) is obliged to pay any sum under or in connection with this Deed by way of indemnity, reimbursement, damages or compensation for or in respect of any liability, damage, cost, demand, charge or expense (the “ Relevant Cost ”), the calculation of such sum shall include an amount determined as follows:

	(A)	if the Relevant Cost is, for VAT purposes, the consideration for a supply of goods or services made to the Treasury (including where such supply is made to the Treasury as agent for LBG (or a member of the Group) within the terms of section 47 of the Value Added Tax Act 1994), such additional amount shall be equal to any input VAT which was incurred by the Treasury in respect of that supply and which it is not able to recover from the relevant Tax authority; and

	(B)	if the Relevant Cost is, for VAT purposes, a disbursement incurred by the Treasury as agent on behalf of LBG (or a member of the Group) and the relevant supply is made to LBG (or a member of the Group) for VAT purposes, such additional amount shall be equal to any amount in respect of VAT which was paid in respect of the Relevant Cost by the Treasury, and the Treasury shall use reasonable endeavours to procure that the relevant third party issues a valid VAT invoice in respect of the Relevant Cost to LBG (or the relevant member of the Group).

4.5	LBG shall pay and bear, and shall indemnify the Treasury on demand against, any Stamp Duty which is payable or paid in connection with the execution, delivery, performance or enforcement of this Deed.

4.6	The Treasury shall co-operate in completing any treaty forms or other procedural formalities reasonably requested by LBG for the purpose of enabling LBG (or the relevant member of the Group) to make any payment pursuant to this Deed without any deduction or withholding in respect of Tax.

4.7	For the purposes of this clause 4:


	(A)	“ Stamp Duty ” means any stamp, documentary, registration or capital duty (including stamp duty, stamp duty reserve tax and any other similar duty or similar tax) and any fine, penalty, charge, cost or interest relating thereto; and

	(B)	“ VAT ” means (i) any Tax imposed in conformity with the council directive of 28 November 2006 on the common system of value added tax (EC Directive 2006/112) (including, in relation to the United Kingdom, any value added tax imposed by the Value Added Tax Act 1994 and/or any legislation or regulations supplemental thereto); and (ii) any other Tax of a similar nature (whether imposed in a member state of the European Union in substitution for or in addition to the Tax mentioned above or imposed elsewhere).

5.	ANNOUNCEMENTS AND PUBLICITY

5.1	Subject to this clause 5, LBG shall ensure that no member of the Group nor any of their respective Representatives, shall make, publish, issue or release any announcement or public statement in relation to, or which refers to this Deed (or any ancillary matter) (each, a “ Restricted Statement ”).

5.2	Notwithstanding clause 5.1, each member of the Group may (and each such member’s Representatives may on its behalf) make, publish, issue or release a Restricted Statement provided that such Restricted Statement is made, published, issued or released only after giving as much prior notification as is reasonably practicable to, and consulting in good faith to the fullest extent reasonably practicable with, the Treasury with a view to giving the Treasury as much time as is reasonably practicable, in all the circumstances, to review and comment on such Restricted Statement.

5.3	If, in respect of any Restricted Statement, any member of the Group (or any of its Representatives) proposes not to adopt, or does not adopt, any amendment proposed by the Treasury pursuant to clause 5.2, LBG shall procure that such member of the Group or Representative shall (to the extent reasonably practicable, prior to the making, publication, issuance or release of the relevant Restricted Statement or, if not reasonably practicable, promptly thereafter) provide to the Treasury reasons explaining why such amendments are not proposed to be, or were not, adopted.

5.4	If any member of the Group (or any of its Representatives) proposes to make, publish, issue or release a Restricted Statement and either:

	(A)	notification to, and consultation with, the Treasury prior to the making, publication, issuance or release of such Restricted Statement is not permissible under: (i) applicable law; or (ii) the rules of the Bank of England or of any securities exchange, clearing system or Authority (including the FSA) to which it is subject or submits; or

	(B)	the Restricted Statement must be made urgently such that prior notification to or consultation with the Treasury is not reasonably practicable,


	then LBG shall ensure that the relevant member of the Group or Representative shall, as soon as permissible and reasonably practicable, provide a copy of such Restricted Statement to the Treasury, together with a notification providing reasonable details of the circumstances giving rise to the Restricted Statement.

5.5	Notwithstanding clause 5.1, the Representatives of each member of the Group may make on behalf of such member Restricted Statements which are unscripted oral public statements, provided that LBG shall use all reasonable endeavours to ensure that processes are in place with a view to ensuring that any such unscripted oral public statements are consistent with any other Restricted Statements made in accordance with this clause 5 by or on behalf of any member of the Group.

6.	WARRANTIES

	LBG represents and warrants to the Treasury on the date of this Deed that:

	(A)	it is duly organised and validly existing under the laws of its jurisdiction of organisation;

	(B)	it has the corporate power and the authority to execute and deliver this Deed and to perform its obligations under this Deed, and no additional act or proceeding, corporate or otherwise, on its part is necessary to authorise the execution and delivery of this Deed or the performance of any of its obligations under this Deed;

	(C)	subject to any principles of law affecting the rights of creditors generally and the provisions of section 117 of the Stamp Act 1891, the obligations expressed to be assumed by LBG under this Deed are legal, valid, binding and enforceable obligations;

	(D)	the only applicable “percentage ratio” (as that term is used in Chapters 10 and 11 of the listing rules made by the Financial Services Authority pursuant to Part VI of the Financial Services and Markets Act 2000) which is relevant to the matters contained in the Deed, is the “consideration test” (as that term is used in Chapters 10 and 11 of the listing rules made by the Financial Services Authority pursuant to Part VI of the Financial Services and Markets Act 2000); and

	(E)	it has duly executed and delivered this Deed.

7.	NOTICES

7.1	Except as otherwise provided in this Deed, a notice under this Deed shall only be effective if it is in writing. Facsimile transmissions are permitted but email is not. Notices under this Deed shall be sent to a party to this Deed at its address or number and for the attention of the individual set out below:


Party and title of individual	Address	Facsimile no.


LBG	Henry Duncan House
	120 George St
	Edinburgh
	Scotland EH2 4LH

	Attention: Company Secretary

Treasury	1 Horse Guards Road	0207 270 4844
	London SW1A 2HQ

	Attention: Nikhil Rathi (team leader, financial stability)


	provided that a party may change its notice details on giving notice to the other party of the change in accordance with this clause 7. That notice shall only be effective on the day falling five clear Business Days after the notification has been received or such later date as may be specified in the notice.

7.2	Any notice given under this Deed shall, in the absence of earlier receipt, be deemed to have been duly given as follows: (i) if delivered personally, on delivery; (ii) if sent by first class post, two clear Business Days after the date of posting; and (iii) if sent by facsimile, when despatched.

7.3	Any notice given under this Deed outside Working Hours (being 9.30am to 5.30pm on a Business Day) in the place to which it is addressed shall be deemed not to have been given until the start of the next period of Working Hours in such place.

7.4	The provisions of this clause 7 shall not apply in relation to the service of any claim form, application notice, order, judgment or other document relating to any Proceedings (as defined in clause 9.2).

8.	MISCELLANEOUS

8.1	No delay or omission by the Treasury or LBG (as the case may be) in exercising any right, power or remedy provided by law or under or pursuant to the Deed shall: (i) affect that right, power or remedy; or (ii) operate as a waiver of it.

8.2	The single or partial exercise by the Treasury of any right, power or remedy provided by law or under or pursuant to this Deed shall not, unless otherwise expressly stated, preclude any other or further exercise of it or the exercise of any other right, power or remedy; and any right of the Treasury is cumulative and not exclusive of any other right (whether provided by law or otherwise).

8.3	LBG acknowledges and agrees that: (i) breaches by it of this Deed may result in injury to the public and/or third parties rather than injury specific to the Treasury; and/or (ii)


	damages may not be an adequate remedy for any breach of any of this Deed, and further acknowledges and agrees that, without prejudice to any other rights or remedies which the Treasury may have, whether pursuant to a provision of this Deed or otherwise equitable relief (including specific performance and injunction) for any such breach (or potential breach) will normally be appropriate. LBG agrees not to raise any objection to any application by the Treasury for any such remedies.

8.4	LBG shall, at its own cost, from time to time on request, do or procure the doing of all acts and/or execute or procure the execution of all documents in a form satisfactory to the Treasury for giving full effect to this Deed and securing the full benefit of the rights, powers and remedies conferred upon the Treasury in this Deed.

8.5	If any provision of this Deed shall be held to be illegal, invalid or unenforceable, in whole or in part, under any enactment or rule of law, such provision or part shall to that extent be deemed not to form part of this Deed but the legality, validity and enforceability of the remainder of this Deed shall not be affected.

8.6	The parties to this Deed do not intend that any term of this Deed should be enforceable, by virtue of the Contracts (Rights of Third Parties) Act 1999, by any person who is not a party to this Deed.

8.7	This Deed may be executed in any number of counterparts, and by the parties on separate counterparts, but shall not be effective until each party has executed at least one counterpart. Each counterpart shall constitute an original of this Deed, but all the counterparts together shall constitute one and the same instrument.

8.8	Any term of this Deed may be amended, and the observance of any term of this Deed may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Treasury.

9.	GOVERNING LAW; JURISDICTION

9.1	This Deed shall be governed by and construed in accordance with the laws of England.

9.2	The courts of England are to have exclusive jurisdiction to settle any Proceedings arising out of or in connection with this Deed. Each party waives (and agrees not to raise) any objection, on the ground of forum non conveniens or on any other ground, to the taking of Proceedings by another party in the courts of England. Each party to this Deed also agrees that a judgment against it in Proceedings brought in England shall be conclusive and binding upon it and may be enforced in any other jurisdiction. Each party irrevocably submits and agrees to submit to the jurisdiction of the English courts. For the purpose of this clause 9.2, “ Proceedings ” means any proceeding, suit or action arising out of or in connection with this Deed, whether contractual or non-contractual.

IN WITNESS WHEREOF this document has been executed and delivered as a deed the day and year first before written.


Executed as a deed by two of	)
THE LORDS COMMISSIONERS OF HER	)
MAJESTY’S TREASURY	) ) )	By:
	)
	)
		By:


Executed as a deed by	)
LLOYDS BANKING GROUP PLC	)
acting by a director and its secretary/two	)	By:
directors:	)
	)
	)		Director
	)
	)
	)	By:
	)

			Director/Secretary

CA093060014

IN WITNESS WHEREOF this document has been executed and delivered as a deed the day and year first before written.


Executed as a deed by two of	)
THE LORDS COMMISSIONERS OF HER	)
MAJESTY’S TREASURY	)	By:
	)
	)
	)
	)
		By:


Executed as a deed by	)
LLOYDS BANKING GROUP PLC	)
acting by a director and its secretary/two directors:	) )	By:
	)
	)
	)		Director
	)
	)
	)	By:


			Director/Secretary

CA093060014

Exhibit 4(a)(xii)

CONFORMED COPY

THIS AGREEMENT is made on 3 November 2009

B etween:


(1)	LLOYDS BANKING GROUP PLC, a company registered in Scotland with number 095000 and whose registered office is at Henry Duncan House, 120 George Street, Edinburgh, Scotland EH2 4LH (the *Company* );

(2)	CITIGROUP GLOBAL MARKETS U.K. EQUITY LIMITED, a company registered in England and Wales with number 2019774 and whose registered office is at Citigroup Centre, Canada Square, Canary Wharf, London E14 5LB ( *Citi* );

(3)	GOLDMAN SACHS INTERNATIONAL, a company registered in England and Wales with number 2263951 whose registered office is at Peterborough Court, 133 Fleet Street, London EC4A 2BB ( GS );

(4)	HSBC BANK PLC, a company registered in England and Wales with number 14259 whose registered office is at 8 Canada Square, London E14 5HQ ( *HSBC* );

(5)	J.P. MORGAN CAZENOVE LIMITED, a company registered in England and Wales with number 4153386 and whose registered office is at 20 Moorgate, London EC2R 6DA ( *JPMC* );

(6)	J.P. MORGAN SECURITIES LTD., a company registered in England and Wales with number 02711006 and whose registered office is at 125 London Wall, London EC2Y 5AJ ( *JPMS* );

(7)	MERRILL LYNCH INTERNATIONAL, a company registered in England and Wales with number 02312079 and whose registered office is at Merrill Lynch Financial Centre, 2 King Edward Street, London EC1A 1HQ ( *Merrill Lynch* );

(8)	UBS LIMITED, a company registered in England and Wales with number 2035362 and whose registered office is at 1 Finsbury Avenue, London EC2M 2PP ( *UBS* );

(9)	THE PERSON named in Schedule 8 (the *Co-Bookrunner* ); and

(10)	EACH OF THE PERSONS named in Schedule 9 (the *Co-Lead Managers* ).

W hereas:

(A) The Company proposes, subject, inter alia , to the passing of the Resolutions, the Share Capital Reorganisation Resolutions, the HMT Resolution and the Exchange Resolutions, to (a) reorganise its share capital by subdividing each Existing Ordinary Share into one ordinary share of 10 pence and one Deferred Share, and (b) offer the New Shares by way of rights at the Issue Price on the terms and subject to the conditions set out in the Prospectus and, where applicable, to be set out in the Provisional Allotment Letter.

(B) Upon the Resolutions and the Share Capital Reorganisation Resolutions becoming effective, which are themselves conditional on the HMT Resolution becoming effective, the

Company will have sufficient authorised but unissued share capital and the Directors will have authority under section 551 of the Companies Act to allot the New Shares.

(C) The Underwriters have agreed, on a several basis, on the terms and subject to the conditions referred to in this Agreement, to underwrite the Underwritten Shares in their Proportionate Shares and the Joint Global Co-ordinators may (but are not obliged to) seek sub-underwriters on the basis of the Prospectus or an underwriting proof of the Prospectus.

(D) On the terms and subject to the conditions set out in the HMT Undertaking, including that the HMT Resolution becomes effective, HM Treasury has irrevocably undertaken, inter alia , to take up its entitlements under the Rights Issue to subscribe for the HMT Shares at the Issue Price and to vote in favour of the Resolutions, the Share Capital Reorganisation Resolutions and the Exchange Resolutions.

(E) Merrill Lynch and UBS have agreed to act as Joint Sponsors for the purpose of the Prospectus to be issued in connection with the Rights Issue.

(F) The Company will apply for admission of the New Shares to the Official List and for admission of the New Shares to trading on the London Stock Exchange’s main market for listed securities.

N ow it is agreed as follows:

1. D efinitions

1.1 In this Agreement:

Acceptance Date means 11 December 2009, or such later date as the Company and the Joint Bookrunners may agree in writing;

Accounts means the audited consolidated accounts of the Group, excluding the HBOS Accounts, for the three years ended 31 December 2008 (including, without limitation, the related directors’ and auditors’ reports, the consolidated income statement, the balance sheets, the consolidated cashflow statement, the consolidated statement of total recognised gains and losses, the reconciliation of movements in shareholders’ funds and all related notes);

Accounts Date means 31 December 2008;

Accredited Investors means certain employee shareholders of the Company or its subsidiaries in the United States;

Admission means the admission of the New Shares (nil paid and fully paid) to the Official List becoming effective (and where such admission does not become effective, references to Admission in this Agreement shall mean the date on which Admission was proposed to take place) in accordance with the Listing Rules and the admission of such shares (nil paid and fully paid) to trading on the London Stock Exchange’s main market for listed securities becoming effective in accordance with the Admission and Disclosure Standards;

Admission and Disclosure Standards means the current Admission and Disclosure Standards published by the London Stock Exchange;

Adverse Interest means any option, lien, mortgage, charge, equity, trust, any other right or interest of any third party and any other encumbrance of any kind;

affiliate has the meaning given in Rule 501(b) of Regulation D or Rule 405 under the Securities Act, as applicable;

associate has the meaning ascribed to it by section 256 of the Companies Act 2006;

Auditors means PricewaterhouseCoopers LLP;

Banks means each of Citi, GS, HSBC, JPMC, JPMS, Merrill Lynch, UBS and each of the Co-Lead Managers;

Board means the board of directors of the Company or a duly constituted and authorised committee thereof;

Business Day means any day which is not a Saturday, a Sunday or a bank or public holiday in England and Wales;

Business IP means the registered (including applications for registration) and material unregistered Intellectual Property Rights owned by a Group company;

Capital Resources Requirement has the meaning given in the FSA Rules;

Circular means the shareholder circular to be published in connection with the Rights Issue and the Share Capital Subdivision, including the notice convening the GM;

Citi means Citigroup Global Markets U.K. Equity Limited;

Citi Indemnified Persons means:


(a)	Citi and any subsidiary, branch or affiliate of Citi;

(b)	a person who is, on or at any time after the date of this Agreement, a director, officer, partner, employee or agent of an undertaking specified in paragraph (a) above; and

(c)	Citi’s respective selling agents and each person, if any, who controls Citi within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act and Citi’s respective affiliates, subsidiaries, branches, associates and holding companies and the subsidiaries, branches, affiliates, associates and holding companies and the subsidiaries of such subsidiaries, branches, affiliates, associates and holding companies and each of such person’s respective directors, officers, employees and agents

and Citi Indemnified Person shall be construed accordingly;

Claims means any and all claims, actions, liabilities, demands, proceedings, regulatory or governmental investigations, judgements or awards whatsoever (and in each case whether or not successful, compromised or settled and whether joint or several) threatened, asserted,

established or instituted against or otherwise involving any person and Claim shall be construed accordingly;

Co-Bookrunner means the person whose name and address is set out in Schedule 8;

Co-Lead Managers means each of the persons whose name and address is set out in Schedule 9 and Co-Lead Manager shall be construed accordingly;

Co-Lead Manager Indemnified Persons means:


(a)	each Co-Lead Manager and any of their respective subsidiaries, branches or affiliates;

(b)	a person who is, on or at any time after the date of this Agreement, a director, officer, partner, employee or agent of an undertaking specified in paragraph (a) above; and

(c)	each Co-Lead Manager’s respective selling agents and each person, if any, who controls a Co-Lead Manager within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act and each Co-Lead Manager’s respective affiliates, subsidiaries, branches, associates and holding companies and the subsidiaries of such subsidiaries, branches, affiliates, associates and holding companies and each of such person’s respective directors, officers, employees and agents,

and Co-Lead Manager Indemnified Person shall be construed accordingly;

Commission Decision means any decision of the European Commission under Article 87 of the EC Treaty regarding the restructuring plan for the Company submitted pursuant to the Company’s participation in the Financial Support Measures to the Banking Industry in the UK approved by the European Commission on 13 October 2008 (Case N507/2008) and on 22 December 2008 (Case N650/2009) as modified and, if applicable, regarding the Company’s proposed participation in the UK asset protection scheme, or any other financial support or investment in the Company by the government of the UK, or any public announcement or statement by or attributable to the European Commission or any of its commissioners or staff in relation to these matters;

Companies Act means the Companies Act 1985 or the Companies Act 2006 as the context requires;

Company’s Counsel means Linklaters LLP;

CREST means the relevant system (as defined in the Regulations) in respect of which Euroclear is the Operator (as defined in the Regulations);

Dealing Day means a day on which dealings in domestic equity market securities may take place on the London Stock Exchange;

Deferred Shares means the deferred shares of 15 pence each in the Company resulting, along with the Ordinary Shares, from the subdivision of the Existing Ordinary Shares pursuant to the Share Capital Subdivision;

Directors means the persons named in the Prospectus as directors of the Company;

Disclosure Rules and Transparency Rules means the Disclosure Rules and Transparency Rules of the FSA made under section 73A of FSMA;

Engagement Letters means the JPMC Engagement Letter, the Merrill Lynch Engagement Letter and the UBS Engagement Letter;

Euroclear means Euroclear UK & Ireland Limited;

Exchange Act means the US Securities Exchange Act of 1934, as amended;

Exchange Offer Memoranda means the two exchange offer memoranda relating to the Exchange Offer published as at the date hereof in relation to the first tranche of the liability management exercise;

Exchange Offer means an exchange offer or offers to holders of certain tier 1 and upper tier 2 capital securities issued by certain Group companies, to exchange such securities for either (a) Ordinary Shares, (b) new lower tier 2 capital qualifying bonds that automatically convert into Ordinary Shares in certain prescribed circumstances, (c) cash, or (d) a combination thereof;

Exchange Resolutions means the resolutions set out in the notice of GM contained in the Circular to authorise the Directors to allot shares of the Company, to authorise the Directors pursuant to section 571 of the Companies Act to allot Ordinary Shares as if section 561 of the Companies Act did not apply to any such allotment, to disapply rights of pre-emption and to repurchase, in connection with the Exchange Offer, certain preference shares issued by the Company and its subsidiaries in accordance with section 701 of the Companies Act, within certain specified parameters;

Excluded Territories Shareholders means holders of Existing Ordinary Shares or holders of Ordinary Shares, as applicable, with registered addresses in Hong Kong, Japan, Israel, Thailand or the United States (other than to persons the Company reasonably believes to be QIBs and/or Accredited Investors who are employees of the Company and who have returned a validly executed Investor Letter in accordance with the Letter to QIBs or the Letter to Accredited Investors as applicable) on the Posting Date, the Record Date or such later date, as the context requires;

Existing Ordinary Shares means the issued fully paid ordinary shares of 25 pence each in the capital of the Company prior to the Share Capital Subdivision;

FCPA has the meaning given to it in paragraph 21.11 of Schedule 3;

Form of Proxy means the form of proxy in the agreed form to be sent to holders of Existing Ordinary Shares for use in connection with the GM;

FSA means the Financial Services Authority;

FSA Rules means the FSA Handbook of Rules and Guidance as amended from time to time;

FSMA means the Financial Services and Markets Act 2000, as amended;

Fully Paid Rights means fully paid rights to subscribe for New Shares;

GM means the general meeting of the Company convened for the GM Date at which, inter alia , the Resolutions and the Share Capital Reorganisation Resolutions will be proposed;

GM Date means 26 November 2009;

Group means the Company and its subsidiary undertakings from time to time (and for the avoidance of doubt, references in this Agreement to the Group , Group company and members of the Group include, without limitation, HBOS and the HBOS Group except where otherwise stated);

Group company means any company that is a member of the Group;

GS means Goldman Sachs International;

GS Indemnified Persons means:


(a)	GS and any subsidiary, branch or affiliate of GS;

(b)	a person who is, on or at any time after the date of this Agreement, a director, officer, partner, employee or agent of an undertaking specified in paragraph (a) above; and

(c)	GS’s respective selling agents and each person, if any, who controls GS within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act and GS’s respective affiliates, subsidiaries, branches, associates and holding companies and the subsidiaries, branches, affiliates, associates and holding companies and the subsidiaries of such subsidiaries, branches, affiliates, associates and holding companies and each of such person’s respective directors, officers, employees and agents,

and GS Indemnified Person shall be construed accordingly;

Heads of Terms means the document entitled “Term sheet for UK state aid commitments in respect of LBG” submitted by the Company to Commissioner Kroes on 2 November 2009;

HBOS means HBOS plc;

HBOS Accounts means the audited consolidated accounts of the HBOS Group for the three years ended 31 December 2008 (including, without limitation, the related directors’ and auditors’ reports, the consolidated income statement, the consolidated balance sheet, the consolidated cashflow statement, the consolidated statement of recognised income and expense and all related notes);

HBOS Group means HBOS and its subsidiaries and subsidiary undertakings;

HM Treasury means the Commissioners of Her Majesty’s Treasury;

HMT Resolution means resolution 4, as set out in the notice of GM contained in the Circular, regarding certain transactions involving HM Treasury;

HMT Shares means the New Shares that are the subject of the HMT Undertaking;

HMT Transactions has the meaning given in the Circular;

HMT Undertaking means the irrevocable undertaking of HM Treasury, subject to certain terms and conditions, including that the HMT Resolution becomes effective, to procure that the Solicitor for the Affairs of Her Majesty’s Treasury (acting as nominee of HM Treasury) takes up the entitlement to the HMT Shares at the Issue Price and votes in favour of the Resolutions, the Share Capital Reorganisation Resolutions and the Exchange Resolutions;

HSBC means HSBC Bank plc;

HSBC Indemnified Persons means:


(a)	HSBC and any subsidiary, branch or affiliate of HSBC;

(b)	a person who is, on or at any time after the date of this Agreement, a director, officer, partner, employee or agent of an undertaking specified in paragraph (a) above; and

(c)	HSBC’s respective selling agents and each person, if any, who controls HSBC within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act and HSBC’s respective affiliates, subsidiaries, branches, associates and holding companies and the subsidiaries, branches, affiliates, associates and holding companies and the subsidiaries of such subsidiaries, branches, affiliates, associates and holding companies and each of such person’s respective directors, officers, employees and agents

and HSBC Indemnified Person shall be construed accordingly.

IFRS means International Financial Reporting Standards as adopted by the European Union;

Indemnified Person means any and each Citi Indemnified Person, any and each Co-Lead Manager Indemnified Person, any and each GS Indemnified Person, any and each HSBC Indemnified Person, any and each JPMC Indemnified Person, any and each JPMS Indemnified Person, any and each Merrill Lynch Indemnified Person and any and each UBS Indemnified Person;

Intellectual Property Rights means patents, trade marks, service marks, logos, get-up, trade names, rights in designs, copyright (including rights in computer software), internet domain names, moral rights, utility models, rights in know how, rights in databases and other intellectual property rights, in each case whether registered or unregistered and including applications for the grant of any such rights and all rights or forms of protection having equivalent or similar effect anywhere in the world;

Interim Accounts means the unaudited financial information relating to the Group for the six months ended 30 June 2009;

Investor Letter means the letters in the forms to be agreed to be executed by all subscribers for Nil Paid Rights or New Shares in the United States;

Issue Price means 15 pence per New Share unless a price per New Share in excess of 15 pence is determined in accordance with Clause 2.5 in which case it shall mean that revised price;

Joint Bookrunners means Citi, GS, HSBC, JPMC, Merrill Lynch and UBS and Joint Bookrunner shall mean any one of them;

Joint Global Co-ordinators means Citi, Merrill Lynch and UBS and Joint Global Co-ordinator shall mean any one of them;

Joint Sponsors means Merrill Lynch and UBS and Joint Sponsor shall mean either one of them;

JPMC means J.P. Morgan Cazenove Limited;

JPMC Engagement Letter means the letter dated on or around 2 November 2009 between the Company and JPMC;

JPMC Indemnified Person means any of the following:


(a)	JPMC, Cazenove Group Limited, J.P. Morgan Cazenove Holdings and their respective selling agents, branches, affiliates, associates, subsidiaries and subsidiary undertakings;

(b)	a person who is, on or at any time after the date of this Agreement, a director, officer, partner, employee or agent of an undertaking specified in paragraph (a) above; and

(c)	JPMC’s respective selling agents and each person, if any, who controls JPMC within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act and JPMC’s respective affiliates, subsidiaries, branches, associates and holding companies and the subsidiaries, branches, affiliates, associates and holding companies and the subsidiaries of such subsidiaries, branches, affiliates, associates and holding companies and each of such person’s respective directors, officers, employees and agents

and JPMC Indemnified Persons shall be construed accordingly;

JPMC’s Group means Cazenove Group Limited, J.P. Morgan Cazenove Holdings, JPMC and its subsidiaries and subsidiary undertakings;

JPMS means J.P. Morgan Securities Ltd.;

JPMS Indemnified Person means any of the following:


(a)	JPMS, JPMorgan Chase & Co. and their respective selling agents, branches, affiliates, associates, subsidiaries and subsidiary undertakings other than any member of JPMC’s Group; and

(b)	a person who is, on or at any time after the date of this Agreement, a director, officer, employee or agent of an undertaking specified in sub paragraph (a) above,

(c)

JPMS’s respective selling agents and each person, if any, who controls JPMS within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act and JPMS’s respective affiliates, subsidiaries, branches, associates and holding companies and the subsidiaries, branches, affiliates, associates and holding companies and the subsidiaries of such subsidiaries, branches, affiliates, associates and holding companies and each of such person’s respective directors, officers, employees and agents

and JPMS Indemnified Persons shall be construed accordingly;

KPMG LLP means KPMG Audit plc of 8 Salisbury Square, London EC4Y 8BB;

Letter to Accredited Investors means the cover letter in the form set out in Schedule 10 provided to certain employee shareholders of the Company or its subsidiaries in the United States in connection with the Rights Issue;

Letter to QIBs means the cover letter, in the form to be agreed, provided to certain shareholders who are QIBs in the United States in connection with the Rights Issue;

Limitation has the meaning given in Clause 14.8;

Limited Voting Shares means limited voting shares of 25 pence each in the capital of the Company;

Listing Rules means the Listing Rules of the FSA made under section 73A of the FSMA;

London Stock Exchange means London Stock Exchange Group plc;

Losses means any and all loss, damage, cost, liability, demand, charge or expense (including legal fees), in each case whether joint or several, which any person may suffer or incur (including, but not limited to all Losses suffered or incurred in investigating, preparing for or disputing or defending or settling any Claim and/or in establishing its right to be indemnified pursuant to Clause 14 or to receive a contribution pursuant to Clause 15 and/or in seeking advice regarding any Claim or in any way related to in connection with the indemnity contained in Clause 14 or the provisions of Clause 15) and Loss shall be construed accordingly;

MAC Event means the occurrence of any of the following events: (i) any material adverse change, or any development reasonably likely to result in a material adverse change, in the condition of the financial markets in the United Kingdom, the United States, any member state of the EEA or the international financial markets, any outbreak of hostilities or escalation thereof, any act of terrorism or war or other calamity or crisis or any change or development involving a prospective change in national or international political, financial or economic conditions, exchange rates or exchange controls; or (ii) trading in any securities of the Company being suspended or materially limited by the London Stock Exchange or the New York Stock Exchange on any exchange or over the counter market or any development reasonably likely to result in trading in any securities of the Company being suspended or materially limited by the London Stock Exchange or the New York Stock Exchange on any exchange or over the counter market, or trading generally on the American Stock Exchange, the New York Stock Exchange, the NASDAQ National Market or the London Stock

Exchange being suspended or materially limited or any development reasonably likely to result in trading generally on the American Stock Exchange, the New York Stock Exchange, the NASDAQ National Market or the London Stock Exchange being suspended or materially limited, or minimum or maximum prices for trading being fixed or any development reasonably likely to result in minimum or maximum prices for trading being fixed, or maximum ranges for prices being required, by any of such exchanges or by such system or by order of the SEC, the National Association of Securities Dealers, Inc. or any governmental authority, or a material disruption occurring in commercial banking or securities settlement or clearance services in the United States or in the EEA or any development reasonably likely to result in a material disruption occurring in commercial banking or securities settlement or clearance services in the United States or in the EEA; or (iii) a banking moratorium being declared by the United States, the United Kingdom, a member state of the EEA, or New York authorities; or (iv) an adverse change or the official announcement by any governmental authority of a prospective adverse change in United States or United Kingdom taxation materially affecting the Existing Ordinary Shares or the Ordinary Shares or the transfer thereof or exchange controls being imposed by the United States, the United Kingdom or a member state of the EEA; or (v) any adverse Commission Decision having been publicly announced or publicly communicated;

Material Adverse Effect means a material adverse change (whether individually or in the aggregate) in, or any development reasonably likely to result in a material adverse change (whether individually or in the aggregate) in or effect on (including, for the avoidance of doubt, any development reasonably likely to result in a material adverse change arising as a result of a Commission Decision having been publicly announced or publicly communicated subsequent to the publication of the Press Announcement) the condition (financial, operational, legal or otherwise) or in the earnings, business affairs, business prospects or financial prospects of any of (i) the Company, (ii) any member of the Group or (iii) the Group taken as a whole, in any such case whether or not arising in the ordinary course of business (including, without limitation, any rating downgrade, notice of prospective downgrade or any indication by rating agencies that such downgrade will take place);

Merrill Lynch Engagement Letter means the letter dated 29 October 2009 between the Company and Merrill Lynch;

Merrill Lynch Indemnified Persons means:


(a)	Merrill Lynch and any subsidiary, branch or affiliate of Merrill Lynch;

(b)	a person who is, on or at any time after the date of this Agreement, a director, officer, partner, employee or agent of an undertaking specified in paragraph (a) above; and

(c)	Merrill Lynch, its selling agents and each person, if any, who controls Merrill Lynch within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act and Merrill Lynch’s respective affiliates, subsidiaries, branches, associates and holding companies and the subsidiaries of such subsidiaries, branches, affiliates, associates and holding companies and each of such person’s respective directors, officers, employees and agents,

and Merrill Lynch Indemnified Person shall be construed accordingly;

Money Laundering Laws has the meaning given to it in paragraph 21.9 of Schedule 3;

New Shares means up to 90,000,000,000 new Ordinary Shares which are to be allotted pursuant to the Rights Issue as such number may be reduced following a Re-Pricing;

Nil Paid Rights means the New Shares in nil paid form provisionally allotted to Qualifying Shareholders in connection with the Rights Issue;

OECD Convention has the meaning given to it in paragraph 21.11 of Schedule 3;

Official List means the Official List of the UK Listing Authority;

Ordinary Shareholders means holders of Existing Ordinary Shares and, following the Share Capital Subdivision coming into effect, holders of Ordinary Shares;

Ordinary Shares means the ordinary shares of 10 pence each in the capital of the Company resulting, along with the Deferred Shares, from the subdivision and conversion of the Existing Ordinary Shares pursuant to the Share Capital Subdivision;

Overall Financial Adequacy Rule has the meaning given in the FSA Rules;

Participating Security has the meaning given to it in the Regulations;

payee has the meaning given in Clause 17;

Posting Date means the date on which the Company publishes the Prospectus;

Presentation Materials means any written materials to be used by the Company in presentations to institutional investors in connection with the Rights Issue;

Press Announcement means the press announcement dated 3 November 2009 giving details of, inter alia , the Rights Issue, the HMT Transactions and the Share Capital Subdivision, as published through a Regulatory Information Service;

Previous Announcements means all documents issued and announcements (other than the Press Announcement) made by or on behalf of the Company or any member of the Group to the public or the press since the Accounts Date and before the date of this Agreement;

Profit Forecast Report means the profit (or loss) forecast report prepared by the Auditors relating to the forecast loss before tax, before the recognition of negative goodwill, for the Group for the period ending 31 December 2009 set out in Part XVII of the Prospectus;

Proportionate Share means, in relation to each Underwriter, the percentage set against its name in column 3 of the table at Schedule 6;

Prospectus means the prospectus (constituting a prospectus for the purposes of the FSMA, the Listing Rules and the Prospectus Rules) in the agreed form to be published by the Company in connection with the Rights Issue;

Prospectus Rules means the Prospectus Rules of the FSA made under section 73A of the FSMA;

Provisional Allotment Letter means the form of renounceable provisional allotment letter, in the agreed form, to be issued or made available by the Company, subject to Clause 4.8, to Qualifying Non-CREST Holders in connection with the Rights Issue;

QIBs or qualified institutional buyers has the meaning given in Rule 144A promulgated under the Securities Act;

Qualifying CREST Holders means Qualifying Shareholders who hold Existing Ordinary Shares and, following the Share Capital Subdivision coming into effect, Ordinary Shares in uncertificated form;

Qualifying LV Shareholders means holders of Limited Voting Shares on the register of members of the Company as at the record date set out in the Prospectus in relation to holders of Limited Voting Shares;

Qualifying Non-CREST Holders means Qualifying Shareholders who hold Existing Ordinary Shares and, following the Share Capital Subdivision coming into effect, Ordinary Shares in certificated form;

Qualifying Shareholders means Ordinary Shareholders on the register of members of the Company as at the close of business on the Record Date and Qualifying LV Shareholders;

Receiving Agent or Registrar means Equiniti Limited;

Record Date means close of business on 20 November 2009;

Regulations means the Uncertificated Securities Regulations 2001 (SI 2001/3755);

Regulatory Information Service means any of the services set out in Appendix 3 to the Listing Rules;

Relevant Documents means the Circular, the Prospectus, the underwriting proof of the Prospectus (in a form initialled, for the purposes of identification only, by Company’s Counsel and Underwriters’ Counsel), the Re-Pricing Disclosure Document, any other Supplementary Prospectus, the Provisional Allotment Letters, any explanatory documents which may accompany the Prospectus and/or Provisional Allotment Letters and/or Circular, the Form of Proxy, the Letter to QIBs, the Letter to Accredited Investors, the Investor Letter, the Presentation Materials, the Press Announcement, the Re-Pricing Press Announcement and any other documents, announcements or communications issued in connection with the Rights Issue, the Share Capital Subdivision or the offering of the New Shares, PROVIDED THAT references to a Relevant Document in Schedule 3 shall be references only to those Relevant Documents that have been issued, published or provided prior to or at the time at which the relevant Warranty is given or repeated, as the case may be;

Relevant Time means the earlier of (a) the fifth Dealing Day following the Acceptance Date; (b) the date following the Acceptance Date on which the Underwriters determine that it is reasonably likely that it will not be possible to place a significant proportion of the Underwritten Shares not taken up; and (c) the date following the Acceptance Date on which the Joint Bookrunners determine that take up pursuant to the Rights Issue has been such that it will not be necessary to undertake a rump placement;

Re-Pricing means an increase in the Issue Price pursuant to and in accordance with Clause 2.5;

Re-Pricing Date means 23 November 2009;

Re-Pricing Disclosure Document means a supplementary prospectus or pricing statement published by the Company in relation to a Re-Pricing;

Re-Pricing Memorandum means the memorandum, substantially in the form of the draft contained in Schedule 7, to be signed on the Re-Pricing Date by the Company and the Banks;

Re-Pricing Press Announcement means, if a price per New Share in excess of 15 pence is determined following a Re-Pricing, the press announcement in the form to be agreed to be dated the Dealing Day immediately following the Re-Pricing Date giving details of, inter alia , the revised Issue Price;

Resolutions means the resolutions set out in the notice of GM contained in the Circular to authorise the Directors to allot shares of the Company and to authorise the Directors pursuant to section 571 of the Companies Act to allot such number of Ordinary Shares as equals or exceeds the number of New Shares as if section 561 of the Companies Act did not apply to any such allotment, in each case, so as to enable the Rights Issue to be implemented provided the Share Capital Reorganisation Resolutions are passed;

Rights Issue means the offer of New Shares to Qualifying Shareholders on the basis set out in Recital (A);

Rump Placing Schedule has the meaning given in Clause 8.6(a);

Securities Act means the US Securities Act of 1933, as amended, and the rules promulgated thereunder;

Selling Restrictions means the selling restrictions set out in Schedule 5;

Senior Manager means each of Tom Murphy, Alex Pietruska, Andrew Geczy and Ian Smith;

Settlement Date means the date for settlement of the Underwriters’ payment obligations pursuant to Clause 8.6 or, if later, Clauses 9.2 and/or 9.4;

Share Capital Reorganisation Resolutions means the resolutions set out in the notice of GM contained in the Circular relating to the Share Capital Subdivision;

Share Capital Subdivision means the proposed subdivision and conversion of the Company’s ordinary share capital described in the Circular and the Prospectus;

Specified Circumstance means (a) fraud, wilful misconduct or dishonest concealment on the part of the Company, any Group company, any Director or any Senior Manager, or (b) any breach by the Company of its undertakings in Clauses 11.3, 12.3 or 12.4 of this Agreement at any time prior to the time of Admission;

Supplementary Prospectus means any supplementary prospectus published by the Company pursuant to section 87G of the FSMA;

taken up has the meaning given in paragraph 3 of Schedule 1;

tax or taxes means all taxes, levies, imposts, duties, charges or withholdings of any nature whatsoever, together with all penalties, charges and interest relating to any of the foregoing and regardless of whether the person concerned is primarily liable or not, including (without limitation) corporation tax, advance corporation tax, income tax, capital gains tax, VAT, duties of customs and excise, national insurance contributions, capital duty, stamp duty, stamp duty reserve tax, stamp duty land tax and any other transfer tax or duty, all taxes, duties or charges replaced by or replacing any of them, and all other taxes on gross or net income, profits or gains, distributions, receipts, importations, sales, use, occupation, franchise, value added, and personal property imposed by a tax authority of any jurisdiction;

Theoretical Ex-Rights Price means the theoretical ex-rights price (ex-dividend if relevant) of the Existing Ordinary Shares calculated by reference to the volume weighted average price on the London Stock Exchange’s main market for listed securities of an Existing Ordinary Share on the Re-Pricing Date;

Top-up Issues Underwriting Agreement means the underwriting agreement dated the date hereof between the Company and the Joint Bookrunners relating to any top-up issues of securities to be made subsequent to the Exchange Offer, as more fully detailed in the Prospectus;

Time of Sale means a time falling within the period commencing at 7.00 a.m. on the first Dealing Day following the Acceptance Date and ending on the second Dealing Day following the Acceptance Date, as is notified to the Company by the Joint Bookrunners as the time of sale with respect to their endeavours to procure subscribers for such number of New Shares equivalent to the number of Underwritten Shares which are not taken up, in accordance with Clause 8.4;

UBS Engagement Letter means the letter dated 29 October 2009 between the Company and UBS;

UBS Indemnified Persons means:


(a)	UBS and any subsidiary, branch or affiliate of UBS;

(b)	a person who is, on or at any time after the date of this Agreement, a director, officer, partner, employee or agent of an undertaking specified in paragraph (a) above; and

(c)	UBS, its selling agents and each person, if any, who controls UBS within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act and UBS’s respective affiliates, subsidiaries, branches, associates and holding companies and the subsidiaries of such subsidiaries, branches, affiliates, associates and holding companies and each of such person’s respective directors, officers, employees and agents,

and UBS Indemnified Person shall be construed accordingly;

UK Listing Authority means the Financial Services Authority acting in its capacity as the competent authority for the purposes of Part VI of the FSMA and in the exercise of its functions in respect of the admission of securities to the Official List otherwise than in accordance with Part VI of the FSMA;

Underwriters means the persons whose names are set out in Schedule 6 and Schedule 9, and Underwriter shall mean any one of them;

Underwriters’ Counsel means Freshfields Bruckhaus Deringer LLP;

Underwritten Shares means the New Shares other than the HMT Shares;

United Kingdom means Great Britain and Northern Ireland;

United States means the United States of America, its territories and possessions, any state of the United States of America and the District of Columbia;

VAT means value added tax or any similar sales or turnover tax or levy imposed in any jurisdiction;

Verification Materials means the materials in the agreed form or form to be agreed, as the case may be, confirming the accuracy of certain information contained in the Relevant Documents as referred to in Schedule 2;

Warranties means the representations, warranties and undertakings set out in Clause 12 and Schedule 3 and Warranty shall be construed accordingly;

Working Capital Report means the cash flow and working capital report prepared by the Auditors in the agreed form relating to the Group for the period to 30 June 2011, dated the date of the Prospectus, and supporting the working capital statements contained in the Prospectus; and

Working Capital Letter means the letter from the Auditors to the Company and the Banks in the agreed form confirming the adequacy of the Company’s working capital to be dated the date of the Prospectus.

1.2 In this Agreement unless the context otherwise requires:


(a)	a reference to *certificated* or *certificated form* in relation to a share or other security is a reference to a share or other security title to which is recorded on the relevant register of the share or other security as being held in certificated form;

(b)	a reference to *uncertificated* or *uncertificated form* in relation to a share or other security is a reference to a share or other security title to which is recorded on the relevant register of the share or other security as being held in uncertificated form, and title to which, by virtue of the Regulations, may be transferred by means of CREST;

(c)	words and expressions defined in the Companies Act shall bear the same meaning;


(d)	headings are for convenience only and shall not affect the construction of this Agreement;

(e)	any reference to an enactment is a reference to it as from time to time amended, consolidated or re enacted (with or without modification) (but, in the case of any amendment, consolidation or re-enactment effected after the date of Admission, only insofar as it applies in relation to a period before Admission and provided that no such amendment, consolidation or re-enactment shall increase or extend the liability of any party to this Agreement) and includes all instruments or orders made under the enactment;

(f)	any reference in this Agreement to any document expressed to be in the *agreed form* or *to be agreed* means a document in the form initialled, for the purpose of identification only, by Company’s Counsel and Underwriters’ Counsel or (in the case of documents to be agreed) in such form as may be initialled for the purpose of identification only, in due course with the agreement of the Company and the Joint Global Co-ordinators, in each case subject to any changes which the Company and the Joint Global Co-ordinators may agree (such agreement not to be unreasonably withheld or delayed); no such initialling shall imply approval of all or any part of its contents by or on behalf of the person initialling it or any of the parties to this Agreement;

(g)	any reference to recitals, clauses and schedules are to recitals, clauses and schedules to this Agreement, and references to paragraphs are to paragraphs in the schedule in which such references appear, and the schedules to this Agreement form part of the Agreement;

(h)	each reference in this Agreement to the Joint Sponsors or any of them, or any of the Joint Global Co-ordinators, Joint Bookrunners or Underwriters by any description or in any capacity includes a reference to it in each other capacity in which it may act pursuant to this Agreement or otherwise with the agreement of the Company in connection with the Rights Issue or the Share Capital Subdivision;

(i)	any reference to any of the Banks or to the Underwriters shall be construed so that, in so far as they relate to JPMS, such terms shall be construed as references to JPMS acting through JPMC so that any communication to be made or notice or consent to be given by JPMS for the purposes of such provisions shall be communicated or delivered by JPMC at the request of JPMS; and, after the Settlement Date, save in respect of Clauses 14 and 15, JPMS shall cease to be a Bank and/or Underwriter unless it has subscribed for Underwritten Shares not otherwise taken up and for which subscribers are not procured under Clause 8.4; and

(j)	any reference to the Underwriters and/or the Joint Bookrunners and/or the Joint Sponsors and/or the Joint Global Co-ordinators approving or agreeing the form of a Relevant Document, shall be a reference to such approval or agreement being given solely for the purposes of this Agreement.

1.3 Unless otherwise stated, references to time are references to London time.

1.4 The expressions holding company, subsidiary undertaking and subsidiary shall have the meaning in this Agreement as in the Companies Act.

2. C onditions

2.1 The Banks’ obligations under this Agreement (save for the obligations under Clauses 3.6 and 4.5 and any other obligations which fall due for performance before Admission) are conditional on:


(a)	publication of the Press Announcement through a Regulatory Information Service by no later than 7.00 a.m. on the date of this Agreement (or such later time and/or date as the Joint Global Co-ordinators may agree in writing);

(b)	approval of the Prospectus as a prospectus by the UK Listing Authority and the Prospectus being filed with the FSA in accordance with the Prospectus Rules and the FSMA and made available to the public by no later than 7.00 a.m. on the date of this Agreement (or such later time and/or date as the Joint Global Co-ordinators may agree in writing);

(c)	if a price per New Share in excess of 15 pence is determined in accordance with Clause 2.5, publication of the Re-Pricing Press Announcement through a Regulatory Information Service by no later than 7.00 a.m. on the Dealing Day immediately following the Re-Pricing Date;

(d)	the passing of the Resolutions, the Share Reorganisation Resolutions, the HMT Resolution and the Exchange Resolutions (in each case, without amendment, save as may be made by the Company with the consent of the Joint Global Co-ordinators, acting in good faith) at the GM on the GM Date (and not, except with the written agreement of the Joint Global Co-ordinators (not to be unreasonably withheld or delayed), at any adjournment of such meeting);

(e)	the Warranties on the part of the Company contained in this Agreement being true and accurate in all respects and not misleading in any respect immediately prior to the release of the Press Announcement, save to an extent which the Joint Global Co-ordinators do not consider, in their sole judgement, acting in good faith, to be (singly or in the aggregate) material in the context of the Rights Issue or the underwriting of the Underwritten Shares or Admission or post-Admission dealings in the Ordinary Shares;

(f)	the Warranties on the part of the Company contained in this Agreement being true and accurate in all respects and not misleading in any respect on and as of the date of Admission as if they had been repeated by reference to the facts and circumstances then existing:

	(i)	other than, directly or indirectly, as a result of a MAC Event or a Material Adverse Effect having occurred subsequent to the publication of the Press Announcement; or


	(ii)	other than, directly or indirectly, as a result of a Commission Decision having been publicly announced or publicly communicated subsequent to the publication of the Press Announcement,

	PROVIDED THAT Clause 2.1(f)(i) shall not apply in circumstances where the MAC Event or Material Adverse Effect occurred as a direct or indirect consequence of a Specified Circumstance; or

	(iii)	save to an extent which the Joint Global Co-ordinators do not consider, in their sole judgement, acting in good faith, to be (singly or in the aggregate) material in the context of the Rights Issue or the underwriting of the Underwritten Shares or Admission or post-Admission dealings in the Ordinary Shares;

(g)	the Company complying with those of its undertakings under this Agreement which fall to be performed on the date of this Agreement and no matter having arisen prior to the release of the Press Announcement which might reasonably be expected to give rise to a claim under Clause 14, save in any case to an extent which the Joint Global Co-ordinators do not consider, in their sole judgement, acting in good faith, to be (singly or in the aggregate) material in the context of the Rights Issue or the underwriting of the Underwritten Shares or Admission or post-Admission dealings in the Ordinary Shares;

(h)	the Company complying with its undertakings under this Agreement which fall to be performed after the date of this Agreement and at all times prior to Admission and no matter having arisen subsequent to the release of the Press Announcement and prior to the time of Admission which might reasonably be expected to give rise to a claim under Clause 14:

	(i)	other than, directly or indirectly, as a result of a MAC Event or a Material Adverse Effect having occurred subsequent to the publication of the Press Announcement; or

	(ii)	other than, directly or indirectly, as a result of a Commission Decision having been publicly announced or publicly communicated subsequent to the publication of the Press Announcement,

	PROVIDED THAT Clause 2.1(h)(i) shall not apply in circumstances where the MAC Event or Material Adverse Effect occurred as a direct or indirect consequence of a Specified Circumstance; or

	(iii)	save to an extent which the Joint Global Co-ordinators do not consider, in their sole judgement, acting in good faith, to be (singly or in the aggregate) material in the context of the Rights Issue or the underwriting of the Underwritten Shares or Admission or post-Admission dealings in the Ordinary Shares;


(i)	no event referred to in section 87G(1) of the FSMA arising between the time of publication of the Prospectus and Admission and no Supplementary Prospectus being published by or on behalf of the Company before Admission:

	(i)	other than the publication by the Company of a Re-Pricing Disclosure Document; or

	(ii)	other than where such event or the publication of the Supplementary Prospectus is:

		(A)	directly or indirectly, as a result of a MAC Event or a Material Adverse Effect having occurred subsequent to the publication of the Prospectus; or

		(B)	directly or indirectly, as a result of a Commission Decision having been publicly announced or publicly communicated subsequent to the publication of the Prospectus,

		PROVIDED THAT Clause 2.1(i)(ii)(A) shall not apply in circumstances where the MAC Event or Material Adverse Effect occurred as a direct or indirect consequence of a Specified Circumstance; or

	(iii)	save to an extent which the Joint Global Co-ordinators do not consider, in their sole judgement, acting in good faith, to be (singly or in the aggregate) material in the context of the Rights Issue or the underwriting of the Underwritten Shares or Admission or post-Admission dealings in the Ordinary Shares;

(j)	the fulfilment by the Company of its obligations under Clauses 3.1, 3.3, 4.4, 4.5, 4.6, 4.7 and 4.9 by the times (if any) specified therein;

(k)	Admission occurring not later than 8.00 a.m. on the first Dealing Day after the GM Date, or such later date as the Company and the Joint Bookrunners may agree in writing;

(l)	each condition to enable the Nil Paid Rights and the Fully Paid Rights to be admitted as a Participating Security in CREST (other than Admission) being satisfied on or before the GM Date;

(m)	the Company delivering to Underwriters’ Counsel on the Dealing Day immediately before Admission a letter in the form set out in Schedule 4 signed on behalf of the Company; and

(n)	the delivery to the Joint Bookrunners, in accordance with Clause 4.4, of the Working Capital Report and Working Capital Letter, in each case, in a form satisfactory to the Joint Global Co-ordinators (acting in good faith).

2.2 The Joint Global Co-ordinators may, in their absolute discretion:


(a)	extend the time or date for satisfaction of any condition set out in Clause 2.1, in which case a reference in this Agreement to the satisfaction of such condition shall be to its satisfaction by the time or date as so extended; or

(b)	waive the satisfaction of any such condition, other than Clauses 2.1(b), 2.1(d) and 2.1(k) in whole or in part, by giving written notice to the Company. For the avoidance of doubt, the rights of the Joint Global Co-ordinators under this Clause 2.2:

	(i)	may be exercised by the Joint Global Co-ordinators, acting jointly, for whatever reason or on whatever basis that they consider to be practicable, appropriate or advisable to them; and

	(ii)	are conferred on the Joint Global Co-ordinators, and may be exercised by the Joint Global Co-ordinators, acting jointly, in their respective capacities as such, and not in any representative or fiduciary capacity.

2.3 If any condition set out in Clause 2.1 is not satisfied (or waived by the Joint Global Co-ordinators in their absolute discretion in accordance with Clause 2.2), or becomes incapable of being satisfied, by the required time and date therefor then:


(a)	the Banks’ obligations under this Agreement shall cease and determine, without prejudice to any liability for any prior breach of this Agreement (including, without limitation, breach of any of the representations, warranties and undertakings contained herein); and

(b)	the Company’s obligations and agreements under Clauses 10, 11, 12, 13, 14, 15, 17 and 20 to 29 inclusive shall remain in full force and effect and the Company’s other obligations under this Agreement shall cease and determine, without prejudice to any liability for any prior breach of this Agreement (including, without limitation, breach of any of the representations, warranties and undertakings contained herein),

provided that, for the avoidance of doubt, the Banks’ obligations under this Agreement shall not be capable of termination at any time after Admission and such obligations shall be deemed to have become unconditional on Admission (but, for the avoidance of doubt, without prejudice to any of the rights and remedies of the Banks in respect of any breach by the Company of its obligations under this Agreement (including without limitation under this Clause 2)).

2.4 The Company shall use all reasonable endeavours to procure that each of the conditions referred to in Clause 2.1 is satisfied within the relevant time.

2.5 At or around 5.30 p.m. on the Re-Pricing Date, the Joint Global Co-ordinators will notify the Company in writing (the Re-Pricing Notification ) of the prices which represent discounts of 42 per cent. and 38 per cent., respectively to the Theoretical Ex-Rights Price. If either or both of the prices so notified is greater than 15 pence then the Issue Price will be increased from 15 pence per New Share to a price per New Share determined by the Joint Bookrunners in consultation with the Company and having taken into account, inter alia, investor feedback received by them in respect of the Rights Issue, economic, market and other conditions prevailing at the time, the condition (financial and otherwise) and prospects of the

Company and the Group at the time and the market price of an Existing Ordinary Share prior to the Re-Pricing Date as derived from the London Stock Exchange Daily Official List (provided always that it represents a discount of no more than 42 per cent. and no less than 38 per cent. to the Theoretical Ex-Rights Price and is not less than 15 pence) and such revised Issue Price will be set out in the Re-Pricing Notification. For the avoidance of doubt, if neither of the prices so notified is greater than 15 pence then the Issue Price will remain 15 pence per New Share. If the Issue Price is increased from 15 pence in accordance with this Clause 2.5 then the number of New Shares will be reduced such that the aggregate number of New Shares to be issued under the Rights Issue multiplied by the revised Issue Price equals £13,500,000,000. Nothing in this Agreement shall increase in any respect any Bank’s underwriting obligations under Clause 9. The revised Issue Price, together with the number of New Shares which are to be allotted pursuant to the Rights Issue at the revised Issue Price and certain other information to be included in the Re-Pricing Press Announcement, will be set out in the Re-Pricing Memorandum. If the Issue Price is increased in accordance with this Clause 2.5, each of the Banks and the Company will execute the Re-Pricing Memorandum.

3. A pplication for listing, admission to trading and to CREST

3.1 The Company undertakes to apply to:


(a)	the UK Listing Authority for admission of the New Shares to the Official List;

(b)	the London Stock Exchange for admission to trading of the New Shares on the London Stock Exchange’s main market for listed securities; and

(c)	Euroclear for admission of the Nil Paid Rights and Fully Paid Rights as a Participating Security in CREST.

The Company shall use all reasonable endeavours to obtain permission (a) for the admission of the New Shares to the Official List, (b) for admission to trading of the New Shares on the London Stock Exchange’s main market for listed securities (subject only to the allotment of the New Shares), and (c) for admission of the Nil Paid Rights and Fully Paid Rights as a Participating Security in CREST (subject only to Admission) as soon as practicable and, in any event, prior to the GM Date.

3.2 The Company confirms that it has applied for formal approval of the Prospectus for the purposes of, and in accordance with, the Listing Rules and the Prospectus Rules and shall use all reasonable endeavours to obtain such approval and passporting as soon as practicable and in any event in relation to approval, before publication of the Prospectus. In addition, if a price per New Share in excess of 15 pence is determined in accordance with Clause 2.5 and the Re-Pricing Disclosure Document constitutes a Supplementary Prospectus, the Company undertakes to apply for formal approval of the Re-Pricing Disclosure Document for the purposes of, and in accordance with, the Listing Rules and the Prospectus Rules and shall use all reasonable endeavours to obtain such approval and passporting as soon as practicable on the Re-Pricing Date and in any event in relation to approval, before publication of the Re-Pricing Disclosure Document.

3.3 The Company shall supply all information, give all undertakings, execute all documents, pay all fees and do or procure to be done all things in each case as may be

necessary or required (a) by the UK Listing Authority and the London Stock Exchange for the purposes of obtaining formal approval of the Prospectus and obtaining Admission and in order to give effect to the Share Capital Subdivision, and (b) to comply with the Listing Rules, the Prospectus Rules, the Admission and Disclosure Standards, the FSMA and the Companies Act, and (c) by Euroclear for the purposes of obtaining permission for the admission of the Nil Paid Rights and the Fully Paid Rights as a Participating Security in CREST.

3.4 The Company shall notify the Banks immediately of any matter referred to in section 87G(1) of the FSMA which arises between the time that the Prospectus is formally approved by the UK Listing Authority and 11.00 a.m. on the Acceptance Date. The Company shall deal with every such matter in accordance with section 87G of the FSMA, the Listing Rules and the Prospectus Rules.

3.5 The Company shall procure (to the extent that it lies in its power to do so) to be communicated or delivered to the Banks all such information and documents (signed by the appropriate person where so required) as the Banks may reasonably require to enable them to discharge their obligations hereunder and pursuant to or in connection with obtaining Admission, the Rights Issue, the Share Capital Subdivision or as may be required to comply with the requirements of the FSMA, the FSA or the London Stock Exchange. In particular, if any Underwriter is required to obtain permission from the FSA and any other relevant regulator to become a controller of the Company prior to acquiring any Underwritten Shares pursuant to Clause 9, the Company will use all reasonable endeavours to assist such Underwriter to obtain such permission.

3.6 Each Joint Sponsor shall use its reasonable endeavours to provide to the Company such assistance as the Company shall reasonably request in connection with the procedural steps required for the performance of the obligations of the Company set out in Clauses 2.1(a), 2.1(b), 2.1(c), 2.1(k), 2.1(l) and in Clause 3.1.

3.7 If, as a result of its obligations pursuant to this Agreement, any Underwriter prima facie becomes subject to an obligation to make a mandatory offer for the Company under the City Code, the Company agrees to support an application to the Panel for a waiver thereof (other than pursuant to note 7 to Rule 9.1 of the City Code or otherwise).

4. A pproval, release and delivery of documents

4.1 The Company confirms to the Banks that a meeting or meetings of the Board or a duly authorised committee of the Board has been held (and/or, in the case of (f), (g), (h) and (i) below, undertakes to hold such a meeting) which has (or will have, as the case may be):


(a)	authorised the Company to enter into and perform its obligations under this Agreement;

(b)	approved the form and release of the Press Announcement;

(c)	approved the form of the Circular, Prospectus, Form of Proxy and Provisional Allotment Letter and authorised and approved the publication of the Circular, Prospectus, the Form of Proxy, each of the other Relevant Documents and all other


	documents connected with the Rights Issue, the Share Capital Subdivision and Admission, as appropriate;

(d)	approved the making of the Rights Issue;

(e)	approved the Share Capital Subdivision;

(f)	approved the making of the applications for Admission;

(g)	approved the making of an application to Euroclear for admission of the Nil Paid Rights and the Fully Paid Rights as a Participating Security in CREST;

(h)	authorised (or authorise, as the case may be) all necessary steps to be taken by the Company in connection with each of the above matters; and

(i)	if a price per New Share in excess of 15 pence is determined in accordance with Clause 2.5, approve the revised Issue Price, the form and release of the Re-Pricing Press Announcement, the form and publication of the Re-Pricing Disclosure Document and the execution of the Re-Pricing Memorandum.

4.2 The Company shall procure delivery of the Press Announcement to a Regulatory Information Service for release by not later than 7.00 a.m. on the date of this Agreement (or such later time and/or date as the parties may agree) and authorises the Joint Global Co-ordinators to deliver the Press Announcement and/or the Prospectus and/or an underwriting proof of the Prospectus to any potential sub-underwriters of the New Shares.

4.3 Subject to the UK Listing Authority having formally approved the Prospectus for the purpose of the Listing Rules and the Prospectus Rules, the Company shall:


(a)	make the Prospectus available in accordance with paragraph 3.2 of the Prospectus Rules and make available to the Banks such number of copies of the Prospectus as they may reasonably require; and

(b)	despatch the Circular and Form of Proxy to Ordinary Shareholders other than, save as may be agreed with the Joint Global Co-ordinators, the Excluded Territories Shareholders and publish the Prospectus,

	in each case, as soon as practicable and in any event on the date of this Agreement.

4.4 Immediately after the execution of this Agreement and, in any event, before the release of the Press Announcement and before despatching the Circular and publishing the Prospectus, the Company shall deliver the documents referred to in Part A of Schedule 2 to the Banks.

4.5 Subject to the Company supplying to the Joint Sponsors all relevant information, each Joint Sponsor shall use its reasonable endeavours to deliver to the UK Listing Authority the documents listed in paragraphs 1, 2 and 3 of Part B of Schedule 2 and each of the Banks shall use its reasonable endeavours to deliver to the Company the document referred to in paragraph 4 of Part B of Schedule 2.

4.6 If a price per New Share in excess of 15 pence is determined in accordance with Clause 2.5, before the release of the Re-Pricing Press Announcement and before publishing the Re-Pricing Disclosure Document, the Company shall deliver the documents referred to in Part C of Schedule 2 to the Banks. In addition, subject to the Company supplying to the Joint Sponsors all relevant information, to the extent that the Re-Pricing Disclosure Document constitutes a Supplementary Prospectus, each of the Banks shall use its reasonable endeavours to deliver to the Company the document referred to in paragraph 4 of Part B of Schedule 2 but with the consent being in relation to the inclusion in the Re-Pricing Disclosure Document of their names in the form and context in which they appear.

4.7 Before complying with Clause 4.8, the Company shall deliver the documents referred to in Part D of Schedule 2 to the Banks.

4.8 The Company shall procure that:


(a)	subject to paragraph (c) below, the Provisional Allotment Letters are despatched to Qualifying Non-CREST Holders other than Excluded Territories Shareholders or their agents or intermediaries, except where the Company and the Joint Global Co-ordinators are satisfied that such action would not result in the contravention of any registration or other legal requirement in any jurisdiction, on the date the Resolutions and the Share Capital Reorganisation Resolutions are passed (or such later date as may be agreed with the Joint Global Co-ordinators in writing);

(b)	subject to paragraph (c) below, the Registrar instructs Euroclear to credit the stock accounts in CREST of Qualifying CREST Holders other than Excluded Territories Shareholders or their agents or intermediaries, except where the Company and the Joint Global Co-ordinators are satisfied that such action would not result in the contravention of any registration or other legal requirement in any jurisdiction, with their entitlements to Nil Paid Rights so that they are credited at 8.00 a.m. on the first Dealing Day after the date the Resolutions and the Share Capital Reorganisation Resolutions are passed (or such later date as may be agreed with the Joint Global Co-ordinators in writing); and

(c)	except as may be agreed with the Joint Global Co-ordinators in writing (where the Company and the Joint Global Co-ordinators are satisfied that such action would not result in the contravention of any registration or other legal requirement in any jurisdiction), neither the Prospectus, any Supplementary Prospectus nor the Circular nor any Provisional Allotment Letters are sent to Excluded Territories Shareholders (in the case of such shareholders who hold their Existing Ordinary Shares in certificated form) who have not given the Company an address in the United Kingdom for the service of notices on them; nor are the stock accounts of Excluded Territories Shareholders credited with Nil Paid Rights (in the case of such shareholders who hold their Existing Ordinary Shares in uncertificated form).

4.9 Before despatching and publishing any Supplementary Prospectus (other than a Re-Pricing Disclosure Document), the Company shall deliver the documents referred to in Part E of Schedule 2 to the Banks.

4.10 On the Settlement Date, the Company will deliver the documents referred to in Part F of Schedule 2 to the Banks.

4.11 No later than five Dealing Days prior to the GM Date, the Company shall give each Joint Sponsor an undated letter from the Company to Euroclear confirming that each condition to enable the Nil Paid Rights and the Fully Paid Rights to be admitted as a Participating Security in CREST has been satisfied. Immediately after Admission, each Joint Sponsor shall date the letter and deliver it to Euroclear.

4.12 Any entitlements of Excluded Territories Shareholders who are not able to or do not take up New Shares provisionally allotted to them shall be treated as having lapsed and shall be dealt with in accordance with Clause 8.4 (to the extent relevant).

4.13 The Company undertakes to procure that as soon as practicable the relevant announcements referred to in paragraphs 9.5.5R and 9.6.4R of the Listing Rules shall be lodged with a Regulatory Information Service as required by such paragraphs.

5. Appointments

5.1 The Company confirms its appointment of each of Merrill Lynch and UBS as Joint Sponsors in connection with the proposed Admission of the New Shares.

5.2 The Company confirms that the appointment in Clause 5.1 confers on Merrill Lynch and UBS all powers, authorities and discretions which are necessary for, or incidental to, the performance of their functions as Joint Sponsors pursuant to the Rights Issue and in connection with the Share Capital Subdivision. The Company will ratify and confirm all actions which the Joint Sponsors properly and lawfully take pursuant to this appointment.

5.3 The Company acknowledges and agrees that none of the Banks are responsible for and have not authorised and will not authorise the contents of the Prospectus and that the Banks have not been requested to verify, nor are, nor shall be, responsible for verifying, the accuracy, completeness or fairness of any information in any of the Relevant Documents (or any supplement or amendment to any of the foregoing).

5.4 The Company consents to each Joint Sponsor disclosing to the FSA at any time before or after Admission, any information which it in its absolute discretion deems to relate to the Company and to address non-compliance with the Listing Rules and/or the Disclosure Rules and Transparency Rules provided that where legally permitted and reasonably practicable such Joint Sponsor notifies the Company prior to making, and consults as to the timing and manner of, such disclosure.

5.5 The Company irrevocably authorises each of the Banks to give to the Registrars and/or Euroclear any instructions consistent with this Agreement and/or the Relevant Documents that it reasonably considers to be necessary for, or incidental to, the performance of its functions as joint sponsor, joint global co-ordinator, joint bookrunner, underwriter, co-bookrunner or co-lead manager (as the case may be).

5.6 The Company acknowledges that the Joint Sponsors’ responsibilities as sponsors pursuant to the Listing Rules are owed solely to the FSA and that agreeing to act as sponsor does not of itself extend any duties or obligations to any one else, including the Company.

5.7 The Company confirms the appointment of each of the Underwriters as underwriter for the purposes of co-ordinating and underwriting the Underwritten Shares on the terms and in the manner described in the Relevant Documents and upon and subject to the terms and conditions set out in this Agreement.

5.8 The Company confirms that the appointments in Clause 5.7 confer on each of the Underwriters all powers, authorities and discretions which are necessary for, or incidental to, the performance of its functions as underwriter to the Rights Issue. The Company will ratify and confirm all actions which an Underwriter properly and lawfully takes pursuant to this appointment.

5.9 The Company confirms the appointment of Citi, GS, HSBC, JPMC, Merrill Lynch and UBS as joint bookrunners for the purposes of the Rights Issue on the terms and in the manner described in the Relevant Documents and upon and subject to the terms and conditions set out in this Agreement.

5.10 The Company confirms that the appointment in Clause 5.9 confers on each of the Joint Bookrunners all powers, authorities and discretions which are necessary for, or incidental to, the performance of its functions as joint bookrunner to the Rights Issue (including the appointment of such agents and affiliates as it deems appropriate). The Company will ratify and confirm all actions which each of the Joint Bookrunners properly and lawfully takes pursuant to this appointment.

5.11 The Company confirms the appointment of the Co-Bookrunner and the Co-Lead Managers as co-bookrunner and co-lead managers, respectively, for the purposes of the Rights Issue on the terms and in the manner described in the Relevant Documents and upon and subject to the terms and conditions in this Agreement.

5.12 The Company confirms that the appointment in Clause 5.11 confers on the Co-Bookrunner and the Co-Lead Managers all powers, authorities and discretions which are necessary for, or incidental to, the performance of their functions as co-bookrunner and co-lead managers to the Rights Issue (including the appointment of such agents and affiliates as they deem appropriate). The Company will ratify and confirm all actions which the Co-Bookrunner and each of the Co-Lead Managers properly and lawfully take pursuant to this appointment.

5.13 The Company will provide the Receiving Agent with all necessary authorisations and information to enable the Receiving Agent to perform its duties in connection with the Rights Issue and the Share Capital Subdivision.

6. Allotment

6.1 Subject to:


(a)	the formal approval by the UK Listing Authority of the Prospectus by the time and date referred to in Clause 2.1(b);

(b)	the UK Listing Authority having granted permission for the New Shares (nil paid) to be admitted to the Official List and the London Stock Exchange having granted permission for the New Shares (nil and fully paid) to be admitted to trading on its


	main market for listed securities and the admission of the Nil Paid Rights and the Fully Paid Rights as a Participating Security in CREST (subject only to the allotment of the New Shares); and

(c)	the passing of the Resolutions, the HMT Resolution and the Share Capital Reorganisation Resolutions in accordance with Clause 2.1(d),

the Company shall provisionally allot the New Shares (nil paid) on the GM Date to all Qualifying Shareholders (including, for the avoidance of doubt, the Excluded Territories Shareholders) pursuant to a resolution of the Board. The allotment of the New Shares shall be made upon the terms and subject to the conditions set out in the Prospectus and to be set out in the Provisional Allotment Letter (to the extent that New Shares are to be allotted in certificated form) and on the basis referred to in Clause 6.4 for acceptance and payment in full by not later than 11.00 a.m. on the Acceptance Date. New Shares representing the aggregate of fractions of New Shares shall be provisionally allotted as directed by the Joint Bookrunners and dealt with in accordance with Clause 7.

6.2 The Company may only exercise its right in the Prospectus in relation to Qualifying CREST Holders to allot and issue the Nil Paid Rights, the Fully Paid Rights or the New Shares in certificated form if it has first obtained the Joint Global Co-ordinators’ written consent (such consent not to be unreasonably withheld or delayed).

6.3 By not later than 5.00 p.m. on the day that is two calendar days after the Acceptance Date, the Company will confirm the provisional allotments of the New Shares which have been taken up pursuant to a resolution of the Board and cancel the provisional allotments of the New Shares which have not been taken up. By not later than the second Dealing Day after the Acceptance Date (or such later date as the Company and the Joint Global Co-ordinators may agree, acting reasonably), the Company will allot a number of New Shares equal to the number of New Shares for which provisional allotments were not taken up in favour of the persons who, pursuant to Clauses 8.4 and/or 9.1, are to subscribe for such New Shares, pursuant to a resolution of the Board, save that where any such allotment of New Shares is in favour of the Underwriters pursuant to Clause 9.1, such allotment shall be provisional and subject to the terms set out in Clause 9.4.

6.4 If a Supplementary Prospectus is issued by the Company two or fewer days prior to the date specified in the Prospectus as the Acceptance Date (or such later date as may be agreed between the parties), the parties agree that the Acceptance Date shall be extended to the date which is three Business Days after the date of issue of the Supplementary Prospectus and all dates in this Agreement referable to the Acceptance Date shall also be extended mutatis mutandis .

6.5 The New Shares, when issued and fully paid, will rank pari passu in all respects with the existing issued Ordinary Shares and will be free from all liens, charges, encumbrances and equitable interests.

7. Placing of fractional entitlements

7.1 As soon as reasonably practicable following the close of business on the GM Date; the Company shall inform each of the Joint Bookrunners of the number of New Shares

representing the aggregate of fractional entitlements. As soon as practicable after dealings in the New Shares commence (nil paid), the Joint Bookrunners shall (acting as agents for the Company) use their reasonable endeavours to procure that all or as many as is reasonably practicable of the Nil Paid Rights in respect of such New Shares are placed through the London Stock Exchange at a premium in excess of the expenses of placing (including, without limitation, any applicable brokerage and commissions and any amounts in respect of VAT which are not recoverable).

7.2 The Joint Bookrunners shall, by no later than the third Dealing Day after the GM Date, inform the Company and the Receiving Agent of the number of New Shares to be issued pursuant to Clause 7.1 (and specifying the number of such New Shares requested to be issued in each of certificated form and uncertificated form). As soon as reasonably practicable after the Joint Bookrunners shall have so notified the Company and the Receiving Agent:


(a)	the Company shall deliver to the Joint Global Co-ordinators on behalf of themselves and the other Joint Bookrunners, or as it shall direct, nil paid split Provisional Allotment Letters in respect of those Nil Paid Rights so placed which placees have requested to receive in certificated form, in the names and denominations required by them; and

(b)	the Company shall procure that the Receiving Agent instructs Euroclear to credit the stock accounts in CREST (notified by the Underwriters) with the number of Nil Paid Rights that they require in respect of those Nil Paid Rights so placed which placees have requested to receive in uncertificated form,

and after the Company has complied with its obligations in Clauses 7.2(a) and 7.2(b), the Joint Bookrunners shall forthwith account to the Receiving Agent for the net proceeds of placing of those Nil Paid Rights that have been placed and the Company shall ensure that the net proceeds of the placing are dealt with in accordance with Clause 7.3.

7.3 It shall be a term of each placing referred to in Clause 7.1 that the proceeds of that placing shall be paid to the Receiving Agent in accordance with the terms of the Receiving Agent Agreement.

7.4 Each Joint Bookrunner severally agrees to consult regularly with the Company whilst performing the procedures set out in Clause 7.1 in relation to the status of its endeavours to procure the placement of the Nil Paid Rights in respect of the New Shares representing the aggregate of fractional entitlements and to provide updates as to the identity of the placees procured and the number of such shares for which placees have been procured on at least a daily basis. Subject to compliance with the foregoing requirements of this Clause 7.4, the Joint Bookrunners shall have absolute discretion to procure such placees of Nil Paid Rights as they think fit and to determine the number of Nil Paid Rights which each such placee acquires.

7.5 If the Nil Paid Rights referred to in Clause 7.1 have not been placed by the time set out in Clause 8.4, they shall be dealt with in accordance with Clause 8 and Clause 9 (to the extent relevant) as if they were New Shares not taken up. Any net proceeds of the placing in respect of such Nil Paid Rights receivable by the Joint Bookrunners pursuant to Clause 8.5

will be paid to the Receiving Agent and will be treated as if they were net proceeds of the placing for the purposes of Clause 7.3.

8. Underwritten Shares not taken up

8.1 If, by 11.00 a.m. on the Acceptance Date, all the Underwritten Shares shall have been taken up, or are subsequently deemed to have been taken up pursuant to Schedule 1, the Banks’ obligations under Clauses 8 and 9 shall cease.

8.2 Whether or not any Underwritten Share shall have been taken up shall be determined in accordance with the provisions of Schedule 1 and the parties agree to give effect to the provisions of Schedule 1.

8.3 As soon as practicable after 11.00 a.m. on the Acceptance Date and by not later than 5.00 p.m. on the second calendar day after the Acceptance Date (or such later date as the Company and the Joint Global Co-ordinators may agree, acting reasonably), the Company will (or will procure that the Receiving Agent will) notify the Joint Bookrunners in writing of the number of Underwritten Shares which have not been taken up.

8.4 The Joint Global Co-ordinators will severally (each in accordance with their Proportionate Share) use their reasonable endeavours to procure (as agent for the Company) subscriber(s) for Underwritten Shares equivalent to the number of Underwritten Shares which are not taken up (or, at their discretion, for so many of the Underwritten Shares in respect of which subscribers can be found) upon the terms (in so far as the same are applicable) of the Prospectus and the Provisional Allotment Letter as soon as reasonably practicable and in any event by not later than 4.30 p.m. on the second Dealing Day after the Acceptance Date if an amount which is not less than the total of the Issue Price multiplied by the number of such Underwritten Shares for which subscriber(s) are so procured and the expenses of procurement (including any applicable brokerage and commissions and amounts in respect of VAT which are not recoverable) can be obtained. Any subscribers so procured by the Joint Global Co-ordinators shall subscribe for the Underwritten Shares at the Issue Price and any amount in excess of the Issue Price shall be paid by the subscriber and received by the Joint Global Co-ordinators on the basis that the same shall be applied in meeting the Joint Global Co-ordinators’ expenses of procuring such acquisition (including any applicable brokerage and commissions and amounts in respect of VAT which are not recoverable) and that any balance remaining shall be received as agent for and payable to non-accepting Qualifying Shareholders in accordance with Clause 8.7. The Joint Global Co-ordinators shall not be obliged to endeavour to procure such subscriber(s) and may, at any time on or after the Acceptance Date, cease or decline to endeavour to procure any such subscriber(s) if, in their opinion, it is unlikely that any such subscriber(s) can be so procured by such time and on the terms referred to above whereupon the Joint Global Co-ordinators shall not be under any obligation to endeavour to procure any such subscriber(s).

8.5 Each Joint Global Co-ordinator severally agrees: (i) to comply with the terms of the Selling Restrictions in seeking to procure subscribers for the purpose of Clause 8.4; and (ii) to consult regularly with the Company whilst performing the procedure set out in Clause 8.4 in relation to the status of its endeavours to procure subscribers for the Underwritten Shares not taken up in accordance with Schedule 1 and to provide the Company with updates as to the identity of subscribers for such shares and the number of such shares for which subscribers

have been procured on at least a daily basis. Subject to compliance with the foregoing requirements of this Clause 8.5, each Joint Global Co-ordinator shall have absolute discretion to use its reasonable endeavours to procure such subscribers in the manner and otherwise as it thinks fit. The Joint Global Co-ordinators shall, by agreement between themselves, determine the number of Underwritten Shares which each such subscriber subscribes for.

8.6 The Joint Global Co-ordinators shall:


(a)	procure that a schedule is delivered to the Company (or the Registrar on behalf of the Company) by no later than 7.30 p.m. on the second Dealing Day after the Acceptance Date following completion of the procedure set out in Clause 8.4 showing the names of the subscribers procured by the Joint Global Co-ordinators pursuant to Clause 8.4 and specifying the number of Underwritten Shares to be issued in each of certificated form and uncertificated form to such subscribers (the Rump Placing Schedule ) and the Joint Global Co-ordinators will consult with the Company in respect of the final version of the Rump Placing Schedule promptly after and, in any event within two hours of, its receipt pursuant to this Clause 8.6; and

(b)	in respect of the amounts received by the Joint Global Co-ordinators in accordance with Clause 8.4 (and after deduction of the expenses of procuring subscribers, including amounts in respect of VAT which are not recoverable), by not later than the fifth Dealing Day after the Acceptance Date procure payment to the Receiving Agent:

	(i)	of the Issue Price in respect of the Underwritten Shares for which subscribers are procured pursuant to Clause 8.4; and

	(ii)	(on behalf of the persons, and in the proportions, referred to in Clause 8.7) of the balance,

	against the issue of Underwritten Shares in certificated form in such names and denominations as specified by the Joint Global Co-ordinators pursuant to Clause 8.6(a) in respect of the Underwritten Shares to be issued in certificated form and subject to Euroclear crediting the Underwriters’ (or their nominees’) stock accounts in CREST (notified by the Underwriters) with the number of Underwritten Shares specified by the Joint Global Co-ordinators pursuant to Clause 8.6(a) in respect of the Underwritten Shares to be issued in uncertificated form (such Underwritten Shares to be held as nominee for the subscribers procured pursuant to Clause 8.4).

8.7 The Company shall procure that the Receiving Agent makes payment of the amount received by the Receiving Agent pursuant to Clause 8.6(b)(ii) in accordance with the terms of the Receiving Agent Agreement to the non accepting Qualifying Shareholders to whom New Shares were provisionally allotted pro rata to their lapsed provisional entitlements as soon as practicable after receipt (save that individual amounts of less than £3.00 will not be so paid but will be aggregated and paid to the Company for the purposes set out in the Prospectus. If the Nil Paid Rights were in certificated form when they lapsed, such payment shall be made to the person whose name and address appears on page one of the Provisional Allotment Letter relating to those Nil Paid Rights. If the Nil Paid Rights were in uncertificated form

when they lapsed, such payment shall be made to the person registered as the holder of those Nil Paid Rights when they were disabled in CREST.

8.8 In the absence of any fraud or wilful default by a Joint Global Co-ordinator which has been finally and judicially determined by a court of competent jurisdiction to have occurred, that Joint Global Co-ordinator shall not be responsible, whether to the Company, any Qualifying Shareholder, any other shareholder or otherwise, for any loss or damage to any person arising from any such transactions as are mentioned in this Clause 8 or for any insufficiency or alleged insufficiency of any dealing price at which subscribers for New Shares may be procured by it or for the timing of any such acquisition or for any determination by that Joint Global Co-ordinator to cease or decline to endeavour to procure such subscribers.

9. Underwriting

9.1 If and to the extent that the Joint Global Co-ordinators are unable to procure subscribers in accordance with Clause 8.4, the Underwriters, as underwriters, shall procure subscribers or, subject to Clause 9.4, themselves subscribe at the Issue Price for the Underwritten Shares not otherwise taken up and for which subscribers are not procured under Clause 8.4. The obligations of the Underwriters in this Clause 9.1 are several (and not joint or joint and several) and, save as otherwise set out in this Clause 9, each Underwriter shall be responsible only for its Proportionate Share of the Underwritten Shares not otherwise taken up and for the avoidance of doubt, save as provided pursuant to Clause 9.10, no Underwriter shall have any liability or obligation in respect of any default by another.

9.2 Each Underwriter shall, not later than the close of business on the fifth Dealing Day after the Acceptance Date, pay, or procure payment of, the Issue Price for the Underwritten Shares subscribed for by it (subject to Clause 9.4) under Clause 9.1 (or for which it has procured subscribers) to the Receiving Agent against credit of fully paid securities representing those Underwritten Shares to the uncertificated securities account of such Underwriter as notified by it to the Company and the Receiving Agent. Upon compliance with this Clause 9.2 by the relevant Underwriter, that Underwriter will be under no further liability to the Company.

9.3 Any subscription for Underwritten Shares under Clause 8.4 or Clause 9.1 will be made on the terms and conditions and on the basis of the information contained in the Relevant Documents (except as regards the time and method for acceptance and payment) so far as they are applicable, subject to the memorandum and articles of association of the Company and, in the case of any acquisition under Clause 9.1, on the terms of this Agreement.

9.4 If the issue of Underwritten Shares to an Underwriter pursuant to Clause 6.3 of this Agreement would result in that Underwriter holding a shareholding in the Company in excess of 4.99 per cent. (or such other percentages as the relevant Underwriter, acting in good faith, determines and notifies in writing to the Company from time to time) of the total share capital of the Company on a fully-diluted basis taking into account the number of shares then held by the Underwriter (the Relevant Underwriter ), the Relevant Underwriter shall give advance written notice thereof to the Company no later than the third Dealing Day after the Acceptance Date and shall specify in such notice whether, as a result of the obligation to

obtain the relevant regulatory approval or consent in any jurisdiction where the Company conducts banking, insurance and/or other regulated operations or as a result of regulatory prohibitions on holdings above a certain threshold by the Relevant Underwriter in any of the Group companies (the Regulatory Approvals ), the Relevant Underwriter elects not to take delivery of the Underwritten Shares to the extent its shareholding in the Company would be in excess of 4.99 per cent. (or such other percentages as the Relevant Underwriter determines and notifies in writing to the Company from time to time) (the Excess Shares ). Such Excess Shares shall be provisionally allotted to the Relevant Underwriter.

If such notice specifies that the Relevant Underwriter elects not to take delivery of the Excess Shares, the Relevant Underwriter and the Company shall promptly consult together and attempt to procure sub-underwriters to subscribe for some or all of the Excess Shares by the fifth Dealing Day after the Acceptance Date. Should it not be possible to find sub-underwriters for all Excess Shares, then on the fifth Dealing Day after the Acceptance Date, the following shall take place:


(a)	the Relevant Underwriter shall take delivery of that number of Underwritten Shares such that its shareholding in the Company does not exceed 4.99 per cent. (or such other percentage as the Relevant Underwriter, acting in good faith, determines and notifies in writing to the Company) of the total share capital of the Company on a fully-diluted basis;

(b)	the Relevant Underwriter shall pay to the Company the Issue Price for: (i) the Underwritten Shares to be taken up by it hereunder (after applying the provisions of this Clause 9.4), and (ii) the Excess Shares, by no later than close of business on the fifth Dealing Day after the Acceptance Date, and such payment in respect of the Excess Shares shall not be refundable except as, and only to the extent, provided for in Clause 9.4(f) and, for the avoidance of doubt, such refund shall only be made by way of set off as therein provided;

(c)	the obligation of the Relevant Underwriter to subscribe for the Excess Shares under this Agreement shall be extended for a period of up to three months after the fifth Dealing Day after the Acceptance Date or, if such period is extended as provided under paragraph (h) of this Clause 9.4, until the end of the extended period;

(d)	as soon as possible after the fifth Dealing Day after the Acceptance Date, the Relevant Underwriter shall seek to obtain, with the assistance and cooperation of the Company, the relevant Regulatory Approvals; wherever appropriate, the Company shall initiate and/or assist in the contacts with the local regulators and use its best efforts to ensure that the relevant Regulatory Approvals are obtained within three months after the fifth Dealing Day after the Acceptance Date; if this three-month period is extended as provided under paragraph (h) of this Clause 9.4, the Company shall continue to assist and cooperate with the Relevant Underwriter so that all relevant Regulatory Approvals are obtained by the end of the extended period;

(e)	to the extent that the Relevant Underwriter has not procured subscribers for the Excess Shares, when all Regulatory Approvals shall have been obtained in all relevant countries, the Relevant Underwriter shall send to the Company a notice to announce that an Unconditional Allotment Date shall take place within five Business


	Days of such notice; on such Unconditional Allotment Date , the Company shall unconditionally allot and deliver the remaining Excess Shares to the Relevant Underwriter;

(f)	if, at any time within the period of three months following the fifth Dealing Day after the Acceptance Date (or, if such period is extended as provided under paragraph (h) hereunder, until the end of the extended period), the Relevant Underwriter is able to procure subscribers for all the remaining Excess Shares or a number of Excess Shares representing at least 1 per cent. of the total share capital of the Company then issued and outstanding, the Relevant Underwriter shall send the Company a notice to announce that an Unconditional Allotment Date shall take place within five Business Days of such notice; on such Unconditional Allotment Date, the provisional allotment in respect of the relevant number of Excess Shares in favour of the Relevant Underwriters shall lapse and the Company shall unconditionally allot and issue the relevant number of Excess Shares to the subscribers nominated by the Relevant Underwriter. The Issue Price paid by the subscribers shall be paid by the subscribers to the Relevant Underwriter for the account of the Company and the Relevant Underwriter may set off the said Issue Price against the Company’s obligation to refund to the Relevant Underwriter the Issue Price payable under Clause 9.4(b) above on the lapse of the provisional allotment as aforesaid;

(g)	if, as a result of obtaining Regulatory Approvals in one or several countries or a determination by the Relevant Underwriter, the highest shareholding that the Relevant Underwriter would be allowed to hold in the Company according to the laws applicable in all remaining countries is higher than 4.99 per cent. (or such other percentage as the Relevant Underwriter, acting in good faith, determines and notifies in writing to the Company from time to time) of the total share capital of the Company on a fully-diluted basis and, hence, the Relevant Underwriter determines it is able to increase the number of Shares it holds in the Company, the Relevant Underwriter shall, to the extent that it has not procured subscribers for such Excess Shares, send to the Company a notice to announce that an Unconditional Allotment Date shall take place within five Business Days of such notice; on such Unconditional Allotment Date, the Company shall unconditionally allot and deliver the number of Excess Shares such that the number of Shares held by the Relevant Underwriter reaches the highest shareholding allowed by applicable law in the countries in which Regulatory Approvals remain to be obtained or such other level as the Relevant Underwriter determines;

(h)	if, on the last day of the three-month period referred to above, all or a number of Excess Shares remain to be allotted and issued, the Company shall unconditionally allot and issue on such day the remaining Excess Shares to the Relevant Underwriter; however, if at that time, the Relevant Underwriter determines that any necessary Regulatory Approval remains to be obtained, the Relevant Underwriter shall inform the Company by notice at least five Business Days prior the end of the three-month period; in such a case, the period by which all Excess Shares must be issued to the Relevant Underwriter shall be extended by three months, so as to avoid the Relevant Underwriter having to subscribe for the Excess Shares in violation of the regulatory rules applicable in any of those countries; such extension shall be granted a maximum of three times, so that the period by which the Excess Shares shall have to be


	unconditionally allotted and subscribed for by the Relevant Underwriter shall not exceed twelve months from the fifth Dealing Day after the Acceptance Date; the Company shall use all reasonable endeavours to assist and cooperate with the Relevant Underwriter so that the Relevant Underwriter is not required to subscribe for the Excess Shares prior to receipt of all necessary Regulatory Approvals; and

(i)	as long as any Excess Shares remain to be unconditionally allotted by the Company to the Relevant Underwriter, for the purpose of distributions payable to shareholders of the Company and other corporate events in relation to the Company, the Company shall pay or distribute such amounts to the Relevant Underwriter (or a person nominated by the Relevant Underwriter) as will put it in the same position as it would have been had it been a shareholder of the Company, taking into account all relevant matters (including tax), had there been no delay in the unconditional allotment and/or issue and/or delivery of any Excess Shares to the Relevant Underwriter.

9.5 If the Underwriters collectively determine, acting in good faith, that the maximum percentage shareholding in the Company specified in Clause 9.4 shall apply to the percentage of Ordinary Shares held by the Underwriters on an aggregated and not an individual basis then the provisions of Clause 9.4 shall apply, mutatis mutandis , to the Underwriters as a group in respect of such Underwritten Shares as would result in their aggregate holding of Ordinary Shares in the Company exceeding 4.99 per cent. (or such other percentage as the Underwriters determine, acting in good faith, and notify in writing to the Company from time to time) with each Underwriter’s obligations in Clause 9.4 in respect of Excess Shares being proportionate to its underwriting commitment set forth in Clause 9.1. The Underwriters shall notify the Company in writing of any determination made pursuant to this Clause 9.5.

9.6 Each of the Joint Global Co-ordinators severally agrees with the Company:


(a)	it will not enter into any agreement in relation to sub-underwriting with any sub-underwriter without first having consulted with the Company as to its identity; and

(b)	to use reasonable endeavours to procure that the sub-underwriting letters into which it enters contain undertakings by the relevant sub-underwriter in a substantially similar form to that in Clause 18.8, provided that such letters may in addition include exceptions for selling Existing Ordinary Shares or, following the Share Capital Subdivision becoming effective, the resulting Ordinary Shares, already held by the sub-underwriter at the date of the sub-underwriting commitment.

9.7 Provided that nothing in this Clause 9.7 shall require any Underwriter to make any enquiries or to take any other action whatsoever to ascertain whether there has been any such breach by a sub-underwriter, each Underwriter agrees to inform the Company if it has come its attention that any sub-underwriter who gives such an undertaking has breached its obligations under the relevant provision of the sub-underwriting letter, it being understood that no Underwriter shall have any liability to any person for any such breach or other action or omission of any such sub-underwriter.

9.8 In the event that one of the Underwriters ( IT BEING UNDERSTOOD that for the purposes of this Clause 9.8 and Clauses 9.9, 9.10 and 9.11 only, “Underwriters” means the

Underwriters other than the Co-Lead Managers and “non-defaulting Underwriters” shall be construed accordingly) defaults or, in the reasonable opinion of the Joint Global Co-ordinators, is likely to default in the performance of its obligations to subscribe for Underwritten Shares treated as having been not taken up (the Defaulted Shares ) on the Settlement Date as required pursuant to Clause 9.1, then each of the non-defaulting Underwriters shall be obliged, severally (and not jointly or jointly and severally), to procure subscribers for (any such procurement being conducted by JPMC on behalf of JPMS) or to subscribe for themselves the Defaulted Shares in the proportions that their respective underwriting obligations bear to the underwriting obligations of all non-defaulting Underwriters, provided, in each case, that: (i) the number of Defaulted Shares which any Underwriter subscribes for pursuant to this Clause 9.7 shall not exceed 10 per cent. of the Underwritten Shares; and (ii) if the number of Defaulted Shares which any Underwriter subscribes for pursuant to this Clause 9.7 is such that they would fall within the definition of Excess Shares, then the acquisition of such Defaulted Shares shall be subject to Clause 9.4.

9.9 No actions taken by any party pursuant to Clause 9.7 shall relieve any defaulting Underwriter from liability in respect of its default.

9.10 In the event of a default in the circumstances described in Clause 9.7, any of the Joint Global Coordinators, the Joint Bookrunners and the Company shall have the right (without obligation) to postpone the Settlement Date for a period not exceeding seven Business Days in order to effect any required changes in the Prospectus or in any other documents or arrangements.

9.11 In the event that two or more Underwriters default in the performance of their obligations to subscribe for the New Shares treated as having been not taken up, pursuant to Clause 9.1, the provisions of Clauses 9.7, 9.9 and 9.10 shall not apply.

10. Commissions and expenses

10.1 Subject to the Banks’ obligations under this Agreement having become unconditional and to this Agreement not having been terminated, the Company shall pay to the Joint Bookrunners and the Co-Lead Managers in consideration for their services under this Agreement an aggregate base fee (the Base Fee ) of 2.25 per cent. of the Issue Price multiplied by the aggregate number of Underwritten Shares, payable to the Joint Bookrunners and the Co-Lead Managers in their Proportionate Shares (and, in the case of JPMC, in JPMS’s Proportionate Share). The Base Fee shall be paid by the Company together with an additional amount in respect of any applicable VAT in accordance with Clause 10.6 (such VAT to be paid by the Company within 10 Business Days after the issue by any Joint Bookrunner or Co-Lead Manager of a valid VAT invoice).

10.2 In addition to the fees described in Clause 10.1 above, the Company may, in its sole discretion (as to payment and allocation), pay to the Joint Bookrunners a discretionary fee equal to 0.2 per cent. of the Issue Price multiplied by the aggregate number of Underwritten Shares. Such discretionary fee shall be payable together with an additional amount in respect of any applicable VAT in accordance with Clause 10.6 (such VAT to be paid by the Company within 10 Business Days after the issue by any Joint Bookrunner of a valid VAT invoice).

10.3 The Company shall pay the fees payable to the Joint Bookrunners and the Co-Lead Managers by not later than the fifth Dealing Day following the Acceptance Date. Without prejudice to their right to receive payment directly from the Company pursuant to this Clause 10.4, the Joint Bookrunners and the Co-Lead Managers shall be entitled and are authorised to deduct some or all of such fees and any other fee and any expense which the Company has agreed to pay the Joint Bookrunners and the Co-Lead Managers from any amount otherwise payable by the Joint Bookrunners and the Co-Lead Managers to the Company under this Agreement.

10.4 Out of the commissions referred to in this Clause 10, the Joint Global Co-ordinators shall pay (together with VAT where applicable) all sub-underwriting commissions payable to such persons (if any) as the Joint Global Co-ordinators may procure to subscribe for Underwritten Shares.

10.5 In addition to the fees and commissions referred to in Clauses 10.1, 10.2 and 10.3, the Company shall pay (whether or not the Banks’ obligations under this Agreement become unconditional) all costs and expenses of, or in connection with, the Rights Issue, the Share Capital Subdivision, the GM, the allotment and issue of the New Shares and this Agreement. This shall include (but shall not be limited to) the UK Listing Authority and the London Stock Exchange listing and trading fees, other regulatory fees and expenses, printing and advertising costs, postage, the Receiving Agent’s charges, its own and the Banks’ properly incurred legal and other out of pocket expenses, all accountancy and other professional fees, properly incurred public relations fees and expenses and all stamp duty and stamp duty reserve tax (if any) and other duties and taxes (other than corporation tax incurred by any of the Joint Bookrunners on the commissions payable to them under this Clause 10) (each a Transfer Tax ) in connection with the Rights Issue or the Share Capital Subdivision and the Company shall indemnify and hold harmless each Indemnified Person against any such Transfer Tax, provided that the Company shall not be liable for any Transfer Tax arising as a result of any subsequent sales or transfers of, or agreements to transfer, the Underwritten Shares by any Underwriter following the acquisition by such Underwriter under Clause 9, (provided that such exclusion shall not limit the liability of the Company with respect to Transfer Tax (if any) arising in connection with the placing of Excess Shares by the Joint Bookrunners or the placing of Excess Shares to the subscribers nominated by the Underwriters, in each case pursuant to Clause 9) or any subscriber of New Shares and shall not be responsible for any charges of CREST payable by users other than the Company. The Company shall immediately on request pay or reimburse the Banks the amount of any expenses which are to be borne by the Company and which the Banks (or any subscriber of New Shares) have paid.

The Company shall have no liability under this Clause 10.5 in respect of any stamp duty reserve tax arising pursuant to sections 67, 70, 93 or 96 of the Finance Act 1986.

10.6 Where, pursuant to this Agreement, a sum is paid or reimbursed to a Bank or an Indemnified Person, the Company shall also pay to that Bank or Indemnified Person in respect of VAT:


(a)	where the payment or reimbursement constitutes the consideration or part of it for any supply of services by that Bank to the Company, such amount as equals any VAT properly payable thereon and on such irrecoverable VAT, if any, as is referred to in (b) below;


(b)	(except where (c) below applies) such amount as equals any VAT charged to that Bank in respect of any cost, charge or expense which gives rise to or is reflected in the payment or reimbursement and which that Bank certifies is not recoverable by it, or the representative member of the VAT group which it is a member of, by repayment or credit, that certificate to be conclusive save in the case of manifest error; and

(c)	on any payment or reimbursement in respect of or indemnification for costs, charges or expenses incurred by that Bank as agent for the Company and except where section 47(2A) or section 47(3) of the Value Added Tax Act 1994 applies, such amount as equals the amount included in the costs, charges or expenses in respect of VAT, provided that in such a case the Bank will use reasonable endeavours to procure that the actual supplier of the goods or services which the Bank received as agent issues its own VAT invoice directly to the Company.

11. Restrictions on actions and announcements

11.1 Without the Joint Global Co-ordinators’ prior written consent (such consent not to be unreasonably withheld or delayed), the Company undertakes that it will not (and the Company will use all reasonable endeavours to procure that no member of the Group will) at any time prior to the date which is 60 Dealing Days after, as appropriate, the Acceptance Date or the date that the Banks’ obligations under this Agreement cease in accordance with Clause 2.3 or Clause 16.1:


(a)	enter into any commitment or agreement, or put itself in a position where it is obliged to announce that any commitment or agreement may be entered into, which is or is reasonably likely to be material in the context of the Rights Issue or the underwriting of the Underwritten Shares or Admission or post-Admission dealings in the Ordinary Shares, save in each case for any commitment or agreement referred to in or contemplated by the Press Announcement or the Prospectus or the Exchange Offer Memoranda; or

(b)	allot, issue (or contract to allot or issue) or grant any rights in respect of any shares or other securities of the Company or of a Group Company, except for (i) the issue by the Company of the New Shares or other subordinated or contingent capital securities referred to in or contemplated by the Press Announcement, the Prospectus or the Exchange Offer Memoranda, (ii) the issue by the Company (or any Group Company) of any Existing Ordinary Shares or Ordinary Shares upon the exercise of an option or warrant or the conversion of a security outstanding on the date of this Agreement and disclosed in the Press Announcement, the Prospectus or the Exchange Offer Memoranda, (iii) the grant of options or rights under, and the allotment and issue of Existing Ordinary Shares or Ordinary Shares pursuant to options or grants granted under, the Company’s existing share schemes, in each case in accordance with normal practice, (iv) any other issue of Existing Ordinary Shares or Ordinary Shares pursuant to an obligation entered into prior to the date hereof and disclosed in the Prospectus, (v) any intra-group issues between wholly-owned subsidiaries, (vi) any issues required by relevant regulatory authorities, (vii) any issue to holders of Limited Voting Shares of: (A) Limited Voting Shares in respect of the Company’s capitalisation issue of May 2009; and (B) Ordinary Shares in respect of the


	Company’s placing and open offer of November 2008 and compensatory open offer of May 2009, or (viii) the issue by the Company or any Group company of such instruments constituting core tier 1, tier 1, lower tier 2 or upper tier 2 capital as are expressly referred to in the Press Announcement, the Prospectus or the Exchange Offer Memoranda or the issue by the Company of any Existing Ordinary Shares or Ordinary Shares upon the conversion of such securities; or

(c)	circulate, distribute, publish, issue or make (nor authorise any other person to circulate, distribute, publish, issue or make) any press or other public announcement or any advertisement, statement or public communication concerning the Company and its subsidiary undertakings which is or is reasonably likely to be material in the context of the Rights Issue or the underwriting of the Underwritten Shares or Admission or post-Admission dealings in the Ordinary Shares (other than (i) an announcement, advertisement, statement or communication required by law or any regulatory body (provided that in that event (1) the Company will consult, to the extent practicable, with the Joint Global Co-ordinators before making any such release; and (2) will obtain the prior consent of any Joint Bookrunner or Underwriter whose name is included in the announcement, advertisement, statement or public communication in question for such inclusion); and (ii) in respect of any public announcement, advertisement, statement or public communication in connection with any matter arising in the ordinary course of business of the Group that is not material in the context of the Rights Issue or the underwriting of the Underwritten Shares or Admission or post-Admission dealings in the Ordinary Shares, but subject always to Clause 11.2).

11.2 The Company undertakes that it will not at any time during the period ending on the date that is 60 Dealing Days following the Acceptance Date make any public announcement, advertisement, statement or communication as is referred to in Clause 11.1 or relating to any matters, events or circumstances which may be necessary to be made known to the public in order to enable the shareholders of the Company and the public to appraise the position of the Company or to avoid the establishment of a false market in its securities, either individually or jointly with any other person (including, without limitation, any matter whatsoever which would require notification by the Company to a Regulatory Information Service in accordance with the provisions of the Listing Rules), without first, where reasonably practicable (a) notifying the Joint Global Co-ordinators as to the content, form and manner of publication of such announcement, advertisement, statement or communication, (b) making available drafts of any such announcement, advertisement, statement or communication to the Joint Global Co-ordinators in sufficient time prior to its publication to allow the Joint Global Co-ordinators an opportunity to consider and comment on the same, and (c) consulting with the Joint Global Co-ordinators as to the content, form and manner of publication of such announcement, advertisement, statement or communication.

11.3 The Company shall use reasonable endeavours not to, and to procure that, no member of the Group will (a) between the date hereof and the Settlement Date, without the prior written consent of the Joint Global Co-ordinators (such consent not to be unreasonably withheld); and (b) for a period that is 60 days after the Settlement Date, without having first consulted with the Joint Global Co-ordinators (and taken into account any of their requests which are reasonable in the context of the Rights Issue, the Share Capital Subdivision or the Banks’ obligations under this Agreement), enter into any commitment, agreement or

arrangement which is or is reasonably likely to be material and adverse to the condition of the Company or the Group taken as a whole or which is materially inconsistent with, or represents a material departure from or new development in, any disclosure or expression of policy or intention or statement contained in the Prospectus, subject in each case to applicable law and regulation (including the Directors’ fiduciary duties) but provided that where the Company or any Group company considers itself bound by applicable law or regulation to enter into any such commitment, agreement or arrangement, it shall not do so without having first consulted with the Joint Global Co-ordinators to the extent that it is practicable to do so.

11.4 If it shall be necessary, in the reasonable opinion of the Company and its advisers or the Joint Global Co-ordinators or their legal advisers, at any such time, until the Settlement Date to amend or supplement any Relevant Documents in order to comply with the requirements of the FSMA, the Listing Rules and/or the Prospectus Rules (as the case may be) and/or ensure that the Relevant Documents remain true and accurate in all respects and not misleading up to the Settlement Date, the Company will promptly prepare and file with the FSA (or procure the filing with the FSA of) such amendment or supplement as may be necessary to correct such statement or omission or to make such Relevant Documents comply with such requirements. Before amending or supplementing any Relevant Documents, the Company will furnish the Joint Global Co-ordinators with a copy of each such proposed amendment or supplement, and will not make any such proposed amendment or supplement without the prior written consent of the Joint Global Co-ordinators, provided always that, subject to the terms of Clause 3.4, (i) nothing in this paragraph shall prevent the Company or the Directors from complying with their obligations at law or under the Prospectus Rules, the Listing Rules or the FSMA having taken into account any requests of the Joint Global Co-ordinators acting in good faith; and (ii) this paragraph shall be without prejudice to the rights of the Banks pursuant to Clauses 2.3 and 16.

11.5 The Company undertakes to make all such announcements concerning the Rights Issue and the Share Capital Subdivision as shall be necessary to comply with the Listing Rules, the Disclosure Rules and Transparency Rules, the Prospectus Rules, the Admission and Disclosure Standards and section 118, sections 118A to 118C inclusive and section 397 of the FSMA, or which any of the Joint Global Co-ordinators otherwise reasonably considers to be necessary or desirable (including, without limitation, for the purposes of procuring any sub-underwriters or potential subscribers for any Underwritten Shares in accordance with this Agreement) and any of the Joint Global Co-ordinators shall be entitled to make any such announcement if the Company fails (in the opinion of such Joint Global Co-ordinators acting in good faith) promptly to fulfil its obligations under this Clause 11.2.

11.6 For the avoidance of doubt, the restrictions on actions or announcements contained in this Clause 11 shall not operate to restrict or limit any action which the Company or the Group takes in accordance with the terms of this Agreement, the Top-up Issues Underwriting Agreement or in furtherance of the proposals described in the Press Announcement, the Prospectus, the Circular or the Exchange Offer Memoranda or as is required in order to give effect to the proposals described in such documents or limit any action which the Company or the Group takes in the ordinary course of the business or banking operations of the Group, as described in the Prospectus, provided that, to the extent reasonably practicable, the Company shall have consulted with the Joint Bookrunners prior to any such action or announcement and given the Joint Bookrunners a reasonable period of time to consider such proposed action or announcement.

12. Representations, warranties and undertakings

12.1 The Company represents, warrants and undertakes to each Bank that each statement set out in Schedule 3 is true and accurate and not misleading at the date of this Agreement and shall remain true and accurate and not misleading and be repeated at any Re-Pricing Date, at Admission, at the Acceptance Date, at any Time of Sale, at the Settlement Date and on the date of publication of any Supplementary Prospectus, in each case by reference to the facts and circumstances then existing (subject to any such matters and facts fairly disclosed in any Supplementary Prospectus published prior to the relevant date).

12.2 The Company acknowledges that each of the Banks is entering into this Agreement in reliance on such representations, warranties and undertakings. Each representation, warranty and undertaking shall be construed separately and shall not be limited or restricted by reference to or inference from the terms of any other representation, warranty and undertaking or any other term of this Agreement. Warranties shall be deemed to be given under this Clause 12 in relation to the relevant document, announcement or event on the basis that any reference in any such Warranty to something being done or something being the case in relation to such document, announcement or event which is expressed in the future tense shall be regarded, to the extent the context requires, as being expressed in the present tense.

12.3 The Company shall use reasonable endeavours not to cause or permit and to procure that no other member of the Group nor any of its or their respective directors, officers, employees or agents shall cause or permit, without the prior consent of the Joint Global Co-ordinators, such consent not to be unreasonably withheld or delayed, any event to occur or omit to do anything between the date of this Agreement and the Settlement Date or the date on which the Banks’ obligations under this Agreement cease in accordance with Clauses 2.3, 8.1 and/or Clause 16.1, as relevant, and shall consult with the Joint Global Co-ordinators from the Settlement Date up to and including the date that falls 60 days after the Settlement Date before taking any actions (a) which would make any statement in Schedule 3 untrue, inaccurate or misleading if, in such case, such statement were repeated at such date by reference to the facts and circumstances then existing, or (b) which would result in a breach by the Company of any of its obligations or undertakings under this Agreement, which in any such case would be material in the context of the Rights Issue.

12.4 The Company shall promptly notify the Banks (giving reasonable details) if it comes to the knowledge of the Company or any Director that (and the Company undertakes to make all reasonable enquiries to ascertain whether) any of the Warranties (a) was (or the Company or the relevant Director reasonably believes it may have been) breached or untrue, inaccurate or misleading in any respect when given, or (b) has ceased (or the Company or the relevant Director reasonably believes it may have ceased) to be true and accurate or has become (or the Company or the relevant Director reasonably believes it may have become) misleading in any respect, or if it becomes aware of any circumstance which would or is reasonably likely to cause any of the Warranties to be breached or become untrue, inaccurate or misleading in any respect if repeated by reference to the facts and circumstances existing at any time during the period between the date of this Agreement and the date which is 60 days after the Settlement Date or, if earlier, the date on which the Banks’ obligations under the Agreement cease in accordance with Clauses 2.3, 8.1 and/or Clause 16.1, or if the Company is in breach of any of its obligations under this Agreement, which, in any such case, would be material in the context of the Rights Issue.

12.5 Subject always to Clause 18.10, the Company agrees that the Underwriters who subscribe for Underwritten Shares pursuant to Clause 9 shall be entitled to the same remedies and rights of action against the Company, and to the same extent, as any person who subscribes for any New Shares pursuant to the Rights Issue on the basis of the Prospectus and the Provisional Allotment Letter.

12.6 References in this Agreement to a representation, warranty or undertaking being (or not being) true and accurate or not being (or being) misleading “ in any material respect ” or “ in all material respects ” (or similar expressions) shall mean material in the context of the Rights Issue and/or the underwriting of the Underwritten Shares and/or Admission and/or post-Admission dealings in the Ordinary Shares. In that connection and otherwise in this Agreement (including, without limitation, the statements set out in Schedule 3) in relation to references to a matter which would or might be “ material in the context of the Rights Issue or the underwriting of the Underwritten Shares or Admission or post-Admission dealings in the Ordinary Shares ” (or similar expressions) a matter shall, without limitation, be deemed to be so material if (i) it would have been material for disclosure to potential sub-underwriters or other subscribers of New Shares had such matter existed when such sub-underwriters or other subscribers of New Shares were sought for the New Shares, and/or (ii) it would be reasonably likely to have a Material Adverse Effect.

12.7 The representations, warranties and undertakings referred to in this Clause 12 shall remain in full force and effect notwithstanding completion of all matters and arrangements referred to in, or contemplated by, this Agreement.

12.8 Where any of the representations, warranties and undertakings are qualified by reference to awareness and/or knowledge and/or information and/or belief, that reference shall be deemed to include a statement to the effect that it has been given after making due and careful enquiries within the Group.

12.9 The Company and the Banks undertake to observe and comply with the provisions in respect of overseas shareholders set out in section 2.6 of Part VIII of the Prospectus under the heading “Overseas Shareholders”.

12.10 Each of the Company and the Banks has offered and sold or procured subscribers for, and will offer and sell or procure subscribers for, the Nil Paid Rights, the Fully Paid Rights or the New Shares only in accordance with (i) Regulation S, (ii) to QIBs located in the United States that have executed and delivered an Investor Letter substantially in the form of Schedule 10 or (iii) pursuant to another exemption from registration under the Securities Act.

12.11 Each Bank severally represents, warrants and undertakes to the Company that it is an “accredited investor” as defined in Rule 501(a) of Regulation D under the Securities Act.

12.12 The Banks and Company recognise that the Nil Paid Rights, the Fully Paid Rights and/or the New Shares do not meet the eligibility requirements under Rule 144A under the Securities Act.

12.13 Each Bank severally acknowledges, agrees and undertakes that:


(a)	none of the Nil Paid Rights, the Fully Paid Rights or the New Shares has been or will be registered under the Securities Act and they may not be offered or sold or subscribers procured within the United States except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act;

(b)	it has not offered or sold or procured subscribers, and agrees that it will not offer or sell or procure subscribers, any Nil Paid Rights, Fully Paid Rights or New Shares constituting part of its allotment within the United States except in accordance with Rule 903 of Regulation S;

(c)	neither it, nor any of its affiliates nor any persons acting on its or their behalf have engaged or will engage in any directed selling or placing efforts with respect to the Nil Paid Rights, the Fully Paid Rights or the New Shares. Terms used in this Clause 12.13have the meaning given to them by Regulation S; and

(d)	neither it, nor any of its affiliates, nor any person acting on its or their behalf has engaged or will engage in any form of general solicitation or general advertising (within the meaning of Regulation D) in connection with any offer and sale or placing of the Nil Paid Rights, the Fully Paid Rights or the New Shares in the United States.

12.14 The Warranties contained in Schedule 3 are qualified by information fairly disclosed in the Prospectus and, if such Warranties are given on or after the publication of any Supplementary Prospectus, the Prospectus as supplemented by such Supplementary Prospectus.

13. Exclusions of liability

13.1 Without prejudice to Clause 13.2, no claim shall be made by the Company or any of its subsidiary undertakings, affiliates or associates, or any of the directors, officers or employees of any of them in any jurisdiction against any Indemnified Person to recover any Loss or Claim suffered or incurred by any person and which arises out of the carrying out by any Indemnified Person of obligations or services in connection with this Agreement, or any other agreements relating to the Rights Issue or the Share Capital Subdivision, or in connection with the Rights Issue itself or the Share Capital Subdivision itself except (otherwise than in connection with the matters referred to in Clauses 14.1(a), (b), (c) and (d) and otherwise than as a result of a payment made or an obligation or liability to make payment arising under Clause 14.1) to the extent only that the Loss or Claim is determined by a court of competent jurisdiction to have resulted from the fraud, gross negligence or wilful default of the relevant Indemnified Person.

13.2 The Company agrees that no Indemnified Person is acting as a financial adviser (except, in the case of JPMC, Merrill Lynch and UBS, solely on and subject to the strict terms of their respective Engagement Letters) or fiduciary to the Company or any other person in providing the services contemplated in this Agreement in respect of the timing, terms, structure or price of the Rights Issue (including, for the avoidance of doubt, the determination of any increase in the price per New Share in excess of 15 pence in accordance with Clause 2.5), irrespective of whether any such Indemnified Person has provided input to the Company with respect thereto. No claim shall be made by the Company, or any of its subsidiary undertakings, affiliates or associates or any of the directors, officers or employees

of any of them against any Indemnified Person in respect of the timing, terms or structure of the Rights Issue, including the setting of the Issue Price (including, for the avoidance of doubt, the determination of any increase in the price per New Share in excess of15 pence in accordance with Clause 2.5) at a level that is too high or too low. Nothing in this Clause shall exclude or restrict any duty or liability of any Indemnified Person which it has under the FSMA or arrangements for regulating any such Indemnified Person thereunder to any extent prohibited by those arrangements. It is acknowledged by all parties that:


(a)	subject to compliance by the relevant Indemnified Persons with the rules of the FSA, the Indemnified Persons may be engaged in a broad range of transactions that involve interests that differ from those of the Company or any other person; and

(b)	except, in the case of JPMC, Merrill Lynch and UBS, solely on and subject to the strict terms of their respective Engagement Letters, no Indemnified Person has advised the Company or any other person as to any general financial or strategic advice or any legal, tax, investment, accounting or regulatory matters in any jurisdiction, the Company and any other person have consulted its own legal, tax, investment, accounting or regulatory advisers to the extent they deem appropriate, and no Indemnified Person shall have any responsibility to the Company or any other person with respect thereto.

13.3 Without prejudice to any rights or claims which the Company or any of its respective subsidiary undertakings, affiliates or associates or any of the directors, officers or employees of any of them may have or assert against the Banks in connection with this Agreement, the Rights Issue, the Share Capital Subdivision or any of the other arrangements contemplated by the Relevant Documents, or any of them, or this Agreement, no claim will be brought by the Company or by any of its respective subsidiary undertakings, affiliates or associates or any of the directors, officers, partners or employees of any of them against any director or any other officer and/or partner and/or employee of any Indemnified Person in respect of any conduct, action or omission by the individual concerned in connection with this Agreement, or the Rights Issue, or the Share Capital Subdivision, or any of the other arrangements contemplated by the Relevant Documents, or any of them, or this Agreement.

14. Indemnities

14.1 The Company agrees to fully and effectively indemnify and hold harmless each Indemnified Person (and whether or not the relevant Loss or Claim is suffered or incurred or arises in respect of circumstances or events existing or occurring before, on or after the date of this Agreement and regardless of the jurisdiction in which such Loss or Claim is suffered or incurred) from and against any and all Losses or Claims, whatsoever, as incurred, if such Losses or Claims, arise, directly or indirectly, out of, or are attributable to, or connected with, anything done or omitted to be done by any person (including by the relevant Indemnified Person) in connection with the Rights Issue, the Share Capital Subdivision, Admission or the arrangements contemplated by the Relevant Documents, or any of them (or any amendment or supplement to any of them), or this Agreement, or any other agreement relating to the Rights Issue or the Share Capital Subdivision, including but not limited to:


(a)	any and all Losses or Claims whatsoever, as incurred, arising out of the Relevant Documents, or any of them (or any amendment or supplement to any of them) not


	containing or fairly presenting, or being alleged not to contain or not to fairly present, all information required to be contained therein, or arising out of any untrue or inaccurate statement or alleged untrue or inaccurate statement of a material fact contained in the Relevant Documents, or any of them (or any amendment or supplement to any of them), or the omission or alleged omission therefrom of a fact necessary in order to make the statements therein not misleading in any material respect, or any statement therein being or being alleged to be in any respect not based on reasonable grounds, in the light of the circumstances in which they were made; and/or

(b)	any and all Losses or Claims whatsoever, as incurred, arising out of any breach or alleged breach by the Company of any of its obligations under this Agreement, including any of the Warranties, covenants and undertakings set out in this Agreement, or out of the arrangements contemplated by the Relevant Documents, or any of them (or any amendment or supplement to any of them) or this Agreement, or any other agreement relating to the Rights Issue or the Share Capital Subdivision; and/or

(c)	any and all Losses or Claims whatsoever, as incurred, in connection with or arising out of the issue, publication or distribution of the Relevant Documents, or any of them (or any amendment or supplement to any of them) and/or any other documents or materials relating to the application for Admission; and/or

(d)	any and all Losses or Claims whatsoever, as incurred, in connection with or arising out of any failure or alleged failure by the Company or any of the Directors or any of its or his agents, employees or advisers to comply with the Companies Act, the FSMA, the Listing Rules, the Prospectus Rules, the Disclosure Rules and Transparency Rules, the rules and regulations of the London Stock Exchange and the Admission and Disclosure Standards, or any other requirement or statute or regulation in any jurisdiction in relation to the application for Admission, the Rights Issue, the Share Capital Subdivision, or the arrangements contemplated by the Relevant Documents, or any of them (or any amendment or supplement to any of them), or this Agreement, or any other agreement relating to the Rights Issue or the Share Capital Subdivision; and/or

(e)	any and all Losses and Claims whatsoever, as incurred, in connection with or arising out of the Share Capital Subdivision; and/or

(f)	any and all Losses or Claims whatsoever, as incurred, suffered or incurred by such Indemnified Person:

	(i)	as a person who has communicated or approved the contents of any financial promotion (other than the Relevant Documents, or any of them, or any amendment or supplement to any of them) made in connection with the Rights Issue or the Share Capital Subdivision or the application for Admission for the purpose of section 21 of the FSMA;

	(ii)	(in the case of each of the Joint Sponsors only) in their capacity as sponsor to the Company’s application for Admission,

PROVIDED THAT , the indemnity contained in this Clause 14.1 shall not apply to any Losses or Claims (i) (otherwise than in connection with the matters referred to in Clauses 14.1(a), (b), (c) and (d)) to the extent determined by a court of competent jurisdiction to have arisen as a result of the fraud, gross negligence or wilful default of that Indemnified Person or (ii) if and to the extent arising out of a decline in market value of the Ordinary Shares suffered or incurred by any Indemnified Person as a result of it having been required to subscribe for Underwritten Shares pursuant to Clause 9.1 or having Underwritten Shares provisionally allotted to it pursuant to Clause 9.4 save to the extent such decline is caused by or results from or is attributable to or would not have arisen but for (in each case directly or indirectly) (aa) the neglect or default of the Company in relation to the content, publication, issue or distribution of the Relevant Documents or any breach by the Company of any of its obligations under this Agreement, including any of the Warranties, undertakings or covenants, or (bb) any of the matters referred to in Clause 14.1(a); or (iii) to the extent they include any tax liability of an Indemnified Person in respect of its actual net income, profits or gains, recoverable VAT or Transfer Tax of the type which is not recoverable under Clause 10.5. This Clause 14.1 shall not apply to any Loss or Claim in respect of tax which is recoverable pursuant to Clauses 10.5 and 10.6.

14.2 Each Bank shall and shall use reasonable endeavours to procure that its Indemnified Persons shall (i) give notice as promptly as reasonably practicable to the Company of any action commenced against it after receipt of a written notice of any Claim or the commencement of any action, claim, suit, investigation or proceeding in respect of which a Claim for indemnification may be sought under this Clause 14, and (ii) as promptly as reasonably practicable notify the Company after any such action is formally commenced (by way of service with a summons or other legal process giving information as to the nature and basis of the claim) and shall keep the Company informed of, and, to the extent reasonably practicable, consult with the Company in relation to, all material developments in respect thereof, but in each case, only insofar as may be consistent with the terms of any relevant insurance policy and provided (in each case) that to do so would not, in such Indemnified Person’s view (acting in good faith), be prejudicial to it (or to any Indemnified Person connected to it) or to any obligation of confidentiality or other legal or regulatory obligation which that Indemnified Person owes to any third party or to any regulatory request that has been made of it. However, the failure to so notify the Company and keep the Company informed shall not relieve the Company from any liability hereunder to the extent it is not materially prejudiced as a result thereof and in any event shall not relieve the Company from any liability which it may have otherwise than on account of the indemnity set out in this Clause 14, provided that non-disclosure by reason of a legal or regulatory restriction shall not constitute a failure to notify by an Indemnified Person.

14.3 Legal advisers for Indemnified Persons shall be selected by the relevant Bank(s) connected with such Indemnified Persons. The Company may participate at its own expense in the defence of any action commenced against it provided however that legal advisers for the Company shall not (except with the consent of the relevant Indemnified Person) also be legal advisers for the Indemnified Person.

14.4 In no event shall the Company be liable for fees and expenses of more than one legal adviser (in addition to any local legal advisers) separate from its own legal advisers for all

Indemnified Persons in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances.

14.5 The Company agrees that if it becomes aware of any Claim relevant for the purposes of this Clause 14 or any matters which may give rise to a Claim it shall: (i) promptly notify the Banks thereof and (ii) subject to, and to the extent of, any duties of confidentiality and any requirements of the Company’s insurers or any legal or regulatory obligations which the Group owes to any third party or any regulatory request that has been made of it, promptly provide the Banks with such information and copies of such documents relating to the claim as the Banks may reasonably request.

14.6 The Company shall not, without the prior written consent of the relevant Indemnified Persons (acting in good faith), settle or compromise or consent to the entry of any judgment with respect to any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever in respect of which indemnification or contribution could be sought under this Clause 14 or Clause 15 (whether or not the Indemnified Persons are actual or potential parties thereto), unless such settlement, compromise or consent:


(a)	includes an unconditional release of each Indemnified Person from all liability arising out of such litigation, investigation, proceeding or claim; and

(b)	does not include a statement as to or an admission of fault, culpability or a failure to act by or on behalf of any Indemnified Person.

14.7 Each Indemnified Person which is not a party to this Agreement will have the right, under the Contracts (Rights of Third Parties) Act 1999, to enforce its rights against the Company under this Clause 14 as amended from time to time, provided that the relevant Bank with whom a relevant Indemnified Person is connected (without obligation) will have sole conduct of any action on behalf of each Indemnified Person connected to it. Save as set out above and other than in respect of Clause 15, a person who is not a party to this Agreement has no right under the Contracts (Rights of Third Parties) Act 1999 to enforce any term of this Agreement but this does not affect any right or remedy of a third party which exists or is available apart from that Act.

14.8 The Company will promptly notify each of the Banks of any limitation (whenever arising) on the extent to which the Company and/or any of its respective subsidiary undertakings, affiliates, or associates may claim against any third party or parties and/or of any waiver or release of any right of the Company to so claim (each a Limitation ) in respect of anything which may arise, directly or indirectly, out of or is based upon or is in connection with the Rights Issue, the Share Capital Subdivision, Admission or the subject matter of the obligations or services to be performed under this Agreement, or in connection with the Rights Issue or the Share Capital Subdivision, by any of the Banks or on their behalf. Where any damage or loss is suffered by the Company for which any Indemnified Person would otherwise be jointly and severally liable with any third party or third parties to the Company, or any of its relevant subsidiary undertakings, affiliates, or associates, the extent to which such damage or loss will be recoverable from the Indemnified Person shall be limited so as to be in proportion to the contribution of the Indemnified Person to the overall fault for such damage or loss, as agreed between the parties, or, in the absence of agreement, as determined

by a court of competent jurisdiction, but in any event, the Indemnified Person shall have no greater liability than if the Limitation did not apply.

14.9 The degree to which any Indemnified Person shall be entitled to rely on the work of any adviser to the Company or any other third party will be unaffected by any limitation (as defined in Clause 14.8) which the Company may have agreed with any third party.

14.10 The provisions of this Clause 14 will remain in full force and effect notwithstanding the completion of all matters and arrangements referred to in or contemplated by this Agreement.

15. Contribution

15.1 If the indemnification provided for in Clause 14 is for any reason (including because such indemnification would be contrary to public policy), unavailable to or insufficient to hold harmless an Indemnified Person in respect of any Losses, liabilities, Claims, damages or expenses referred to therein, then the Company, in lieu of indemnifying such Indemnified Person hereunder, shall contribute to the aggregate amount of such Losses, liabilities, Claims, damages or expenses incurred by such Indemnified Person, as incurred:


(a)	in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Banks on the other hand from the Rights Issue (excluding the HMT Shares) and offering of Underwritten Shares pursuant to this Agreement; or

(b)	if the allocation provided by Clause 15.1(a) is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in Clause 15.1(a) above but also the relative fault of the Company on the one hand and of the Banks on the other hand in connection with the acts or statements or omissions which resulted in such Losses, liabilities, Claims, damages or expenses, as well as any other relevant equitable considerations.

15.2 The relative benefits received by the Company on the one hand and the Banks on the other hand in connection with the Rights Issue (excluding the HMT Shares) and the offering of Underwritten Shares pursuant to this Agreement shall be deemed to be in the same respective proportions as the total net proceeds from the offering of Underwritten Shares pursuant to this Agreement (before deducting commissions or expenses) received by the Company and the total fees and commissions received by the Joint Bookrunners bear to the total gross proceeds from the offering of Underwritten Shares.

15.3 The relative fault of the Company on the one hand and the Banks on the other hand will be determined by reference to, among other things, whether any such act or alleged act or untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Company or by the Banks and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such act, statement or omission.

15.4 The Company and the Banks agree that it would not be just and equitable if contribution pursuant to this Clause 15 were determined by pro rata allocation (even if the

Banks were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this Clause 15. The aggregate amount of Losses, liabilities, Claims, damages and expenses incurred by an Indemnified Person and referred to above in this Clause 15 will be deemed to include any legal or other expenses reasonably incurred by such Indemnified Person in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such act or alleged act or untrue or inaccurate or alleged untrue or inaccurate statement or omission or alleged omission.

15.5 Notwithstanding the provisions of this Clause 15, none of the Banks will be required to contribute any amount in excess of the underwriting commission received by it (and which it is not liable to pay to any other underwriter or intermediary under this Agreement or otherwise) in relation to the Underwritten Shares underwritten or subscribed for by such Bank pursuant to this Agreement.

15.6 No person guilty of negligence, wilful default, fraud or fraudulent misrepresentation (whether within the meaning of Section 11(f) of the Securities Act or otherwise) will be entitled to contribution from any person who was not guilty of such negligence, wilful default, fraud or fraudulent misrepresentation.

15.7 For the purposes of this Clause 15, each Indemnified Person shall have the same rights to contribution as the Banks and the Banks’ respective obligations to contribute pursuant to this Clause 15 are several (and are not joint or joint and several), in proportion to their respective Proportionate Shares (and, in the case of JPMC, JPMS’s Proportionate Share).

15.8 Notwithstanding the provisions of this Clause 15, no Indemnified Person will be entitled to recover from the Company by way of contribution under Clause 15 any amount in excess of the amount that the Company would have been liable to pay such Indemnified Person had the indemnification provided for in Clause 14 been available to the extent provided in that Clause in respect of the relevant Loss or Claim.

16. Termination

16.1 Subject to Clauses 16.2, 16.3 and 16.4, if:


(a)	the Warranties on the part of the Company contained in or given pursuant to Clause 12 are not true and accurate in all respects or are misleading in any respect, immediately prior to the release of the Press Announcement, or if the Company does not comply with those of its undertakings under this Agreement which fall to be performed on the date of this Agreement, which, in any such case, a Joint Global Co-ordinator considers, in its sole judgement, acting in good faith, to be (singly or in the aggregate) material in the context of the Rights Issue or the underwriting of the Underwritten Shares or Admission or post-Admission dealings in the Ordinary Shares; or

(b)	at any time following the release of the Press Announcement and prior to Admission, the Warranties on the part of the Company given pursuant to Clause 12 are not true and accurate in all respects or are misleading in any respect, or the Company does not


	comply with those of its undertakings under this Agreement which fall to be performed after the date of this Agreement and prior to Admission, which, in any such case, a Joint Global Co-ordinator considers, in its sole judgement, acting in good faith, to be (singly or in the aggregate) material in the context of the Rights Issue or the underwriting of the Underwritten Shares or Admission or post-Admission dealings in the Ordinary Shares; or

(c)	the Company’s application to the UK Listing Authority for admission of the New Shares to the Official List or the Company’s application to the London Stock Exchange for admission to trading of the New Shares on the London Stock Exchange’s main market for listed securities is withdrawn by the Company or refused by the UK Listing Authority or London Stock Exchange (as appropriate); or

(d)	it shall come to the notice of a Joint Global Co-ordinator that any statement contained in any Relevant Document (or any amendment or supplement thereto) has become untrue, inaccurate or misleading in any respect, or any matter has arisen, which would, if such document had been issued at that time, constitute an omission from such Relevant Document (or any amendment or supplement to any of them), and which such Joint Global Co-ordinator considers, acting in good faith, to be (singly or in the aggregate) material in the context of the Rights Issue or the underwriting of the Underwritten Shares or Admission or post-Admission dealings in the Ordinary Shares; or

(e)	(A) in the opinion of a Joint Global Co-ordinator, any matter referred to in section 87G of the FSMA has arisen between the publication of the Prospectus and Admission, or (B) any Supplementary Prospectus has been published or is due to be published by the Company (other than the publication by the Company of a Re-Pricing Disclosure Document) which, in any such case, a Joint Global Co-ordinator considers, in its sole judgement, acting in good faith, to be (singly or in the aggregate) material in the context of the Rights Issue or the underwriting of the Underwritten Shares or Admission or post-Admission dealings in the Ordinary Shares,

	(i)	each of the Joint Sponsors, for itself in its capacity as sponsor only, shall be entitled, in its absolute discretion (after consultation with the Company to the extent reasonably practicable; provided that a failure to do so will not invalidate any notice given under this Clause 16) by notice in writing given to the Company, to terminate this Agreement insofar as it relates to the obligations of such Joint Sponsor in its capacity as sponsor and, in the event of such termination, the obligations of such Joint Sponsor in its capacity as sponsor shall cease and determine, and

	(ii)	the Joint Global Co-ordinators, acting together on behalf of the Banks and the Co-Bookrunner, shall be entitled, in their absolute discretion (after consultation with the Company to the extent reasonably practicable; provided that a failure to do so will not invalidate any notice given under this Clause 16) by notice in writing to the Company, to terminate this Agreement in its entirety and, in the event of such termination, this Agreement shall cease to have any further effect.


			For the avoidance of doubt, the rights of the Joint Sponsors (acting separately or jointly in the case of Clause 16.1(e)(i)) and the Joint Global Co-ordinators (acting jointly only) in the case of this Clause 16.1(e)(ii)):

			(A)		may be exercised by any Joint Sponsor or the Joint Global Co-ordinators, acting jointly only on behalf of the Banks and the Co-Bookrunner, for whatever reason or on whatever basis that it reasonably considers to be practicable, appropriate or advisable to it; and

			(B)		are conferred on the Joint Sponsors and the Joint Global Co-ordinators, acting jointly only, and may be exercised by any Joint Sponsor, in the case of Clause 16.1(e)(i), or the Joint Global Co-ordinators, acting jointly only, on behalf of the Banks and the Co-Bookrunner, in the case of Clause 16.1(e)(ii), in their capacities as such, and not in any representative or fiduciary capacity.

16.2 The termination of this Agreement (save to the extent specified in this Clause 16.2) pursuant to Clauses 2.3 and 16.1 shall be without prejudice to:


(a)	any claim in respect of a breach of this Agreement prior to the termination;

(b)	any obligation of the Company in respect of New Shares which have already been issued, subscribed and paid for, at the time of such termination; and

(c)	the provisions of Clauses 1, 10, 11, 12, 13, 14, this Clause 16.2, and Clauses 20 to 29 (inclusive), which will continue to apply.

16.3 Notwithstanding any other provision of this Agreement:

(a)	a MAC Event or a Material Adverse Effect occurring subsequent to the publication of the Press Announcement (or any direct or indirect result thereof); or

(b)	a Commission Decision having been publicly announced or publicly communicated subsequent to the publication of the Press Announcement (or any direct or indirect result thereof); or

(c)	the occurrence of an event referred to in section 87G(1) of the FSMA arising between the time of publication of the Prospectus and Admission or a Supplementary Prospectus being published by or on behalf of the Company before Admission, directly or indirectly, as a result of:

	(i)	a MAC Event or a Material Adverse Effect having occurred subsequent to the publication of the Prospectus; or

	(ii)	a Commission Decision having been announced or communicated subsequent to the publication of the Prospectus,

	shall not entitle any of the Banks at any time, to terminate any or all of their obligations under this Agreement pursuant to Clauses 16.1(b), (d) or (e), unless such


	matter, event or circumstance arose, directly or indirectly, as a result of a MAC Event or a Material Adverse Effect that occurred as a direct or indirect consequence of a Specified Circumstance.

16.4 To the extent that any right to terminate this Agreement pursuant to Clause 16.1 would have otherwise arisen, directly or indirectly, as a result of:


(a)	the occurrence of a MAC Event and/or a Material Adverse Effect having occurred subsequent to the publication of the Press Announcement; and/or

(b)	a Commission Decision having been publicly announced or publicly communicated subsequent to the publication of the Press Announcement; and/or

(c)	the occurrence of an event referred to in section 87G(1) of the FSMA arising between the time of publication of the Prospectus and Admission and a Supplementary Prospectus being published by or on behalf of the Company before Admission, directly or indirectly, as a result of:

	(i)	a MAC Event and/or a Material Adverse Effect having occurred subsequent to the publication of the Prospectus; and/or

	(ii)	a Commission Decision having been announced or communicated subsequent to the publication of the Prospectus,

	then such right to terminate this Agreement pursuant to Clauses 16.1(b), (d) or (e), (but for no other purpose and without prejudice to any other rights that the Banks may have under this Agreement) shall, unless, in any of the cases referred to in Clause 16.4(a), (b) or (c), such matter, event or circumstance arose, directly or indirectly, as a result of a MAC Event or a Material Adverse Effect that occurred as a direct or indirect consequence of a Specified Circumstance, be deemed not to have arisen for the purposes of this Agreement.

16.5 The Banks and the Company shall have no right to terminate this Agreement except as provided in Clause 2 or this Clause 16 and any right of rescission is hereby expressly waived and excluded by the Banks.

17. Withholding and Grossing Up

17.1 All sums payable by the Company to the Banks or any other Indemnified Person (for the purposes of this Clause 17 only, each a payee ) under this Agreement shall be paid in pounds sterling free and clear of all deductions or withholdings unless the deduction or withholding is required by law, in which event the Company shall pay such additional amount as shall be required to ensure that the net amount received by the payee will equal the full amount which would have been received by it had no such deduction or withholding been required to be made.

17.2 If the Company makes such an increased payment under Clause 17.1 and the payee subsequently obtains a refund of tax or credit against tax by reason of the Company making such a deduction or withholding, the payee shall reimburse the Company as soon as reasonably practicable with an amount such as the payee shall determine (with such

determination in good faith being final and conclusive) to be such proportion of the said refund or credit as shall leave the payee after such reimbursement in no better or worse position (having regard to the time value of money) than it would have been in had no deduction or withholding been required. Nothing in this Clause 17.2 shall oblige a payee to disclose to the relevant person, nor shall the relevant person be entitled to inspect, any of the books and other records of the payee nor shall anything herein prevent the payee from arranging its tax and commercial affairs in whatever manner it thinks fit and, in particular, the payee shall not be under any obligation to claim credit or relief from or against its corporate profits or similar liability to tax in respect of the amount of such deduction or withholding as aforesaid in priority to any other reliefs available to it.

17.3 If the United Kingdom HM Revenue & Customs or any other tax authority brings into charge to tax (or into any computation of income, profit or gains for the purposes of any charge to tax) any sum paid to a payee under this Agreement, other than payment of commission under Clause 10, (including in circumstances where any relief is available in respect of such charge to tax), then the Company shall pay such additional amount as shall be required to ensure that the total amount paid, less the tax chargeable on such amount (or that would be so chargeable but for such relief), (after giving credit for any tax relief obtained by the payee as a result of the matter giving rise to the indemnity claim or the reimbursement) is equal to the amount that would otherwise be payable under this Agreement. This Clause 17.3 shall apply in respect of any additional amount paid pursuant to Clause 17.1 as it applies to other amounts paid to the payee.

18. Miscellaneous

18.1 For the avoidance of doubt, the Company acknowledges and agrees that it is responsible for any due diligence carried out in relation to the Rights Issue or the Share Capital Subdivision and that neither the Banks nor any of their advisers shall be responsible to the Company or any Director for any due diligence in relation thereto or for verifying the accuracy or fairness of any information published by or on behalf of the Company in connection with the Rights Issue or the Share Capital Subdivision unless it or they have agreed in writing to take specific responsibility for such due diligence or verification.

18.2 The Company agrees that for the purpose of the Rights Issue (including for the purposes of seeking to procure any sub-underwriters for the Underwritten Shares), the Share Capital Subdivision and of obtaining Admission, none of the Banks shall be responsible for the provision of or obtaining advice as to the requirements of any applicable laws or regulations of any jurisdictions nor shall any such person be responsible where it or the Company has acted in the absence of such advice or in reliance on any advice obtained by the Company in respect thereof.

18.3 The Company acknowledges that the representations, warranties, undertakings and indemnities contained in this Agreement are given to the Banks in connection with Admission, the Rights Issue and the Share Capital Subdivision in each case whether in their capacities as underwriters, financial advisers, joint bookrunners, joint sponsors, joint global co-ordinators, co-bookrunners or co-lead managers and references in this Agreement to Bank shall be construed accordingly.

18.4 Notwithstanding that each of the Banks may act as the Company’s agent in connection with the Rights Issue, each of such persons and its agents may:


(a)	receive and keep for its own benefit any commissions, fees, brokerage or other benefits paid to or received by it in connection with the Rights Issue, and shall not be liable to account to the Company for any such commissions, fees, brokerage or other benefits; and

(b)	keep or deal in any New Shares for which it may subscribe for its own use and benefit.

18.5 For the avoidance of doubt, the obligations of each of the Banks under this Agreement are several (not joint or joint and several). Each of the Banks shall (except as otherwise agreed among them) have the right to protect and enforce its rights under this Agreement by whatever lawful means it deems fit, including, without limitation, commencing any legal proceedings without joining any of the others in any proceedings.

18.6 The Company acknowledges and agrees that (i) each of the Banks is acting solely pursuant to a contractual relationship with the Company on an arm’s length basis with respect to the Rights Issue and the Share Capital Subdivision (including in connection with determining the terms of the Rights Issue (including, for the avoidance of doubt, the determination of any increase in the price per New Share in excess of 15 pence in accordance with Clause 2.5)) and not, in relation to the Rights Issue or the Share Capital Subdivision, as a financial adviser (except, in the case of JPMC, Merrill Lynch and UBS, solely on and subject to the strict terms of their respective Engagement Letters) or a fiduciary to the Company or any other person; and (ii) none of the Banks owes and duties or obligations to the Company of any nature whatsoever, save as expressly set out in this Agreement, provided however in each case that this shall not exclude or restrict any duty or liability that any of them have under FSMA or arrangements for regulating any of them thereunder to any extent prohibited thereby.

18.7 The Company understands (i) that Bank of America Corporation (BAC) is the parent company of Merrill Lynch & Co., Inc, of which Merrill Lynch International is a wholly-owned subsidiary and that BAC and its subsidiaries and affiliates are a financial services group, and (ii) that each of the Banks is part of its own financial services group (for the purposes of this Clause 18.7, each referred to as a group). Each of the Banks and BAC is a full service securities firm and commercial bank engaged in activities and businesses, including among others, securities, commodities and derivatives trading, foreign exchange and other brokerage activities, research publication, and principal investing, as well as providing investment, corporate and private banking, asset and investment management, financing and financial advisory services and other commercial services and products to a wide range of corporations, governments and individuals from which conflicting interests or duties, or a perception thereof, may arise. Accordingly, in no circumstance shall any Bank or any other member of their respective groups have any liability by reason of members of the group conducting such other businesses or activities, acting in their own interests or in the interests of other clients in respect of matters affecting the Company, its affiliates or any other company, including where in so acting members of the group act in a manner which is adverse to the interests of the Company or its affiliates. In addition, as a result of duties of confidentiality, each of the Banks and the other members of their respective groups may be

prohibited from disclosing information to the Company or such disclosure may be inappropriate and the Company agrees that no member of the respective groups will be under a duty to use or to disclose any non-public information acquired from, or during the course of carrying on business for, any other person. The Company expressly acknowledges and agrees that, in the ordinary course of business, each of the Banks and other parts of their respective groups at any time (i) may invest on a principal basis or manage funds that invest, make or hold long or short positions, finance positions or trade or otherwise effect transactions, for their own accounts or the accounts of customers, in equity, debt or other securities or financial instruments (including derivatives, bank loans or other obligations) of the Company or any other company that may be involved in any proposed transaction, and (ii) may provide or arrange financing and other financial services to other companies that may be involved in any proposed transaction or a competing transaction, in each case whose interests may conflict with those of the Company.

18.8 Each Underwriter severally undertakes that from the date of this Agreement up until the Relevant Time, it will not, without prior consultation with the Company, enter into any transaction involving the Existing Ordinary Shares and, following the Share Capital Subdivision becoming effective, the Ordinary Shares (for the purpose of this Clause 18.8 only, the Existing Ordinary Shares and the Ordinary Shares together, the Securities ) or derivatives relating to the Securities intended to have the economic effect, whether directly or indirectly, of hedging or otherwise mitigating the economic risk associated with its underwriting commitments under this Agreement. The foregoing restrictions (save as prohibited by applicable law or regulations) shall not apply to:


(a)	the ordinary course sales and trading and other activities of the Underwriters that are unrelated to their underwriting commitments;

(b)	transactions entered into for the purposes of hedging in relation to the Company’s securities that are undertaken with a view to achieving a substantially market-neutral position (but allowing for daily trading fluctuations and without taking into account such Underwriter’s underwriting commitments); or

(c)	transactions that involve any securities or derivatives that reference any existing and established sector or market index, provided that the weighting of the Securities of any such sector or market index does not exceed 10 per cent. of the weighting of such index; or

(d)	in relation to proprietary positions in the Company’s securities or in derivatives related to the Company’s securities entered into by the Underwriters prior to the date of this Agreement; or

(e)	any other transactions relating to ordinary course market making or customer facilitation transactions.

Furthermore, for the avoidance of doubt, none of the Underwriters shall be restricted in carrying out transactions for the account of their customers, or in customer facilitation transactions.

18.9 No variation of this Agreement shall be valid unless it is in writing and signed by or on behalf of each of the Banks and the Company.

18.10 Notwithstanding any other provision of this Agreement but save as provided below, each of the Banks acknowledges, agrees and accepts (for itself and for and on behalf of each Indemnified Person with whom such Bank is connected) that (a) the Company shall have no liability of any kind, whether in contract, tort or otherwise or for misrepresentation in respect of any Loss, and (b) none of the Banks shall have a claim for breach of Warranty in respect of any Loss, in either case suffered by any Underwriter which has subscribed for, or been provisionally allotted, Underwritten Shares pursuant to Clause 9 as a result of any decline in the market value of any such Underwritten Shares which was caused by or resulted from or is attributable to or would not have arisen but for (in each case, directly or indirectly):


(a)	a MAC Event and/or a Material Adverse Effect having occurred subsequent to the publication of the Press Announcement; and/or

(b)	a Commission Decision having been publicly announced or publicly communicated subsequent to the publication of the Press Announcement,

PROVIDED THAT the Company shall be liable if and to the extent that (i) any such decline is caused by or results from or is attributable to or would not have arisen but for (in each case directly or indirectly) a MAC Event or a Material Adverse Effect having occurred as a direct or indirect consequence of a Specified Circumstance, or (ii) such Loss arises, directly or indirectly, out of a Loss or Claim of a person who is not acting in the capacity of an Underwriter (and for the purposes of this sub paragraph (ii) only, “Underwriter” includes any Indemnified Person to the extent that it acquires any New Shares from or in lieu of an Underwriter with whom it is connected solely for the purposes of enabling such Underwriter to satisfy its obligations under Clause 9.1 but solely in relation to any Loss or Claim that such Indemnified Person may have arising out of, directly or indirectly, the acquisition of those New Shares from or in lieu of that Underwriter).

18.11 The parties to this Agreement acknowledge and agree that: (i) no Relevant Person accepts any responsibility for the contents of, or makes any representation or warranty (express or implied) as to the accuracy, completeness or fairness of any information in the Prospectus, the Circular, any other Relevant Document, any Previous Announcement or either of the Exchange Offer Memoranda (or any supplement or amendment to any of them); and (ii) no Relevant Person has authorised or will authorise the contents of any of the foregoing. For the purposes of this Clause 18.11 and Clause 22.2, Relevant Person means HM Treasury, the Solicitor for the Affairs of Her Majesty’s Treasury, any of Her Majesty’s Secretaries of State (and any other Minister of the Crown), UK Financial Investments Limited, the Asset Protection Agency, and any and all directors, officers, officials, employees and agents of the foregoing.

19. Receiving Agent

The Company confirms that it has instructed the Receiving Agent to act as receiving agent in connection with the Rights Issue and the GM and as Registrar in relation to the Share Capital Subdivision, the Nil Paid Rights and the Fully Paid Rights and to perform the obligations

assigned to it under the Prospectus, the Form of Proxy, the Provisional Allotment Letters and this Agreement as receiving agent.

20. Time of the essence

Any time, date or period mentioned in this Agreement may be extended by mutual agreement between the Company and the Banks but as regards any time, date or period originally fixed, or any time, date or period so extended, time shall be of the essence.

21. Waiver

21.1 Any right or remedy of the Company and the Banks under this Agreement shall only be waived or varied by an express waiver or variation in writing.

21.2 No failure or delay by the Company or the Banks in exercising any right or remedy under this Agreement shall impair such right or remedy or operate or be construed as a waiver or variation of the right or remedy or preclude its exercise at any subsequent time. No single or partial exercise of any such right or remedy shall preclude any other or further exercise of such right or remedy or the exercise of any other right or remedy. The rights, powers and remedies of the Company and the Banks provided in this Agreement are cumulative and not exclusive of any rights, powers and remedies provided by law.

22. Third party rights

22.1 Each Indemnified Person shall have the right under the Contracts (Rights of Third Parties) Act 1999 to enforce its rights against the Company under Clause 14 provided that Citi (without obligation) will have the sole conduct of any action to enforce such rights on behalf of Citi Indemnified Persons, GS (without obligation) will have the sole right of action to enforce such rights on behalf of GS Indemnified Persons, HSBC (without obligation) will have the sole right of action to enforce such rights on behalf of HSBC Indemnified Persons, JPMC (without obligation) will have the sole right of action to enforce such rights on behalf of JPMC Indemnified Persons, JPMS (without obligation) will have the sole right of action to enforce such rights on behalf of JPMS Indemnified Persons, Merrill Lynch (without obligation) will have the sole conduct of any action to enforce rights on behalf of Merrill Lynch Indemnified Persons and UBS (without obligation) will have sole conduct of any action to enforce rights on behalf of UBS Indemnified Persons.

22.2 Each Relevant Person shall have the right under the Contracts (Rights of Third Parties) Act 1999 to enforce its rights under Clause 18.11, provided that HM Treasury will have the sole conduct of any action to enforce such rights on behalf of each Relevant Person.

22.3 Except as provided in Clauses 22.1 and 22.2, a person who is not a party to this Agreement has no rights under the Contracts (Rights of Third Parties) Act 1999 to enforce any term of this Agreement. The Banks and the Company may agree to terminate this Agreement or vary any of its terms, other than Clauses 18.11 and 22.2, without the consent of any Indemnified Person which is not party to this Agreement or any other third party. The Banks will have no responsibility to any Indemnified Person which is not a party to this Agreement or any other third party under or as a result of this Agreement, except pursuant to Clauses 18.11 and 22.2.

23. Severability

If any provision of this Agreement is or is held to be invalid or unenforceable, then so far as it is invalid or unenforceable it has no effect and is deemed not to be included in this Agreement. This shall not invalidate any of the remaining provisions of this Agreement. The parties shall use all reasonable endeavours to replace any invalid or unenforceable provision by a valid provision the effect of which is as close as possible to the intended effect of the invalid or unenforceable provision.

24. Notices

24.1 Subject to Clause 24.2, any notice to be given under, or in connection with, this Agreement shall be in writing and be signed by or on behalf of the party giving it. It shall be served by sending it by fax to the number set out in Clause 24.2 or by delivering it by hand, or sending it by pre-paid recorded delivery, special delivery or registered post, to the address set out in Clause 24.2 marked for the attention of the relevant party (or as otherwise notified from time to time under this Agreement).

Any notice so served shall be deemed to have been duly received:


(a)	in the case of delivery by hand, when delivered;

(b)	in the case of fax, at the time of transmission; and

(c)	in the case of pre paid recorded delivery, special delivery or registered post, on the Dealing Day following the date of posting;

provided that if delivery by hand or fax occurs on a day which is not a Dealing Day or after 6.00 p.m. on a Dealing Day, service shall be deemed to occur at 9.00 a.m. on the following Dealing Day.

24.2 Any notice given by the Banks under, or in connection with, this Agreement may also be given by any director or other authorised representative of the Banks to any Director either personally or by telephone (to be confirmed as soon as reasonably practicable in writing) and shall have immediate effect.

24.3 For the purposes of Clause 24.1, the fax numbers and addresses of each of the Underwriters and the Joint Sponsors are set out in Schedule 6, the fax number and address of the Co-Bookrunner is set out in Schedule 8, the fax numbers and addresses of each of the Co-Lead Managers are set out in Schedule 9 and the fax number and address of each of the Company and JPMC is:


The Company:	Lloyds Banking Group plc

	Henry Duncan House,
	129 George Street,
	Edinburgh, Scotland, EH2 4LH

	Fax number: +44 (0) 20 7356 2168


	For the attention of: Company Secretary

	With a copy to: Jeremy Parr

	Fax number: +44 (0) 20 7456 2000

JPMC:	J.P. Morgan Cazenove Limited

	20 Moorgate
	London EC2R 6DA

	Fax number: +44 (0) 20 7155 9112

	For the attention of: Legal Department

25. Further Assurances

The Company shall register the New Shares in the names of the successful applicants, and shall provide, and shall procure that the Directors shall provide, all information and assistance that the Banks may reasonably require for the purposes of this Agreement and execute (or procure to be executed) each document and do (or procure to be done) each act and thing that a Bank may reasonably request in order to give effect to the Rights Issue, the Share Capital Subdivision or Admission.

26. Assignment

No party may assign, or purport to assign: (i) this Agreement; (ii) all or any of their respective rights or obligations arising under or out of this Agreement; or (iii) the benefit of all or any of the other parties’ obligations under this Agreement.

27. Entire Agreement

This Agreement (together with, in the case of Merrill Lynch and UBS only, the Merrill Lynch Engagement Letter and the UBS Engagement Letter respectively, and only then in respect of the strict terms of such engagement letters as regards the provision of certain financial advice specified therein relating to the structuring of the Rights Issue) constitutes the entire agreement between the parties relating to the subject matter of this Agreement and supersedes and replaces all agreements, understandings, undertakings, representations, warranties and arrangements of any nature whatsoever between the parties relating to the subject matter of this Agreement. In the event of any inconsistency between this Agreement and the Merrill Lynch Engagement Letter, the UBS Engagement Letter and any other agreement referred to in, or entered into in connection with, this Agreement, the terms of this Agreement shall prevail. For the avoidance of doubt, the foregoing is without prejudice to the placing and open offer agreement dated 13 October 2008 and the open offer agreement dated as of 7 March 2009 as amended and restated as at 20 March 2009 and as at 18 May 2009.

28. Counterparts

This Agreement may be executed by any one or more of the parties hereto in any number of counterparts, each of which shall be deemed to be an original, but all such counterparts shall

together constitute one and the same instrument. Delivery of an executed counterpart signature page of this Agreement by e-mail (PDF) or telecopy shall be as effective as delivery of a manually executed counterpart of this Agreement. In relation to each counterpart, upon confirmation by or on behalf of the signatory that the signatory authorises the attachment of such counterpart signature page to the final text of this Agreement, such counterpart signature page shall take effect together with such final text as a complete authoritative counterpart.

29. Governing Law

29.1 This Agreement and the relationship among the parties to it and any non-contractual obligations which may arise out of or in connection with this Agreement shall be governed by and interpreted in accordance with English law.

29.2 All parties to this Agreement agree that the courts of England are (subject to Clause 29.3(a)) to have exclusive jurisdiction to settle any dispute (including claims for set-off and counterclaims) which may arise out of or is in connection with (i) the creation, validity, effect, interpretation or performance of, or of the legal relationships established by, this Agreement or otherwise arising out of or in connection with this Agreement, and (ii) any non-contractual obligations which may arise out of or in connection with this Agreement, and for such purposes all parties irrevocably submit to the exclusive jurisdiction of the English courts.

29.3 Notwithstanding the provisions of Clause 29.2, in the event that any Bank or any of such Bank’s Indemnified Persons becomes subject to proceedings brought by a third party (the Foreign Proceedings ) in the courts of any country other than England (including, without prejudice to the generality of the foregoing, in any court of competent jurisdiction in the United States) (the Foreign Jurisdiction ), such Bank shall be entitled, without objection by the Company, either:


(a)	to join the Company and/or any other person to the Foreign Proceedings; and/or

(b)	to bring separate proceedings for any breach of this Agreement and/or for a contribution or an indemnity against the Company and/or any other person in the Foreign Jurisdiction, provided that such separate proceedings arise out of or are in connection with the subject matter of the Foreign Proceedings.

29.4 Each of the parties to this Agreement irrevocably waives any objection to the jurisdiction of any courts referred to in this Clause 29.

29.5 Each party to this Agreement irrevocably agrees that a judgment and/or order of any court referred to in this Clause 29 based on any matter arising out of or in connection with this Agreement (including but not limited to the enforcement of any indemnity) shall be conclusive and binding on it and may be enforced against it in any other jurisdiction, whether or not (subject to due process having been served on it) it participates in the relevant proceedings.

29.6 Each of the parties with an address outside England shall at all times maintain an agent for service of process and any other documents and proceedings in England or any other proceedings in connection with this Agreement. For the Company, such agent shall be the

London office of the Company at 25 Gresham Street, London EC2V 7HN. For each of the Co-Lead Managers with an address outside England, such agent shall be the person identified in Schedule 9. Any writ, judgment or other notice of legal process shall be sufficiently served on the relevant party if delivered to such agent at its address for the time being. Each of the parties with an address outside England irrevocably undertakes not to revoke the authority of the above agent and if, for any reason, the Joint Global Co-ordinators (for themselves or on behalf of the Indemnified Persons) request such party to do so it shall promptly appoint another such agent with an address in England and advise each of them. If, following such request, the relevant party fails to appoint another agent, the Joint Global Co-ordinators shall be entitled to appoint one on the relevant party’s behalf and at such party’s expense.

29.7 The Company agrees to appoint an agent for service of process in any Foreign Jurisdiction other than England in which any other party is subject to legal suit, action or proceedings based on or arising under this Agreement within 14 days of receiving written notice of such legal suit, action or proceedings and the request to appoint such agent for service. In the event that the Company does not appoint such an agent within 14 days of the notice requesting it to do so, such other party may appoint a commercial agent for service for the Company on the Company’s behalf and at the Company’s expense and the Company agrees that subject to being notified of such appointment in writing, service upon such commercial agent will constitute service upon the Company.

I N WITNESS WHEREOF this Agreement has been duly executed under hand by the Company, each Bank and the Co-Bookrunner or their duly authorised attorneys the day and year first above written.

SCHEDULE 1
NEW SHARES TAKEN UP

1. Subject to paragraph 2 below, in this schedule MTM instruction means a many to many instruction which:


(a)	on its settlement has the effect as described in paragraph 2.2.2 of Part VIII of the Prospectus;

(b)	has been properly authenticated in accordance with Euroclear’s specifications as referred to in that paragraph; and

(c)	contains the information required by that paragraph.

2. The Company may in its sole discretion treat an MTM instruction which constitutes a properly authenticated dematerialised instruction (the first instruction ) as not constituting a valid acceptance in accordance with paragraph 2.2.2(iii) of Part VIII of the Prospectus if at the time at which the Registrar receives a properly authenticated dematerialised instruction giving details of the first instruction, the Company or the Registrar has received actual notice from Euroclear of any of the matters specified in regulation 35(5)(a) of the Regulations in relation to the first instruction.

3. A New Share shall, for the purposes of this Agreement, be treated as having been taken up if:


(a)	the New Share in nil paid form is in certificated form and the following requirements have been satisfied by 11.00 a.m. on the Acceptance Date:

		(i)	a Provisional Allotment Letter relating to that New Share has been lodged for acceptance by the person to whom it was provisionally allotted or by a renouncee of the right to accept allotment together with a cheque or other remittance for the full amount payable in respect of that New Share, in accordance with the terms of the Prospectus and the Provisional Allotment Letter (or the Company exercises any discretion it has in the Prospectus to treat the Provisional Allotment Letter as binding notwithstanding it does not meet these requirements); and

		(ii)	the Company has not, with the Joint Bookrunners’ and Joint Sponsors’ consent, rejected the Provisional Allotment Letter for any reason; and

		(iii)	the Receiving Agent has not been notified that the cheque or other remittance has not been accepted by the drawee on first presentation.

(b)		the New Share in nil paid form is in uncertificated form and:

		(i)	an MTM instruction in respect of those New Shares settles by 11.00 a.m. on the Acceptance Date; or


(ii)	an MTM instruction in respect of those New Shares constitutes a valid acceptance in accordance with paragraph 2.2.2(iii) of Part VIII of the Prospectus and settles by 11.00 a.m. on the Acceptance Date; or

(iii)	the following has occurred:

	(A)	an MTM instruction in respect of those New Shares constitutes a valid acceptance in accordance with paragraph 2.2.2(iii) of Part VIII of the Prospectus; and

	(B)	the MTM instruction has not settled by 11.00 a.m. on the Acceptance Date (or by such later time or date as the Company and the Joint Bookrunners and Joint Sponsors decide); and

	(C)	the Company is not entitled to assume, in accordance with sub-paragraph (vii) of paragraph 2.2.2 of Part VIII of the Prospectus, that there has been a breach of any of the representations, warranties or undertakings set out or referred to in sub-paragraph (iv) of paragraph 2.2.2 of Part VIII of the Prospectus because it is aware of a reason outside the control of the CREST member or CREST sponsor that sent the MTM instruction for its failure to settle; or


(iv)	the following has occurred:

	(A)	an MTM instruction in respect of those New Shares constitutes a valid acceptance in accordance with paragraph 2.2.2(iii) of Part VIII of the Prospectus;

	(B)	the MTM has not settled by 11.00 a.m. on the Acceptance Date (or by such later time or date as the Company and the Joint Sponsors decide); and

	(C)	the Company is entitled to assume, in accordance with sub-paragraph (vii) of paragraph 2.2.2 of Part VIII of the Prospectus, that there has been a breach of any of the representations, warranties or undertakings set out or referred to in sub-paragraph (iv) of paragraph 2.2.2 of Part VIII of the Prospectus because it is not aware of a reason outside the control of the CREST member or CREST sponsor that sent the MTM instruction for its failure to settle; but

	(D)	the Company nevertheless exercises its discretion to treat as valid the acceptance constituted by the MTM instruction; or

(v)	an MTM instruction in respect of those New Shares does not constitute a valid acceptance in accordance with paragraph 2.2.2(iii) of Part VIII of the Prospectus but the Company nevertheless exercises its discretion to treat as valid the acceptance constituted by the MTM instruction; or

(vi)	a Director has irrevocably undertaken to the Company to subscribe for such New Share.

4. For the avoidance of doubt, the Joint Bookrunners and the Underwriters have no liability or obligation under this Agreement in relation to any New Shares if the New Shares in nil paid form are in certificated form and:


(a)	the Receiving Agent has determined in relation to an acceptance of any Provisional Allotment Letter by 11.00 a.m. on the Acceptance Date that there has been a failure to satisfy the verification of identity requirements for the purposes of the Money Laundering Regulations 2003 or the Money Laundering Regulations 2007, as applicable, in the manner contemplated in the Press Announcement, the Prospectus and the Provisional Allotment Letter; or

(b)	the cheque or other remittance returned with the relevant Provisional Allotment Letter(s) relating to such New Shares is dishonoured after 11.00 a.m. on the Acceptance Date unless the Joint Bookrunners have each been notified that the cheque or other remittance has been dishonoured prior to the Receiving Agent informing the Joint Bookrunners of the number of New Shares not taken up.

5. If (but only if) the parties so agree, New Shares will be deemed to have been taken up by 11.00 a.m. on the Acceptance Date if the New Shares in nil paid form are in certificated form and:


(a)	a cheque or other remittance for the full amount payable in respect of those New Shares (and whether or not the cheque or other remittance is honoured) is received by 11.00 a.m. on the Acceptance Date from an authorised person (as defined in the FSMA) identifying those New Shares and agreeing to lodge the relevant Provisional Allotment Letter properly completed in due course; or

(b)	the relevant Provisional Allotment Letter and a cheque or other remittance for the full amount payable in respect of those New Shares (and whether or not the cheque or other remittance is honoured) are received by 11.00 a.m. on the first Dealing Day after the Acceptance Date by post and the cover bears a legible postmark of not later than 11.00 a.m. on the Acceptance Date.

6. If the parties decide to extend the time for settlement of MTM instructions in accordance with paragraphs 3(b)(iii)(B) or 3(b)(iv)(B), the Company shall forthwith ask Euroclear not to disable the Nil Paid Rights until the end of that extension.

7. As soon as practicable after 11.00 a.m. on the Acceptance Date and by not later than 2.30 p.m. on the Acceptance Date, the Company shall, following consultation with the Underwriters, exercise its discretion in paragraphs 3(b)(iv)(D) or 3(b)(v) reasonably.

8. If the Company accepts:


(a)	an alternative properly authenticated dematerialised instruction from a CREST member or (where applicable) a CREST sponsor in accordance with paragraph 2.2.2(vii)(C) of Part VIII of the Prospectus; or

(b)	an alternative instruction or notification from a CREST member or CREST sponsored member or (where applicable) a CREST sponsor in accordance with paragraph 2.2.2(vii)(e) of Part VIII of the Prospectus,

as constituting a valid acceptance in respect of any New Shares, those New Shares are deemed to have been taken up.

SCHEDULE 2
DELIVERY OF DOCUMENTS

Part A

Immediately after execution of this Agreement and, in any event, before the release of the Press Announcement and before publishing and despatching the Circular and the Prospectus, the Company shall deliver to each Bank:

1. A certified copy of the Circular and Prospectus bearing evidence of the formal approval of the UK Listing Authority, pursuant to the Listing Rules and the Prospectus Rules.

2. A completed ‘Form A’, to be submitted to the FSA in accordance with paragraph 3.1.1(1) of the Prospectus Rules for approval of a prospectus in accordance with Part VI of the FSMA.

3. A certified copy of any press release relating to the posting of the Circular or the Prospectus.

4. An original letter in the agreed form to the Joint Sponsors from the Company to be dated the date of the Prospectus, addressing the following: (i) paragraphs 8.3.4, 8.4.8 and 8.4.9 and 8.4.12 and 8.4.13 of the Listing Rules; and (ii) the adequacy of the Company’s working capital, duly signed by the Company.

5. An original letter in the agreed form to the Joint Sponsors from the Company to be dated the date of the Prospectus, confirming that: (i) there has been no significant change in the financial and trading position, including the indebtedness position, of the Group since the Accounts Date; and (ii) the proper extraction of the financial information in the Prospectus and incorporated by reference into the Prospectus which relates to the Group.

6. An original letter in the agreed form to the Joint Sponsors from the Company’s Counsel to be dated the date of the Prospectus, relating to paragraphs 8.3.4, 8.4.8, 8.4.9 and 8.4.12 and 8.4.13 of the Listing Rules.

7. An original letter in the agreed form to the Joint Sponsors signed by each of the Directors authorising the publication of the Prospectus, accepting responsibility for information contained in the Prospectus and any Supplementary Prospectus, acknowledging their understanding of their responsibilities under the UK Listing Rules and the Disclosure Rules and Transparency Rules in accordance with paragraph 8.3.4 of the UK Listing Rules and including a power of attorney in favour of each of the other Directors.

8. An original or certified copy of the Verification Materials dated the date of the Prospectus and copies of all evidence supporting answers in the notes.

9. A certified copy of an extract from the minutes of the meetings of the Board, or a duly authorised committee thereof, authorising the issue of the Prospectus, approving the Relevant Documents, this Agreement, the Verification Materials and (where appropriate) the other documents referred to in this Agreement and authorising the steps to be taken by the Company in connection with the Rights Issue and the Share Capital Subdivision, including the execution, delivery and performance of this Agreement, in the agreed form.

10. An original or certified copy of the Working Capital Report, including an opinion confirming the adequacy of the Company’s working capital, duly signed by the Auditors, in the form to be agreed, and dated the same date as the Prospectus.

11. An original letter in the agreed form duly signed by the Company’s Auditors in relation to paragraphs 8.4.8(1), 8.4.8(2), 8.4.9(3), 8.4.12 and 8.4.13 of the UK Listing Rules.

12. An original copy of the Profit Forecast Report duly signed by the Auditors and dated the date of the Prospectus.

13. An original letter in the agreed form duly signed by the Auditors and dated the same date as the Prospectus:


(a)	in relation to the statement of capital and indebtedness included in the Prospectus;

(b)	confirming the correct extraction of financial information contained in the Prospectus;

(c)	relating to the statement in the Prospectus that there has been no significant change in the financial and trading position of the Group; and

14. An original letter in the agreed form duly signed by the Auditors and dated the same date as the Prospectus in relation to the tax information included in Part XVIII of the Prospectus.

15. An original letter in the agreed form duly signed by the Auditors and dated the same date as the Prospectus in relation to the working capital requirements of the Group for the period to 30 June 2011.

16. An original letter in the agreed form duly signed by the Auditors dated the same date as the Prospectus consenting to the inclusion of the pro forma financial information report, loss forecast report and of references thereto in the form and context in which they appear in the Prospectus.

17. An original of a SAS 72 letter and a SAS 72 “lookalike” letter duly signed by the Auditors and dated the same date as the Prospectus.

18. An original of a SAS 72 letter and a SAS 72 “lookalike” letter duly signed by KPMG Audit plc and dated the same date as the Prospectus.

19. An original letter in the agreed form duly signed by KPMG LLP dated the same date as the Prospectus regarding the extraction of financial information in respect of the HBOS Group.

20. An original letter in the agreed form duly signed by KPMG LLP dated the same date as the Prospectus in relation to paragraphs 8.4.8(1), 8.4.8(2) and 8.4.9(3) of the UK Listing Rules.

21. An original CFO certificate duly signed by the CFO of the Company and dated the same date as the Prospectus.

22. An original of a signed Rule 10b-5 disclosure letter of Company’s Counsel dated the same date as the Prospectus.

23. An original of a signed Rule 10b-5 disclosure letter of Underwriters’ Counsel dated the same date as the Prospectus.

24. An original of a signed “no registration” opinion, an “investment company” opinion and an opinion in relation to United States taxation of Company’s Counsel dated the same date as the Prospectus.

25. An original of a signed “no registration” opinion of Underwriters’ Counsel dated the same date as the Prospectus.

26. A certified copy of each of the other documents stated in the Prospectus and Circular as being available for inspection.

27. A certified copy of an extract from the minutes of the meeting of the Board appointing any committee such as is referred to in paragraph 9 above.

28. A copy of the Form of Proxy.

29. A copy of the Provisional Allotment Letter.

30. A signed opinion of Company’s Counsel, as English legal advisers to the Company, dated the same date as the Prospectus.

31. A signed opinion of Underwriters’ Counsel, as English legal advisers to the Underwriters, dated the same date as the Prospectus.

32. A signed opinion of Maclay Murray and Spens LLP, as Scottish legal advisers to the Company, dated the same date as the Prospectus.

33. A certified copy of a Memorandum of advice reminding the Directors of their responsibilities as directors of a listed company.

34. A certified copy of a Memorandum of advice reminding the Directors of their potential liabilities in connection with an offer of shares to be admitted to the Official List.

The Company is entitled to request that the Joint Global Co-ordinators agree (such agreement not to be unreasonably withheld or delayed) that the delivery of any of the documents referred to in this Part A of Schedule 2 may be deferred and/or substituted with another document in a form reasonably satisfactory to the Joint Global Co-ordinators, it being understood that the form of any such deferred and/or substituted document will, if applicable, take account of the effect of any MAC Event or Material Adverse Effect that may have occurred on or prior to the date on which the relevant document is to be delivered.

Part B

1. Joint Sponsors’ Declaration to the FSA as required by Listing Rule 8.4.9.

2. Joint Sponsors’ Declaration to the FSA as required by Listing Rule 8.4.13.

3. Declaration as required by Listing Rule 8.7.12 relating to independence of the Joint Sponsors.

4. An original letter in the agreed form from each of the Banks to the Company duly signed by the relevant Bank consenting to the issue of the Prospectus with the inclusion therein of the references to their names in the form and context in which they appear, and dated the same date as the Prospectus.

Part C

Immediately after a Re-Pricing and, in any event, before the release of the Re-Pricing Press Announcement and before publishing and despatching the Re-Pricing Disclosure Document, to the extent that such Re-Pricing Disclosure Document constitutes a Supplementary Prospectus, the Company shall deliver to each Bank:

1. A copy of the Re-Pricing Disclosure Document bearing, if such document is a Supplementary Prospectus, evidence of the formal approval of the UK Listing Authority, pursuant to the Listing Rules and the Prospectus Rules.

2. A certified copy of an extract from the minutes of the meetings of the Board, or a duly authorised committee thereof, authorising the issue of the Re-Pricing Disclosure Document.

3. An original of a signed bring down UK comfort letter from the Auditors dated the date of the Re-Pricing Disclosure Document.

4. An original of a signed bring down SAS 72 letter and SAS 72 “lookalike” letter from the Auditors dated the date of the Re-Pricing Disclosure Document.

5. An original of a signed bring down SAS 72 letter and a SAS 72 “lookalike” letter from KPMG Audit plc and dated the Re-Pricing Disclosure Document.

6. An original of a bring down CFO certificate duly signed by the CFO of the Company.

7. An original of a signed Rule 10b-5 disclosure letter of Company’s Counsel dated the same date as the Re-Pricing Disclosure Document.

8. An original of a signed Rule 10b-5 disclosure letter of Underwriters’ Counsel dated the same date as the Re-Pricing Disclosure Document.

9. An original of a signed “no registration” opinion, an “investment company” opinion and an opinion in relation to United States taxation of Company’s Counsel dated the same date as the Re-Pricing Disclosure Document.

10. An original of a signed “non registration” opinion of Underwriters’ Counsel dated the same date as the Re-Pricing Disclosure Document.

11. An original of a signed letter from the Auditors relating to the declaration required from the Joint Sponsors pursuant to paragraphs 8.4.8 and 8.4.9 of the Listing Rules, dated the Re-Pricing Disclosure Document, in a form and substance satisfactory to the Joint Sponsors.

12. An original of a signed letter in the form to be agreed duly signed by KPMG LLP dated the same date as the Re-Pricing Disclosure Document regarding the accuracy of extraction of financial information in respect of the HBOS Group.

13. An original of a signed letter in the form to be agreed duly signed by the KPMG LLP dated the same date as the Re-Pricing Disclosure Document in relation to paragraphs 8.4.8(1), 8.4.8(2) and 8.4.9(3) of the UK Listing Rules.

14. An original letter in the agreed form from the Company to the Joint Sponsors to be dated the date of the Re-Pricing Disclosure Document, relating to paragraphs 8.3.4, 8.4.8 and 8.4.9 of the Listing Rules and confirming the Company can give the statement that there has been no significant change in the financial and trading position (including indebtedness).

15. An original of a signed letter to the Joint Sponsors from the Company’s Counsel relating to paragraphs 8.3.4, 8.4.8 and 8.4.9 of the Listing Rules, dated the date of the Re-Pricing Disclosure Document.

16. An original of a signed opinion of Company’s Counsel as to matters of English law dated the date of the Re-Pricing Disclosure Document.

17. An original of a signed opinion of Underwriters’ Counsel as to matters of English law dated the date of the Re-Pricing Disclosure Document.

18. An original of a signed opinion of Maclay Murray and Spens LLP, as Scottish legal advisers to the Company, as to matters of Scottish law dated the date of the Re-Pricing Disclosure Document.

19. An original letter in the form of Schedule 4 signed by a director or secretary of the Company authorised to do so.

Immediately after a Re-Pricing and, in any event, before the release of the Re-Pricing Press Announcement and before publishing and despatching the Re-Pricing Disclosure Document, to the extent that such Re-Pricing Disclosure Document constitutes a pricing statement, the Company shall deliver to each Bank:

1. A copy of the Re-Pricing Disclosure Document.

2. A certified copy of an extract from the minutes of the meetings of the Board, or a duly authorised committee thereof, authorising the issue of the Re-Pricing Disclosure Document.

The Company is entitled to request that the Joint Global Co-ordinators agree (such agreement not to be unreasonably withheld or delayed) that the delivery of any of the documents referred to in this Part C of Schedule 2 may be deferred and/or substituted with another document in a form reasonably satisfactory to the Joint Global Co-ordinators, it being understood that the form of any such deferred and/or substituted document will, if applicable, take account of the

effect of any MAC Event or Material Adverse Effect that may have occurred on or prior to the date on which the relevant document is to be delivered.

Part D

Following the passing of the Resolutions and the Share Capital Reorganisation Resolutions, and prior to Admission, the Company shall deliver to each Bank:

1. A copy of the signed application for admission of the New Shares to the Official List certified by a Director or the Secretary of the Company.

2. A copy of the signed application for admission to trading issued by the London Stock Exchange certified by a Director or the Secretary of the Company (Form 1 of the Admission and Disclosure Standards).

3. A certified copy of the passporting confirmation for the Prospectus issued by the competent authority in the Relevant Member State into which the Prospectus is being passported.

4. A copy of the security application forms in respect of the Ordinary Shares, Nil Paid Rights and the Fully Paid Rights that have been given to Euroclear.

5. A certified copy of the Resolutions and any other ordinary or special resolutions of the Company in general meeting authorising the Directors under section 551 of the Companies Act to allot the New Shares.

6. A certified copy of the Share Capital Reorganisation Resolutions.

7. A certified copy of the resolution of the Board provisionally allotting the New Shares as referred to in Clause 6.1 of the Underwriting Agreement and approving and authorising the despatch or publication of the Provisional Allotment Letters.

8. An original of a signed opinion of Company’s Counsel, as English legal advisers to the Company, in the form to be agreed dated the same date as Admission.

9. An original of a signed opinion of Underwriters’ Counsel, as English legal advisers to the Underwriters, dated the same date as Admission.

10. An original of a signed opinion of Maclay Murray and Spens LLP, as Scottish legal advisers to the Company, as to matters of Scottish law dated the same date as Admission.

11. An original of a signed Rule 10b-5 bring down disclosure letter of Company Counsel in the form to be agreed dated the date of Admission.

12. An original of a signed Rule 10b-5 bring down disclosure letter of Underwriters’ Counsel in the form to be agreed dated the date of Admission.

13. An original of a signed bring-down letter of the Auditors in the agreed form.

14. An original of a bring down SAS 72 letter and SAS 72 “lookalike” letter from the Auditors dated the date of Admission.

15. An original of a bring down SAS 72 letter and a SAS 72 “lookalike” letter from KPMG Audit plc dated the date of Admission.

16. An original of a bring down CFO certificate duly signed by the CFO of the Company.

17. A certified copy of the CREST enablement letter confirming that the conditions for admission of the New Shares to CREST are satisfied.

18. An original letter in the form of Schedule 4 of the Underwriting Agreement signed by a director or secretary of the Company authorised to do so.

19. An original of a signed bring-down “no registration” opinion of Underwriters’ Counsel dated the same date as Admission.

20. An original of a signed bring-down “no registration” opinion, an “investment company” opinion and an opinion in relation to United States taxation of Company’s Counsel dated the same date as Admission.

21. An original letter in the form of Schedule 4 signed by a director or secretary of the Company authorised to do so.

The Company is entitled to request that the Joint Global Co-ordinators agree (such agreement not to be unreasonably withheld or delayed) that the delivery of any of the documents referred to in this Part D of Schedule 2 may be deferred and/or substituted with another document in a form reasonably satisfactory to the Joint Global Co-ordinators, it being understood that the form of any such deferred and/or substituted document will, if applicable, take account of the effect of any MAC Event or Material Adverse Effect that may have occurred on or prior to the date on which the relevant document is to be delivered.

Part E

Before despatching and publishing any Supplementary Prospectus, the Company shall deliver to each Bank:

1. An original of a signed bring-down UK comfort letter from the Auditors dated the date of such Supplementary Prospectus.

2. A certified copy of the minutes of the meetings of the Board, or a duly authorised committee thereof, authorising the issue of the Supplementary Prospectus.

3. An original of a SAS 72 letter and a SAS 72 “lookalike” letter duly signed by the Auditors and dated the same date as the Supplementary Prospectus.

4. An original of a bring down SAS 72 letter and a SAS 72 “lookalike” letter from KPMG Audit plc and dated the same date as the Supplementary Prospectus

5. An original of a bring down CFO certificate duly signed by the CFO of the Company.

6. An original of a signed letter from the Auditors relating to the declaration required from the Joint Sponsors pursuant to paragraphs 8.4.8 and 8.4.9 of the Listing Rules, dated the date of such Supplementary Prospectus, in a form and substance satisfactory to the Joint Sponsors.

7. An original of a signed letter in the form to be agreed duly signed by KPMG LLP dated the same date as such Supplementary Prospectus regarding the accuracy of extraction of financial information in respect of the HBOS Group.

8. An original of a signed letter in the form to be agreed duly signed by the KPMG LLP dated the same date as such Supplementary Prospectus in relation to paragraphs 8.4.8(1), 8.4.8(2) and 8.4.9(3) of the UK Listing Rules.

9. An original letter in the agreed form from the Company to the Joint Sponsors to be dated the date of such Supplementary Prospectus, relating to paragraphs 8.3.4, 8.4.8 and 8.4.9 of the Listing Rules and confirming the Company can give the statement that there has been no significant change in the financial and trading position (including indebtedness).

10. An original of a signed “no registration” opinion, an “investment company” opinion and an opinion in relation to United States taxation of Company’s Counsel dated the same date as the Supplementary Prospectus.

11. An original of a signed “no registration” opinion of Underwriters’ Counsel dated the same date as the Supplementary Prospectus.

12. An original of a signed Rule 10b-5 disclosure letter of each of Company’s Counsel and Underwriters’ Counsel dated the date of such Supplementary Prospectus.

13. An original of a signed Rule 10b-5 disclosure letter of Underwriters’ Counsel dated the same date as the Supplementary Prospectus.

14. An original of a signed opinion of Company’s Counsel as to matters of English law dated the date of such Supplementary Prospectus.

15. An original of a signed opinion of Underwriters’ Counsel as to matters of English law dated the date of such Supplementary Prospectus.

16. An original of a signed opinion of Maclay Murray and Spens LLP, as Scottish legal advisers to the Company, as to matters of Scottish law dated the date of the Supplementary Prospectus.

17. An original letter in the agreed form from the Company’s Counsel to the Joint Sponsors dated the date of such Supplementary Prospectus, relating to paragraphs 8.3.4, 8.4.8 and 8.4.9 of the Listing Rules.

18. An original letter in the form of Schedule 4 signed by a director or secretary of the Company authorised to do so.

The Company is entitled to request that the Joint Global Co-ordinators agree (such agreement not to be unreasonably withheld or delayed) that the delivery of any of the documents referred

to in this Part E of Schedule 2 may be deferred and/or substituted with another document in a form reasonably satisfactory to the Joint Global Co-ordinators, it being understood that the form of any such deferred and/or substituted document will, if applicable, take account of the effect of any MAC Event or Material Adverse Effect that may have occurred on or prior to the date on which the relevant document is to be delivered.

Part F

On or prior to the Settlement Date the Company shall deliver to each Bank:

1. An original of a signed bring-down UK comfort letter from the Auditors dated the date that the Joint Bookrunners, in accordance with Clause 8.4, procure subscribers for Underwritten Shares not taken up;

2. An original of a signed SAS 72 letter and a SAS 72 “lookalike” letter duly signed by the Auditors and dated the Settlement Date.

3. An original of a signed bring down SAS 72 letter and a SAS 72 “lookalike” letter from KPMG Audit plc dated the Settlement Date.

4. An original of a bring down CFO certificate duly signed by the CFO of the Company and dated the Settlement Date.

5. An original of a signed opinion of Company’s Counsel as to matters of English law dated the date of the Settlement Date.

6. An original of a signed opinion of Underwriters’ Counsel as to matters of English law dated the date of the Settlement Date.

7. An original of a signed Rule 10b-5 disclosure letter of each of Company’s Counsel and Underwriters’ Counsel dated as of the Settlement Date and referring to the Time of Sale and the Settlement Date.

8. An original of a signed “no registration” opinion, an “investment company” opinion and an opinion in relation to United States taxation of Company’s Counsel dated as of the Settlement Date.

9. An original of a signed “no registration” opinion of Underwriters’ Counsel dated as of the Settlement Date.

10. An original of a letter in the form of Schedule 4 signed by a director or secretary of the Company authorised to do so.

The Company is entitled to request that the Joint Global Co-ordinators agree (such agreement not to be unreasonably withheld or delayed) that the delivery of any of the documents referred to in this Part F of Schedule 2 may be deferred and/or substituted with another document in a form reasonably satisfactory to the Joint Global Co-ordinators, it being understood that the form of any such deferred and/or substituted document will, if applicable, take account of the effect of any MAC Event or Material Adverse Effect that may have occurred on or prior to the date on which the relevant document is to be delivered.

SCHEDULE 3
REPRESENTATIONS, WARRANTIES AND UNDERTAKING S

1. Compliance

1.1 Each Group company, other than those undertakings in which the Company holds a proportion of the capital that is not likely to have a significant effect on the assessment of its own assets and liabilities, financial position or profits and losses, has been duly incorporated and is validly existing as a company with limited liability under the laws of the country of its incorporation with full corporate power and authority to own, lease and operate the properties which it owns, leases and operates and to own its other assets and carry on its business as presently carried on in all material respects and as intended to be carried on as described in the Prospectus.

1.2 Each Group company has conducted its business in all material respects in accordance with all applicable laws and regulations of the United Kingdom and all relevant foreign countries or authorities, and there is no order, decree or judgment of any court or any governmental or other competent authority or agency of the United Kingdom or any foreign country outstanding against any Group company or any person for whose acts any Group company is vicariously liable, except for such orders, decrees or judgments, that, either singly or in the aggregate, would not result in a Material Adverse Effect.

1.3 All licences, permissions, authorisations and consents which are material for carrying on the business of the Group have been obtained and are in full force and effect and, so far as the Company is aware, there are no circumstances which might lead to any of such licences, permissions, authorisations and consents being revoked, suspended, varied or refused renewal.

1.4 All sums due in respect of the issued share capital of the Company at the date of this Agreement have been paid to and received by the Company. None of the owners or holders of any of the share capital of the Company shall, with effect from Admission, have any pre-emptive or other rights, in his capacity as such, in relation to the Group other than as set out in the memorandum and articles of association of the Company.

1.5 The Company is the beneficial owner free from all Adverse Interests of the shares it holds in each Group company.

1.6 The Company and the Directors have at all times complied with the provisions of the Company’s memorandum and articles of association (save in relation to the offer of Ordinary Shares to certain holders of Limited Voting Shares pursuant to the placing and open offer agreement dated 13 October 2008 and the open offer agreement dated as of 7 March 2009, as amended and restated as at 20 March 2009 and as at 18 May 2009) and the Companies Act and, subject to the passing of the Resolutions and the Share Capital Reorganisation Resolutions, have or will have the right, power and authority under the memorandum and articles of association of the Company, or pursuant to resolution passed in general meeting, to enter into and perform this Agreement (including, without limitation, the power to pay commissions, fees, costs and expenses provided for in this Agreement), to effect the Share Capital Subdivision, to make the Rights Issue, to allot and issue the New Shares in certificated and uncertificated form, to issue the Relevant Documents in the manner proposed

without any sanction or consent by members of the Company or any class of them and to enter into any other agreement in connection with the Rights Issue or the Share Capital Subdivision to which it is, or is to be, a party. Subject to Admission, there are no other consents, authorisations or approvals required by the Company in connection with the entering into and the performance of this Agreement, and the actions referred to in this paragraph 1.6 which have not been irrevocably and unconditionally obtained. The Existing Ordinary Shares are and, following the Share Capital Subdivision coming into effect, the Ordinary Shares will be, participating securities in, and have not been suspended from, CREST.

1.7 The allotment and issue of the New Shares, the Rights Issue, the Share Capital Subdivision, the issue and distribution of the Relevant Documents and any other document by or on behalf of the Company in connection with Admission or the Rights Issue or the Share Capital Subdivision complies with all agreements to which any Group company is a party or by which any such Group company is bound and, except where non-compliance would not, either singly or in the aggregate, result in a Material Adverse Effect, complies with (a) all applicable laws and regulations of the United Kingdom (including, without limitation, the Act, the FSMA, Listing Rules, the Prospectus Rules, the Disclosure Rules and Transparency Rules, the Admission and Disclosure Standards) and (in all material respects) with, all applicable laws and regulations of any relevant jurisdiction; and (b) the memorandum and articles of association of the Company; and does not exceed or infringe any restrictions or the terms of any contract, indenture, security, obligation, commitment or arrangement by or binding upon the board of directors of any Group company or their respective properties, revenues or assets or result in the implementation of any right of pre-emption or any other material provision thereof, or result in the imposition or variation of any material rights or obligations of any Group company, except where such non-compliance would not, either singly or in the aggregate, result in a Material Adverse Effect.

1.8 The Relevant Documents contain all particulars and information required by, and comply, in all material respects with the memorandum and articles of association of the Company, the Companies Act, the FSMA, the Listing Rules, the Disclosure Rules and Transparency Rules, the Prospectus Rules, all applicable rules and requirements of the London Stock Exchange and the FSA (in all material respects) and all other applicable requirements of statute, statutory regulation or any regulatory body.

1.9 The New Shares will, upon allotment, be free from all Adverse Interests and will rank pari passu in all respects with the existing issued shares in the issued share capital of the Company.

1.10 The Company has complied in all material respects with the requirements of Euroclear and the Uncertificated Securities Regulations 2001.

1.11 This Agreement and the other agreements to be entered into by the Company in connection with Admission, the Rights Issue, the Share Capital Subdivision have been or will be duly authorised, executed and delivered on behalf of the Company and assuming due authorisation, execution and delivery by the other parties thereto, constitute valid and binding obligations of the Company enforceable against it in accordance with their terms (subject to mandatory rules of law relating to insolvency and section 117 of the Stamp Act 1891).

1.12 The Rights Issue and the Share Capital Subdivision (including without limitation, the creation, allotment and issue of the New Shares and the publication and distribution of the Relevant Documents) will be conducted in all material respects in accordance with the terms and conditions of the Relevant Documents and the Company has complied and will comply with all laws, rules and regulations applicable to the Rights Issue and the Share Capital Subdivision in each jurisdiction in which the New Shares are offered, except where such non-compliance would not, either singly or in the aggregate, result in a Material Adverse Effect.

1.13 Other than those undertakings in which the Company holds a proportion of the capital that is not (either singly or in the aggregate) likely to have a significant effect on the assessment of its own assets and liabilities, financial position or profits and losses, there are no rights (conditional or otherwise) (i) to require the issue of any shares or other securities of a Group company (including without limitation, any loan capital) or securities convertible into or exchangeable for, or warrants, rights or options to purchase, or obligations, commitments or intentions to create the same or (ii) other than: (a) in accordance the registration rights agreement entered into between HM Treasury and the Company on 12 January 2009 and as amended and restated on 11 June 2009 and the resale rights agreement entered into between HM Treasury and the Company on 11 June 2009; (b) in accordance with alternative cash settlement mechanisms or principal stock settlement features on capital instruments issued by members of the Group; or (c) other than in respect of the Group’s obligations to the holders of Limited Voting Shares, to sell or otherwise dispose of any shares or other securities of a Group company (other than to another Group, company, as the case may be) which are outstanding and in force.

1.14 No member of the Group or any person acting on its behalf has taken, directly or indirectly, any action designed to or which has constituted or which might reasonably be expected to cause or result in stabilisation or manipulation of the price of any security of the Company.

1.15 The Company has not paid or agreed to pay to any person any compensation for soliciting another to purchase any New Shares (except as contemplated in this Agreement).

2. Relevant Documents

2.1 None of the Relevant Documents contains any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading in any material respect.

2.2 All expressions of opinion, intention, belief or expectation contained in any Relevant Document are truly and honestly held by the Directors, are fairly based and have been made on reasonable grounds after due and careful consideration and enquiry.

2.3 There are no facts or matters known, or which could on reasonable enquiry have been known, to the Company or any of the Directors omitted from any Relevant Document, the omission of which would make any statement of fact or expression of opinion, intention or expectation contained in a Relevant Document misleading in any material respect.

2.4 Having regard to the particular nature of the Company and the Group and the Company’s share capital and the other matters referred to in section 87A of the FSMA, the Prospectus contains all information about the Group which is or would be reasonably likely to be material for disclosure to potential investors and their professional advisers and which they would reasonably require and reasonably expect to find there for the purpose of making an informed assessment of the matters specified in section 87A(2) of the FSMA.

2.5 There is no fact or circumstance which is not disclosed with sufficient prominence in the Prospectus which ought to be taken into account by the UK Listing Authority in considering the application for listing of the New Shares.

2.6 All information provided by the Company, its subsidiary undertakings or any of its or their officers or employees to the Banks and/or the Auditors in connection with its organised due diligence enquiries or similar requests for information has been supplied in good faith and such information was when supplied, and remains, true and accurate in all material respects and no further information requested has been withheld, the absence of which would be reasonably likely to be considered to be material to such due diligence enquiries or requests for information.

3. Previous announcements

With respect to all Previous Announcements, all statements of fact contained therein were at the date of the relevant Previous Announcement and, save to the extent corrected or amended in any document or announcement issued or made by or on behalf of the Company or any member of the Group subsequent thereto, remain true and accurate in all material respects and not misleading in any material respect and all estimates, expressions of opinion or intention or expectation of the Directors contained therein were made on reasonable grounds and were honestly held by the Directors and were fairly based and there were no facts known (or which could on reasonable enquiry have been known by the Directors) the omission of which would make any statement of fact or estimate or statement or expression of opinion, intention or expectation in any of the Previous Announcements misleading in any material respect and all Previous Announcements complied with the memorandum and articles of association of the Company in all material respects, the Listing Rules, the Disclosure Rules and Transparency Rules, the Prospectus Rules, the Companies Act, the FSMA, all applicable rules and requirements of the London Stock Exchange and the FSA and (in all material respects) all other applicable requirements of statute, statutory regulation or any regulatory body.

4. Derogation

Each statement, if any, made by or on behalf of the Company (and of which the Company is aware) in connection with any application to the London Stock Exchange or the UK Listing Authority for information to be omitted from the Prospectus is true, complete and accurate and not misleading in any material respect. There is no information which has not been disclosed in writing to the London Stock Exchange or the UK Listing Authority in connection with such an application which by its omission makes such a statement untrue, inaccurate or misleading in any material respect.

5. Accounts


5.1 The Accounts incorporated by reference into the Prospectus:

(a)	have been prepared and audited in accordance and comply with IFRS, the Companies Act and all applicable laws and regulations;

(b)	give a true and fair view of the financial condition and of the state of affairs of the Company and the Group as at the end of each of the relevant financial periods (including the Accounts Date) and of the profit, loss, cash flow and changes in equity of the Company and the Group; and

(c)	either make proper provision for, or, where appropriate, in accordance with IFRS, include a note in respect of all material liabilities or commitments, whether actual, deferred, contingent or disputed of the Group.

5.2 The HBOS Accounts incorporated by reference into the Prospectus:

(a)	have been prepared and audited in accordance and comply with IFRS, the Companies Act and all applicable laws and regulations;

(b)	give a true and fair view of the financial condition and of the state of affairs of HBOS and the HBOS Group as at the end of each of the relevant financial periods (including the Accounts Date) and of the profit, loss, cash flow and changes in equity of HBOS and the HBOS Group for such periods; and

(c)	either make proper provision for, or, where appropriate, in accordance with IFRS, include a note in respect of all material liabilities or commitments, whether actual, deferred, contingent or disputed of the HBOS Group.

5.3 The Interim Accounts present fairly the information shown therein and are presented on a basis consistent with the accounting policies of the Group (subject to the qualification that they are unaudited) and the consolidated balance sheet, cash flow statement and income statement for the Group for the six months ended 30 June 2009 have been prepared in accordance with the Disclosure and Transparency Rules and with IAS 34, Interim Financial Reporting, as adopted by the European Union and includes a fair review of the information as required by DTR 4.2.7 and DTR 4.2.8, namely an indication of important events that have occurred during the six months ended 30 June 2009 and their impact on the condensed interim financial statements, and a description of the principal risks and uncertainties for the remaining six months of the financial year, and material related party transactions in the six months ended 30 June 2009 and any material changes in the related party transactions described in the Company’s annual report for the financial year ended 31 December 2008.

5.4 The pro forma financial information on the Group set out in the Prospectus has been duly and carefully prepared on the bases set out in Part XVI of the Prospectus in accordance with the Prospectus Rules and is presented on a basis consistent with the accounting policies normally applied by the Company for the period ended 30 June 2009.

5.5 The summary and selected financial information on the Group set out in the Prospectus has been duly and carefully extracted from the Accounts and the Interim Accounts

(as applicable) and has been properly compiled on a basis consistent with the accounting policies applied in the Accounts and the Interim Accounts (as applicable).

5.6 The capitalisation and indebtedness table set out in the Prospectus has been properly compiled on a basis that is consistent with the accounting policies applied in the Accounts.

5.7 No Group company has any off balance sheet financing, investment or liability material for disclosure in the Prospectus that is not so fairly disclosed.

5.8 The Directors have established procedures which provide a reasonable basis for them to make proper judgements on an ongoing basis as to the financial position and prospects of the Company and the Group.

5.9 There are no, and during the past four years have been no (i) material weaknesses in the Company’s internal controls over financial reporting (whether or not remediated) of the Company or the Group, (ii) changes in the Company’s internal controls over financial reporting of the Company or the Group that has materially adversely affected, or would be reasonably likely to materially adversely affect, the Company’s internal controls over financial reporting of the Company or the Group; or (iii) fraud that involves any current member of management of the Company or (so far as the Company is aware) of any member of the Group and no material fraud that involves any employee of the Company or (so far as the Company is aware) of any member of the Group.

6. Position Since Accounts Date

6.1 So far as the Company is aware, since the Accounts Date:


(a)	each Group company has carried on its respective business in the ordinary course in all material respects, and there has been no Material Adverse Effect;

(b)	there has been no impairment or charges in respect of any assets of the Company or the Group, and there has been no increase in the provisions in respect of losses in relation to any mortgage, loans or other assets of the Company or of any Group company, except in any such case as would not result in a Material Adverse Effect;

(c)	save for any utilisation by the Company of the short-term liquidity measures being made available by the Bank of England (in the form notified by HM Government to the European Commission on 13 October 2008 and on 22 December 2008) or of the HM Treasury 2008 Credit Guarantee Scheme, no Group company has, otherwise than in the ordinary course of business, entered into or assumed or incurred any contract, commitment (whether in respect of capital expenditure or otherwise), borrowing, indebtedness in the nature of borrowing, guarantee, liability (including contingent liability) or any other agreement or obligation, except in any such case as would not result in a Material Adverse Effect;

(d)	other than in the ordinary course of business, no debtor has been released by the Company to an extent which (singly or in the aggregate) is material in the context of the Rights Issue, underwriting of the Underwritten Shares, Admission or post-Admission dealings in the Ordinary Shares on terms that he pays less than the book value of his debt and no debt of such material amount owing to the Company or


	any Group company has been deferred, subordinated or written off or has proven irrecoverable to any material extent;

(e)	no Group company has been involved in any transaction (other than the compensatory open offer agreement entered into by the Company on 20 March 2009), which has resulted or would be reasonably likely to result (singly or in the aggregate) in any material liability for tax on the Company or any Group company other than a transaction in the ordinary course of business or a transaction in respect of which the liability for tax is provided for or taken into account in any provision for tax contained in the Accounts or the Interim Accounts incorporated by reference in the Prospectus; and

(f)	no Group company has been in default in any material respect under any agreement or arrangement to which any Group company is a party and which is or is reasonably likely to be material and, so far as the Company is aware, there are no circumstances likely to give rise to such default.

7. Working Capital Report

7.1 All information supplied by the Company to the Banks and/or the Auditors for the purposes of the Working Capital Report prepared by the Auditors in connection with the Rights Issue and in respect of any updates thereto, has been supplied to them in good faith; and such information was when supplied and remains true and accurate in all material respects and not misleading in any material respect, and no information has been withheld the absence of which would be reasonably likely to have affected the contents of the Working Capital Report.

7.2 The Working Capital Report has been approved by the Directors or a duly authorised committee thereof and the liquidity and funding and regulatory capital projections contained in the Working Capital Report have been made after due and careful enquiry and consideration, all statements of fact therein are true and accurate and not misleading in any material respect, all expressions of opinion, intention or expectation contained therein will be made on reasonable grounds after due and careful enquiry and consideration and honestly held by the Directors and fairly based, there will be no other facts known or which could on reasonable enquiry have been known to the Company on the date of the Working Capital Report or the date of the Prospectus or at Admission, the omission of which would make any such statement or expression in the Working Capital Report misleading in any material respect, all the bases and assumptions on which the Working Capital Report is based are reasonable and, so far as the Company is aware, there are no other assumptions on which the Working Capital Report ought to have been based which were not made.

7.3 So far as the Company is aware, after taking into account existing available bank and other facilities, the Exchange Offers and the net proceeds of the Rights Issue, the Group has sufficient working capital for its present requirements, that is, for at least the next 12 months from the date of this Agreement and the Prospectus.

8. Guarantees, indemnities, borrowings and default

8.1 Save for (i) guarantees or indemnities given by any Group company in the ordinary course of business and (ii) any indemnities given by the Company to the Banks, no Group company has given or has agreed to give any guarantee or indemnity or similar obligation in favour of a third party and no Group company has any current or known future liability, howsoever arising except for any guarantees, indemnities, similar obligations or liabilities that, either singly or in the aggregate, would not result in a Material Adverse Effect.

8.2 No event has occurred nor have any circumstances arisen (and the making and completion of the Rights Issue, the Share Capital Subdivision and the allotment and issue of the New Shares will not give rise to any such event or circumstance) so that any person is or would be entitled, or could, with the giving of notice or lapse of time or the fulfilment of any condition or the making of any determination, become entitled, to require repayment before its stated maturity of, or to take any step to enforce any security for, any indebtedness of any member of the Group which is material in the context of the Group’s borrowings or working capital projections and no person to whom any indebtedness, which is material in the context of the Group’s borrowings, is payable on demand has demanded or threatened to demand repayment of, or taken or threatened to take any step to enforce any guarantee, indemnity or other security for, the same.

8.3 There are no companies, undertakings, partnerships or joint ventures in existence in which any Group company has an ownership interest but whose results are not consolidated with the results of the Group, but whose default would affect the indebtedness or increase the contingent liabilities of the Group in any material respect.

8.4 No event or circumstance exists, has occurred or arisen or, so far as the Company is aware, is about to occur which constitutes or results in, or would with the giving of notice and/or lapse of time and/or the making of a relevant determination, constitute, or result in, termination of or a default or the acceleration or breach of any obligation under any agreement, instrument or arrangement to which any Group company is a party or by which any such Group company or any of its properties, revenues or assets are bound, which event or circumstance would, either singly or in the aggregate, result in a Material Adverse Effect.

9. T axation

9.1 All material information, returns, computations and notices of the Group for tax purposes have been made for all purposes within the requisite period and on a proper basis and all such information, returns, computations and notices are up-to-date and correct in all material respects and, so far as the Directors of the Company are aware, are not the subject of any dispute between the Group, or claim against the Group, by HMRC or any other taxation authority which is or would be reasonably likely to be considered material in the context of the Rights Issue, the underwriting of the Underwritten Shares, Admission or post-Admission dealings in the Ordinary Shares and, so far as the Directors of the Company are aware, no enquiry has been raised by HMRC or any other taxation authority in respect of any member of the Group which is or would be reasonably likely to be material in the context of the Group.

9.2 No stamp duty or stamp duty reserve tax imposed under the law of the United Kingdom is payable in connection with the allotment, issue and delivery of the New Shares

by the Company in accordance with the terms of this Agreement or otherwise in connection with the Rights Issue, save for any stamp duty or stamp duty reserve tax payable under sections 67, 70, 93 or 96 of the Finance Act 1986 in relation to the issue of the New Shares and save that no warranty is given in respect of any of such shares or duty or taxes arising in respect of the allotment and issue of Excess Shares to subscribers nominated by the Underwriters pursuant to Clause 9.4(f).

10. Litigation

10.1 So far as the Company is aware, no Group company nor any of its officers or agents or employees is involved in relation to the affairs of any Group company, or has during the recent past (being not less than 12 months ending on the date of this Agreement) been involved in any civil, criminal, arbitration, administrative, governmental or other proceedings or governmental regulatory or similar investigation or enquiry in relation to the affairs of any Group company, whether as plaintiff, defendant or otherwise which, by itself or with other proceedings, would be, or is reasonably likely to be, material in the context of the Rights Issue, the underwriting of the Underwritten Shares, Admission or post-Admission dealings in the Ordinary Shares.

10.2 So far as the Company is aware, no litigation or arbitration, administrative, governmental, civil, criminal or other proceedings nor governmental, regulatory or similar investigation or enquiry are pending or have been threatened by or against any Group company or any of their respective officers, agents or employees in relation to the affairs of any Group company and, to the best of the knowledge, information and belief of the Company and the Directors, there are no facts or circumstances likely to give rise to any such litigation or arbitration, administrative, criminal, governmental, civil, or other proceedings or governmental, regulatory or similar investigation or enquiry, in each case, to an extent which, by itself or with other proceedings, which would be, or is reasonably likely to be, material in the context of the Rights Issue, underwriting of the Underwritten Shares, Admission or post-Admission dealings in the Ordinary Shares.

10.3 So far as the Company is aware, no Group company nor any of its officers or agents or employees in relation to the affairs of any Group company has been a party to any undertaking or assurance given to any court or governmental agency or the subject of any injunction which in any of the foregoing cases is still in force and which, by itself or with other proceedings, which would be, or is reasonably likely to be, material in the context of the Rights Issue, underwriting of the Underwritten Shares, Admission or post-Admission dealings in the Ordinary Shares.

10.4 For the purpose of this paragraph 10.4, proceedings includes any action by any governmental, public or regulatory authority (including any investment exchange or any authority or body which regulates investment business or takeovers or which is concerned with regulatory, licensing, competition, taxation matters or matters concerning Intellectual Property Rights).

11. Intellectual Property

11.1 Except to an extent that would not (singly or in the aggregate) be material in the context of the Rights Issue, the underwriting of the Underwritten Shares, Admission or

post-Admission dealings in the Ordinary Shares, the Group does not infringe the Intellectual Property Rights of any third party nor so far as the Company is aware does any third party infringe the Intellectual Property Rights owned or used by the Group.

11.2 All material Intellectual Property Rights used by the Group are either legally or beneficially owned by the Group in all material respects or are used under a licence and are not subject to any Adverse Interests to an extent that would or might (singly or in the aggregate) be material in the context of the Rights Issue, the underwriting of the Underwritten Shares, Admission or post-Admission dealings in the Ordinary Shares.

11.3 Save as would not (singly or in the aggregate) be material in the context of the Rights Issue, the underwriting of the Underwritten Shares, Admission or post-Admission dealings in the Ordinary Shares, (i) all Intellectual Property Rights registered in the name of a Group company (if any) are beneficially owned by it and subsisting and if granted not subject to revocation and (ii) all requisite registration and renewal fees in respect thereof have been duly and timeously paid.

11.4 Save as would not (singly or in the aggregate) be material in the context of the Rights Issue, the underwriting of the Underwritten Shares, Admission or post-Admission dealings in the Ordinary Shares, (i) all Intellectual Property Rights owned and used or reasonably likely to be used by the Group and capable of legal protection are subject to appropriate and enforceable protection (including, where reasonably appropriate, by registration), and (ii) so far as the Company is aware there is no restriction of the Group’s rights to use any Intellectual Property Rights owned by or licensed to the Company to engage in any of the activities presently or proposed to be undertaken by it.

12. Arrangements with directors and shareholders


12.1

(a)	Other than the articles of association of the Company and any service agreement with a Director, the deeds of indemnity entered into between the Company and its directors and any contracts entered into in the ordinary course of business, there are no existing contracts or engagements or other arrangements to which any Group company is a party and in which any of the directors of any Group company and/or any associate of any of them is interested; and to the extent that any such contracts, engagements or other arrangements exist they comply with the related party requirements of the Listing Rules of the UK Listing Authority (or other relevant regulator);

(b)	other than HM Treasury, no Shareholder has any rights, in his capacity as such, in relation to the Company other than as set out in the articles of association of the Company;

(c)	the Company is not aware of any claim, demand or right of action against any Group company (otherwise than for accrued remuneration in accordance with their contracts of employment by any officer or employee (or former officer or employee) of the Group and/or any associate of them in any of the foregoing cases), other than any such claims, demands or rights of action which would not, either singly or in the aggregate, result in a Material Adverse Effect;


(d)	so far as the Company is aware, no Director nor any person connected with such Director nor any of the employees of the Group nor any person connected with any such employee is in breach of any restrictive covenant, employment agreement or contract for services which would, or would be reasonably likely to, affect the Company or any other Group company and so far as the Company is aware, there are no circumstances which would be reasonably likely to give rise to any claim of such a breach or any other dispute with any employer, former employer or other person for whom any Director or employee of the Group provides or has provided services, except for any such breach or dispute which, either singly or in the aggregate, would not result in a Material Adverse Effect; and

(e)	(i) no Director nor any director of any Group company has given notice of termination of his contract of employment, and (ii) no Director nor any director of any Group company has indicated an intention to resign except, in respect of (i) and (ii) above, where such notice of termination or notice of intention to resign would not result in a Material Adverse Effect.

12.2	For the purpose of this paragraph 12, *associate* has the meaning:

(a)	in the case of an individual, given to “connected person” under section 256 of the Companies Act; and

(b)	in the case of a body corporate, given to “associated company” in sections 416 et seq of the Income and Corporation Taxes Act 1988.

13. Competition

13.1 No Group company is a party to (or is concerned in) any agreement, arrangement, concerted practice or course of conduct which infringes, or of which particulars have or should have been delivered to any relevant governmental or other authority in any jurisdiction under any relevant legislation in any territory regarding anti-competitive or restrictive trade or business practices or which falls within Articles 81 and/or 82 of the EC Treaty, or otherwise, in any of the foregoing cases to an extent that (singly or in the aggregate) would, or would be reasonably likely to, be material in the context of the Rights Issue, the underwriting of the Underwritten Shares, Admission or post-Admission dealings in the Ordinary Shares.

13.2 No Group company is, or has been, in connection with its business or that of any other Group company, engaged in any practice which contravenes any such legislation as is referred to in the preceding paragraph or which is under investigation by any authority referred to in the preceding paragraph or which is the subject of undertakings to any such authority and, so far as the Company is aware, none of the practices carried on by any Group company contravenes or may contravene any such legislation or is reasonably likely to be subject to such investigation, in any of the foregoing cases to an extent that would, or would be reasonably likely to, be (singly or in the aggregate) material in the context of the Rights Issue, the underwriting of the Underwritten Shares, Admission or post-Admission dealings in the Ordinary Shares.

14. I NSURANCE

The Group is insured to adequate levels against all risks which the Company reasonably believes to be commonly insured against by persons carrying on the same or similar businesses as those carried on by the Group and against all risks against which the Group could reasonably be expected to insure in the particular circumstances of the businesses carried on by each Group company, all such insurances are in full force and effect and to the best knowledge, information and belief of the Company, there are no circumstances which could render any such insurances void or voidable and there is no material insurance claim, pending, threatened or outstanding against any Group company and all premiums due in respect of such insurances have been duly paid.

15. I NFORMATION TECHNOLOGY


(a)	systems used or planned to be used in connection with the businesses of the Group are all the systems required for the present needs of the business of the Group, including, without limitation, as to system capacity and ability to process current peak volumes and anticipated volumes in a timely manner;

(b)	in the 12 months prior to the date of this Agreement, the Group not suffered any failures or bugs in or breakdowns of any systems used in connection with the businesses of the Group which have caused any substantial disruption or interruption in or to its use and the Company is not aware of any fact or matter which may so disrupt or interrupt or affect the use of such equipment following the date of this Agreement on the same basis as it is presently used;

(c)	all hardware comprised in any systems, excluding any software and any external communications lines, used in the businesses of the Group are owned (except those items which are subject to finance leases) and operated by and are under the control of a Group company and are not wholly or partly dependent on any facilities which are not under the ownership, operation or control of the Group or (where governed by outsourcing or other similar arrangements) are otherwise openly accessible to the Group; and

(d)	each Group company is validly licensed to use the software used in its business.

16. R ATING

So far as the Company is aware, it has not received notice of any intended or potential downgrading of the rating assigned to any of the Company’s (or any other member of its Group’s) credit or debt by a ratings agency and (other than awareness of publicly known general market conditions and speculation) is not aware of a specific fact, circumstance or condition in respect of itself or any Group company from which or a combination of any of which, when considered in the context of current market conditions and speculation in the financial services sector, it could reasonably expect such a downgrade to be threatened or to

occur. So far as the Company is aware, no ratings agency has placed the Company or any Group company or any of the Company’s or any Group company’s debt on credit watch.

17. S HARE S CHEMES

17.1 The particulars of the employee schemes contained in the Prospectus or any Supplementary Prospectus and, in particular, the information as to the dates on which options or other rights may be exercised and the number of options or other rights granted (conditionally or otherwise) on or before the date of this Agreement are accurate in all material respects and not misleading in any material respect.

17.2 Save as otherwise would not (singly or in the aggregate) be material in the context of the Rights Issue, the underwriting of the Underwritten Shares, Admission or post-Admission dealings in the Ordinary Shares, except for options or other rights granted under the Company’s approved share option schemes in accordance with normal practice, there are no arrangements which (contingently or otherwise) may give rise to an obligation on the Company or any Group company to allot, issue or grant any relevant securities as contemplated by section 549 of the Companies Act

18. P ENSION S CHEMES

Save as otherwise would not (singly or in the aggregate) be material in the context of the Rights Issue, the underwriting of the Underwritten Shares, Admission or post-Admission dealings in the Ordinary Shares, the Group is not paying, and is not under any liability (actual or contingent) to pay or secure (other than by payment of employers’ contributions under national insurance or social security legislation), any pension or other benefit on retirement, death or disability or on the attainment of a specified age or on the completion of a specified number of years of service.

19. A GREEMENTS

Otherwise than arising as a result of ordinary course financing arrangements entered into by the Group and otherwise as would not (singly or in the aggregate) be material in the context of the Rights Issue, the underwriting of the Underwritten Shares, Admission or post-Admission dealings in the Ordinary Shares, other than: (i) in accordance the registration rights agreement entered into between HM Treasury and the Company on 12 January 2009 and as amended and restated on 11 June 2009 and the resale rights agreement entered into between HM Treasury and the Company on 11 June 2009; (ii) in accordance with alternative cash settlement mechanisms or principal stock settlement features on capital instruments issued by members of the Group; or (iii) other than in respect of the Group’s obligations to the holders of Limited Voting Shares, there is no agreement, undertaking, instrument or arrangement requiring the creation, allotment, issue, redemption or repayment, or the grant to any person of the right (whether conditional or not) to require the allotment, issue, redemption or repayment, of any shares in the capital of a Group company (including, without limitation, an option or right of pre-emption or conversion).

20. I NSOLVENCY

20.1 No Group company is unable to pay its debts within the meaning of section 123 of the Insolvency Act 1986 or is otherwise insolvent except where the inability to pay any such debt, or such insolvency would not result in a Material Adverse Effect.

20.2 No order has been made, petition presented or resolutions passed for the winding up of any Group company and no meeting has been convened for the purpose of winding up any such Group company that, in any such case, would, either singly or in the aggregate, result in a Material Adverse Effect. No such Group company has been a party to any transaction which could be avoided in a winding up where such avoidance would result in a Material Adverse Effect.

20.3 No steps have been taken for the appointment of an administrator or receiver (including an administrative receiver) of all or any part of the assets of any Group company that, either singly or in the aggregate, would result in a Material Adverse Effect.

20.4 By reason of actual or anticipated financial difficulties, no Group company has commenced discussions with the FSA, the Bank of England, the European Central Bank or any other regulatory authority to obtain stand-by or emergency funding (whether by way of repo transactions or otherwise) or has commenced negotiations with its creditors or any class of its creditors with a view to rescheduling any of its indebtedness or has made or proposed any arrangement or composition with its creditors or any class of its creditors.

21. R EGULATORY

21.1 Each Group Company required to be licensed (as a bank or otherwise) is duly licensed in its jurisdiction of incorporation and domicile and, except as would not reasonably be expected to be material, is duly licensed or authorised in each other jurisdiction where it is required to be licensed or authorised to conduct its business as described in the Prospectus.

21.2 No Group Company nor any of its officers, in relation to a Group Company, has failed to comply with any statutory provision or any rules, regulations, directions, requirements, notices and provisions of the FSA or any other regulatory body applying to such Group Company in relation to its business including (without limitation) in respect of the maintenance of its Capital Resources Requirement and satisfaction of the Overall Financial Adequacy Rule and any equivalent capital requirements in any other jurisdiction that are applicable to any Group Company; no obligation has arisen, in relation to a Group Company, in respect of the general notification requirements under Chapter 15.3 of SUP, save in any of the foregoing cases to an extent which would not (singly or in the aggregate) be material in the context of the Rights Issue, the underwriting of the Underwritten Shares, Admission or post-Admission dealings in the Ordinary Shares.

21.3 There are no facts or circumstances, which have not been included in the Prospectus or any other information provided to the UK Listing Authority, which would cause the UK Listing Authority not to be satisfied that the Company’s capital adequacy is regulated by the FSA or suitably regulated by another regulatory body.

21.4 Save as would not (singly or in the aggregate) be material in the context of the Rights Issue, the underwriting of the Underwritten Shares, Admission or post-Admission dealings in the Ordinary Shares, no Group Company is the subject of any investigation, enforcement action (including, without limitation to vary the terms of any permission of licence) or disciplinary proceeding by the FSA or any other regulatory body having jurisdiction over such Group Company, and no such investigation, enforcement action or disciplinary proceeding is threatened or pending.

21.5 Save as would not (singly or in the aggregate) be material in the context of the Rights Issue, the underwriting of the Underwritten Shares, Admission or post-Admission dealings in the Ordinary Shares, the Company is not subject to any special or additional surveillance by the FSA or to any special or additional reporting requirements in relation to its assets, liquidity position, funding position or otherwise and the Company is not subject to any visits, beyond customary visits, by the FSA.

21.6 No Group company is, or has been, in receipt of aid within the meaning of Article 87(1) of the EC Treaty which has not been notified or which, having been notified, has been put into effect prior to clearance or which has been found not to be compatible with the common market. No Group company is aware of any procedure initiated by the European Commission which is reasonably likely to lead to a decision addressed to any EU member state that could result in a decision ordering the recovery of aid from any Group company.

21.7 No Group company is aware of any investigation, formal or informal, having been initiated by the Office of Fair Trading, the European Commission or any agency responsible for the enforcement of competition law in any territory or jurisdiction concerning a violation of Section 2 or Section 18 of the Competition Act 1998, as amended, or Article 81 or Article 82 of the EC Treaty or any similar or related provision in English or EU law or the law of any other territory or jurisdiction, except where any such investigation, either singly or in the aggregate, would not result in a Material Adverse Effect.

21.8 All information supplied by the Company to the European Commission in relation to the matters addressed by the Heads of Terms was when supplied and remains true and accurate in all material respects and not misleading in any material respect, and no information has been withheld the absence of which could be reasonably likely to have affected the contents of such Heads of Terms.

21.9 The operations of each Group company are and have been conducted at all times in compliance with the money laundering statutes of all jurisdictions, the rules and regulations thereunder and any related or similar rules, regulations or guidelines, issued, administered or enforced by any governmental agency (collectively, the Money Laundering Laws ) and no action, suit or proceeding by or before any court or governmental agency, authority or body or any arbitrator involving any Group company with respect to the Money Laundering Laws is pending or, to the best knowledge of the Company, threatened except in any such case for any action, suit or proceeding which would not, either singly or in the aggregate, result in a Material Adverse Effect.

21.10 None of the Company, any other member of the Group or, to the knowledge of the Company, any director, officer, agent, employee or affiliate of the Company is currently subject to any sanctions administered by the U.S. Department of the Treasury or any similar

sanctions imposed by the European Union, the United Nations or any other body, governmental or other, to which the Company or any of its affiliates is subject; and the Nil Paid Rights, Fully Paid Rights and New Shares to be issued in the Rights Issue are not being issued for the purpose of funding any operations in, financing any investment or activities in or making any payments to any country or to any person targeted by any U.S. sanctions administered by the Office of Foreign Assets Control of the U.S. Department of the Treasury.

21.11 None of the Company, any other member of the Group or, to the knowledge of the Company, any director, officer, agent, employee or Affiliate of the Company, is aware of or has taken any action, directly or indirectly, that could result in a violation by such persons of the U.S. Foreign Corrupt Practices Act of 1977, as amended, or the rules and regulations thereunder (the FCPA ) (including, without limitation, making use of the mail or any means or instrument of interstate commerce corruptly in furtherance of an offer, payment, promise to pay or authorisation of the payment of any money, or other property, gift, promise to give, or authorisation of the giving of anything of value to any “foreign official” (as such term is defined in the FCPA) or any foreign political office, in contravention of the FCPA), the OECD Convention on Bribery of Foreign Public Officials in International Business Transactions (the OECD Convention ) or any similar law or regulation, to which the Company, any other member of the Group, any director, officer, agent, employee of any member of the Group or, to the knowledge of the Company, any Affiliate is subject; and the Company, each member of the Group and, to the knowledge of the Company, its Affiliates have conducted their businesses in compliance with the FCPA, the OECD Convention and any applicable similar law or regulation and have instituted and maintain policies and procedures designed to ensure, and which are reasonably expected to continue to ensure, continued compliance therewith.

22. P ROFIT F ORECAST

22.1 The forecast loss before tax, before the recognition of negative goodwill, for the period ending 31 December 2009 set out in Part XVII of the Prospectus represents the honest belief of the Directors, has been made after due and careful enquiry by the Company, presents fairly the information shown therein, has been prepared in accordance with applicable guidelines and rules and has been properly compiled on the basis set out therein (and the basis of accounting used is consistent with the accounting policies of the Group) and the assumptions used in the preparation thereof are reasonable.

22.2 The Profit Forecast Report has been approved by the Directors or a duly authorised committee thereof, and takes into account all material matters and sensitivities of which the Company is aware concerning the Company, the other members of the Group or the markets in which any of them is carrying on, or is expecting to carry on, business. All assumptions on which such projections are based are set out in the Profit Forecast Report and are reasonable and such projections take into account all material matters of which the Company is aware concerning the Company, the other members of the Group or the markets in which any of them is carrying on, or is expecting to carry on, business and all factual information supplied to the Auditors by the Company or any other member of the Group or any of such person’s officers for the purpose of enabling the Auditors to identify or evaluate the assumptions underlying the relevant projections is true, accurate and not misleading and all other information (including any forecast or projection) supplied for that purpose was carefully prepared and given in good faith.

23. U NITED S TATES S ECURITIES R EGULATIONS

23.1 None of the Company, its affiliates (as defined in Rule 405 under the Securities Act), or any person acting on its or their behalf (provided that the Company does not make any representation or warranty with respect to the Banks) has engaged or will engage in any “directed selling efforts” (within the meaning of Rule 902(c) of Regulation S under the Securities Act) with respect to the New Shares, the Provisional Allotment Letter, the Nil Paid Rights or the Fully Paid Rights.

23.2 The Company is a “foreign issuer” (as defined in Regulation S under the Securities Act).

23.3 The Company reasonably believes that there is no “substantial US market interest” (as defined in Rule 902(j) of Regulation S under the Securities Act) in any of the New Shares, the Provisional Allotment Letter, the Nil Paid Rights or the Fully Paid Rights or any security of the same class or series as the New Shares.

23.4 None of the Company, its affiliates (as defined under Rule 501(b) under Regulation D under the Securities Act) or any person acting on its or their behalf (provided that the Company does not make any representation or warranty with respect to the Banks) has engaged or will engage in any form of general solicitation or general advertising (within the meaning of Rule 502(c) of Regulation D under the Securities Act) in the United States in connection with any offer or sale of the New Shares, the Provisional Allotment Letter, the Nil Paid Rights or the Fully Paid Rights or has offered or will offer to sell or solicited or will solicit offers to by any New Shares, the Provisional Allotment Letter, Nil Paid Rights or the Fully Paid Rights in any manner involving a public offering in the United States within the meaning of Section 4(2) of the Securities Act.

23.5 None of the Company, its Affiliates or any person acting on behalf of any of them has, directly or indirectly, (a) made or will make offers or sales of any security, (b) solicited or will solicit offers or sales by any security, (c) otherwise negotiated or will negotiate in respect of any security, in any of the foregoing cases under circumstances that would require the registration of the New Shares, the Provisional Allotment Letter, the Nil Paid Rights or the Fully Paid Rights under the Securities Act or (d) taken or will take any other action that would require the registration of the New Shares, the Provisional Allotment Letter, the Nil Paid Rights or the Fully Paid Rights under the Securities Act.

23.6 The Company does not believe that it is and does not expect to become (whether as a result of the receipt and application of the proceeds of the sale of the New Shares, the Provisional Allotment Letters, the Nil Paid rights, or the Fully Paid Rights or otherwise) a “passive foreign investment company” within the meaning of section 1297 of the US Internal Revenue Code of 1986.

23.7 The Company is not, and, immediately after giving effect to the offering and sale of the New Shares, the Provisional Allotment Letters, the Nil Paid rights, or the Fully Paid Rights and the application of the proceeds thereof as set forth in the Prospectus will not be, an “investment company” as such term is defined in the US Investment Company Act of 1940.

23.8 Other than HM Treasury, there are no persons with registration rights or other similar rights to have any shares registered by the Company under the Securities Act except to the extent that HM Treasury has transferred any of its registration rights to any persons in accordance with any provisions of the registration rights agreement entered into between HM Treasury and the Company in effect from 12 January 2009 and as amended and restated on 11 June 2009 and the resale rights agreement entered into between HM Treasury and the Company on 11 June 2009.

23.9 During the period of six months after Admission, the Company will not, and will not permit any of its Affiliates to, resell any New Shares which constitute “restricted securities” under Rule 144 that have been reacquired by any of them other than in transactions that meet the applicable requirements of Regulation S.

23.10 The Company, its Affiliates or any person acting on its or their behalf (provided that the Company does not make any representation or warranty with respect to the Banks) has only solicited and will only solicit subscriptions of and has only offered or sold and will only offer or sell the Nil Paid Rights, the Fully Paid Rights or the New Shares in the United States to QIBs that have executed and delivered an investor letter substantially in the form of Schedule 10 to this Agreement in reliance on an exemption from the registration requirements of the Securities Act for transactions not involving any public offering of securities within the meaning of Section 4(2) thereof.

SCHEDULE 4
LETTER OF CONFIRMATION

[On the letterhead of the Company]


To:	Citigroup Global Markets U.K. Equity	CALYON
	Limited	9, quai du Président Paul Doumer
	Citigroup Centre	92920 Paris
	Canada Square	France
	Canary Wharf
	London E14 5LB

	Goldman Sachs International	COMMERZBANK Aktiengesellschaft
	Peterborough Court	Commerzbank AG
	133 Fleet Street	Corporates & Markets
	London EC4A 2BB	Mainzer Landstrasse 153
		DLZ 2, 60261
		Frankfurt am Main
		Germany

	HSBC Bank plc	ING Bank N.V.
	8 Canada Square	Bijlmerplein 888
	Canary Wharf	1102 MG Amsterdam
	London E14 5HQ	The Netherlands

	J.P. Morgan Cazenove Limited	RBS Hoare Govett Limited
	20 Moorgate	250 Bishopsgate
	London EC2R 6FA	London EC2M 4AA

	J.P. Morgan Securities Ltd.	Banco Santander, S.A.
	125 London Wall	Paseo de Pereda 9-12
	London EC2Y 5AJ	39004 Santander
		Spain

	Merrill Lynch International	Macquarie Capital (Europe) Limited
	Merrill Lynch Financial Centre	Level 35, 1 Ropemaker Street
	2 King Edward Street	London EC2Y 9HD
	London EC1A 1HQ

	UBS Limited	NATIXIS
	1 Finsbury Avenue	30, Avenue Pierre Mendès
	London EC2M 2PP	75013 Paris
		France

	Lloyds TSB Bank plc	Royal Bank of Canada Europe Limited
	25 Gresham Street	71 Queen Victoria Street
	London EC2V 7AE	London EC4V 4DE


	Banca IMI S.p.A.	UniCredit Group (Bayerische Hypo-
	Piazzetta Giordano dell’Amore, 3	und Vereinsbank AG)
	20121 Milan	Kardinal-Faulhaber-Str. 1
	Italy	80333 Munich
		Germany

	Barclays Bank plc	Nomura International Plc
	1 Churchill Place	Nomura House,
	London E14 5HP	1 St Martin’s-le-Grand
		London EC1A 4NP

		[ ] 2009

Dear Sirs

[ NB: wording in square brackets only to be included in the Certificate to be given pursuant to Clause 4.7 ]

We refer to the underwriting agreement between us dated 3 November 2009 in relation to the Rights Issue (the Underwriting Agreement ) [and to the conditions set out in Clause 2.1 of the Underwriting Agreement (the Conditions )]. References in this letter to Clauses are to Clauses of the Underwriting Agreement and words and expressions defined in the Underwriting Agreement have the same meaning herein.

We hereby confirm that:


(a)	[each of the Conditions, other than that contained in Clause 2.1(k), is satisfied as at the delivery of this letter;

(b)	we are not aware of any reason why the Conditions will not continue to be satisfied until Admission; and]

(c)	it has not come to the knowledge of the Company or any Director that the Company is in breach of any of its obligations under the Underwriting Agreement which fall to be performed [(i)] on the date of the Underwriting Agreement [, or (ii) to date (such confirmation excluding any breach of the Company’s obligations which fall to be performed to date that has arisen, directly or indirectly, as a result of (a) a MAC Event or a Material Adverse Effect that has occurred subsequent to the publication of the Press Announcement, or (b) a Commission Decision that has been publicly announced or publicly communicated subsequent to the publication of the Press Announcement, other than where the MAC Event or Material Adverse Effect occurred as a direct or indirect consequence of a Specified Circumstance)]; and

(d)	with reference to our obligation in Clause 12.4 of the Underwriting Agreement, it has not come to the knowledge of the Company or any Director that any of the Warranties [(i)] was breached or untrue, inaccurate or misleading in any respect when given on the date of the Underwriting Agreement[, or (ii) has ceased to be true and accurate or has become misleading in any respect; or that there is any circumstance which would or is reasonably likely to cause any of the Warranties to be breached or become untrue, inaccurate or misleading in any respect if repeated by reference to the

facts and circumstances existing at the date hereof (such confirmation excluding any breach of the Warranties that has arisen, directly or indirectly, as a result of (A) a MAC Event or a Material Adverse Effect having occurred subsequent to the publication of the Press Announcement, or (B) a Commission Decision having been publicly announced or publicly communicated subsequent to the publication of the Press Announcement, other than where the MAC Event or Material Adverse Effect occurred as a direct or indirect consequence of a Specified Circumstance)].

[ We undertake to notify you immediately if the confirmations contained in this letter could not continue to be given by us at any time prior to Admission (in each case by reference to the facts and circumstances then existing). ]


Yours faithfully



Director/Secretary

SCHEDULE 5
SELLING RESTRICTIONS

1. G ENERAL

Each Bank represents and warrants to, and agrees with the Company that it will, in all material respects, severally comply with such applicable laws in each jurisdiction in which it subscribes for, offers, sells or delivers the New Shares or Nil Paid Rights as are customarily complied with by banks of international reputation.

Each Bank acknowledges and agrees that offers and sales of the Nil Paid Rights, the Fully Paid Rights and the New Shares will be made as described in the Prospectus (and any amendment or supplement thereto) and the Provisional Allotment Letter and in accordance with the terms of this Agreement.

2. U NITED S TATES

Each Bank represents and warrants to, and agrees with, the Company that:


(a)	none of the Provisional Allotment Letter, the Nil Paid Rights, the Fully Paid Rights or the New Shares have been or will be registered under the Securities Act and none of them may be offered or sold within the United States except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act;

(b)	neither it, its affiliates (as such term is defined in Rule 405 under the Securities Act) nor any persons acting on its or their behalf has engaged or will engage in any directed selling efforts (as that term is defined in Regulation S under the Securities Act) with respect to the Provisional Allotment Letter, the Nil Paid Rights, the Fully Paid Rights or the New Shares;

(c)	it has not offered or sold, and agrees that, subject to Clause (e) below, it will not offer or sell the Provisional Allotment Letter, the Nil Paid Rights, the Fully Paid Rights or the New Shares within the United States except in accordance with Rule 903 of Regulation S under the Securities Act;

(d)	notwithstanding Clause (d) above, it may:

	(i)	offer and sell Nil Paid Rights in accordance with Clause 7.1 and New Shares in accordance with Clause 8.4 and Clause 9.1 through its US registered broker-dealer affiliate in the United States to QIBs which have executed and delivered an Investor Letter substantially in the form of Schedule 10 in reliance on an exemption from the registration requirements of the Securities Act for transactions not involving any public offering of securities within the meaning of Section 4(2) thereof; and

	(ii)	offer and sell New Shares subscribed for by it pursuant to Clause 9.1, through its US registered broker-dealer affiliate in the United States to QIBs which have executed and delivered an Investor Letter substantially in the form of Schedule 10;

(e)

neither it, its affiliates (as such term is defined in Rule 501(b) under Regulation D under the Securities Act) nor any persons acting on its or their behalf has engaged or will engage in any form of general solicitation or general advertising (as those terms are used in Rule 502(c) of Regulation D under the Securities Act) in connection with any offer or sale of the Provisional Allotment Letter, the Nil Paid Rights, the Fully Paid Rights or the New Shares in the United States, or otherwise has offered or will offer the Provisional Allotment Letter, the Nil Paid Rights, the Fully Paid Rights or the New Shares in any manner involving a “public offering” within the meaning of Section 4(2) of the Securities Act.

3. E UROPEAN E CONOMIC A REA

In relation to each member state of the European Economic Area which has implemented the Prospectus Directive (each, a Relevant Member State ), each of the parties warrants to each other that it has not made and will not make an offer of any New Shares, Nil Paid Rights and/or Fully Paid Rights to the public in that Relevant Member State prior to the publication of a prospectus in relation to the New Shares, Nil Paid Rights and/or Fully Paid Rights which has been approved by the competent authority in that Relevant Member State or, where appropriate, approved in another Relevant Member State and notified to the competent authority in the Relevant Member State, all in accordance with the Prospectus Directive, except that it may make an offer of any New Shares, Nil Paid Rights and/or Fully Paid Rights to the public in that Relevant Member State at any time under the following exemptions under the Prospectus Directive, if they have been implemented in that Relevant Member State:


(a)	to legal entities which are authorised or regulated to operate in the financial markets or, if not so authorised or regulated, whose corporate purpose is solely to invest in securities;

(b)	to any legal entity which has two or more of: (i) an average of at least 250 employees during the last financial year; (ii) a total balance sheet of more than €43,000,000; and (iii) an annual turnover of more than €50,000,000, as shown in its last annual or consolidated accounts; and

(c)	in any other circumstances falling within Article 3(2) of the Prospectus Directive, subject to obtaining the prior consent of the Joint Global Co-ordinators for any such offer,

provided that no such offer of New Shares, Nil Paid Rights and/or Fully Paid Rights shall result in a requirement for the publication by the Company or any Bank of a prospectus pursuant to Article 3 of the Prospectus Directive.

For the purposes of this provision, the expression “an offer of any New Shares, Nil Paid Rights and/or Fully Paid Rights to the public” in relation to any New Shares, Nil Paid Rights and/or Fully Paid Rights in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and any New Shares, Nil Paid Rights and/or Fully Paid Rights to be offered so as to enable an investor to decide to subscribe for any New Shares, as the same may be varied in that Member State by any measure implementing the Prospectus Directive in that Member State.

4. U NITED K INGDOM

Each of the parties warrants that it has only communicated or caused to be communicated and will only communicate or cause to be communicated an invitation or inducement to engage in investment activity (within the meaning of section 21 of the FSMA) received by them in connection with the placing or sale of the New Shares in circumstances in which section 21(1) of the FSMA does not apply.

SCHEDULE 6
THE UNDERWRITERS


(1)	(2)	(3)
Name	Address and fax number	Proportionate Share

Citigroup Global Markets	Citigroup Centre	9.95	%
U.K. Equity Limited	Canada Square
	Canary Wharf
	London E14 5LB

	Fax number: +44 (0) 20 7986 1103

	For the attention of: ECM Syndicate

Goldman Sachs International	Peterborough Court	9.44	%
	133 Fleet Street
	London EC4A 2BB

	Fax number: +44 (0) 20 7774 1550

	For the attention of: Equity Capital
	Markets

HSBC Bank plc	8 Canada Square	9.44	%
	Canary Wharf
	London E14 5HQ

	Fax number: +44 (0) 20 7991 4426

	For the attention of: Equity Capital
	Markets

J.P. Morgan Securities Ltd.	125 London Wall	9.44	%
	London EC2Y 5AJ

	Fax number: +44 (0) 20 7325 8168

	For the attention of: Equity Capital
	Markets Syndicate Desk

Merrill Lynch International	Merrill Lynch Financial Centre	24.46	%
	2 King Edward Street
	London EC1A 1HQ

	Fax number: +44 (0) 20 7995 2516

	For the attention of: ECM Syndicate Desk


(1)	(2)	(3)
Name	Address and fax number	Proportionate Share

UBS Limited	1 Finsbury Avenue	24.45	%
	London EC2M 2PP

	Fax number: +44 (0) 20 7567 4127

	For the attention of: Equity Capital
	Markets Group

	With a copy to: Transactions Legal

	Fax number: +44 (0) 20 7567 2364

Banca IMI S.p.A.	See Schedule 9	1.24	%

Barclays Bank plc	See Schedule 9	1.24	%

CALYON	See Schedule 9	1.24	%

COMMERZBANK	See Schedule 9	1.24	%
Aktiengesellschaft

ING Bank N.V.	See Schedule 9	2.62	%

RBS Hoare Govett Limited	See Schedule 9	1.24	%

Banco Santander, S.A.	See Schedule 9	0.67	%

Macquarie Capital (Europe)	See Schedule 9	0.67	%
Limited

NATIXIS	See Schedule 9	0.67	%

Royal Bank of Canada	See Schedule 9	0.67	%
Europe Limited

UniCredit Group (Bayerische	See Schedule 9	0.67	%
Hypo- und Vereinsbank AG)

Nomura International Plc	See Schedule 9	0.65	%

SCHEDULE 7
FORM OF RE-PRICING MEMORANDUM

Dated [ ] November 2009

The revised Issue Price is [ ] pence per New Share.

The revised basis of the Rights Issue is an offer by way of rights of [ ] New Shares on the basis of [ ] New Share[s] for every [ ] Existing Ordinary Share[s] held by Qualifying Shareholders on the Record Date.

The revised Issue Price represents a discount of [approximately] [ ]% to the volume weighted average price of an Existing Ordinary Share as derived from the Daily Official List of the London Stock Exchange on [ ] 2009.

On the basis of the revised Issue Price, the number of Underwritten Shares contained in each Underwriter’s Proportionate Share is as follows:


Name	Number of Underwritten Shares	Proportionate Share

Citigroup Global Markets U.K. Equity Limited	[ ]	[ ]%

Goldman Sachs International	[ ]	[ ]%

HSBC Bank plc	[ ]	[ ]%

J.P. Morgan Securities Ltd.	[ ]	[ ]%

Merrill Lynch International	[ ]	[ ]%

UBS Limited	[ ]	[ ]%

Banca IMI S.p.A.	[ ]	[ ]%

Barclays Bank plc	[ ]	[ ]%

CALYON	[ ]	[ ]%

COMMERZBANK Aktiengesellschaft	[ ]	[ ]%

ING Bank N.V.	[ ]	[ ]%

RBS Hoare Govett Limited	[ ]	[ ]%

Banco Santander, S.A.	[ ]	[ ]%

Macquarie Capital (Europe) Limited	[ ]	[ ]%


NATIXIS	[ ]	[ ]%

Royal Bank of Canada Europe Limited	[ ]	[ ]%

UniCredit Group (Bayerische Hypo-und Vereinsbank AG)	[ ]	[ ]%

Nomura International Plc	[ ]	[ ]%

This counterpart, when taken together any other counterparts executed pursuant to Clause 2.5 and in the form of Schedule 7 to the underwriting agreement dated [ ] November 2009 between the Company and the Banks, constitutes the Re-Pricing Memorandum. Delivery of an executed counterpart signature page of this Re-Pricing Memorandum by e-mail (PDF) or telecopy shall be as effective as delivery of a manually executed counterpart of this Re-Pricing Memorandum. In relation to each counterpart, upon confirmation by or on behalf of the signatory that the signatory authorises the attachment of such counterpart signature page to the final text of this Re-Pricing Memorandum, such counterpart signature page shall take effect together with such final text as a complete authoritative counterpart.

Terms defined in the Underwriting Agreement have the same meanings when used in this Re-Pricing Memorandum.


SIGNED by	)
for and on behalf of	)
LLOYDS BANKING GROUP PLC	)

SIGNED by	)
for and on behalf of	)
CITIGROUP GLOBAL	)
MARKETS U.K. EQUITY LIMITED	)

SIGNED by	)
for and on behalf of	)
GOLDMAN SACHS INTERNATIONAL	)

SIGNED by	)
for and on behalf of	)
HSBC BANK PLC	)


SIGNED by	)
for and on behalf of	)
J.P. MORGAN CAZENOVE LIMITED	)

SIGNED by	)
for and on behalf of	)
J.P. MORGAN SECURITIES LTD.	)

SIGNED by	)
for and on behalf of	)
MERRILL LYNCH INTERNATIONAL	)

SIGNED by	)
and	)
SIGNED by	)
for and on behalf of	)
UBS LIMITED	)

SIGNED by	)
for and on behalf of	)
BANCA IMI S.p.A.	)

SIGNED by	)
for and on behalf of	)
BARCLAYS BANK PLC	)

SIGNED by	)
for and on behalf of	)
CALYON	)


SIGNED by	)
for and on behalf of	)
COMMERZBANK	)
AKTIENGESELLSCHAFT	)

SIGNED by	)
for and on behalf of	)
ING BANK N.V.	)

SIGNED by	)
for and on behalf of	)
RBS HOARE GOVETT LIMITED	)

SIGNED by	)
for and on behalf of	)
BANCO SANTANDER, S.A.	)

SIGNED by	)
for and on behalf of	)
MACQUARIE CAPITAL (EUROPE)	)
LIMITED	)

SIGNED by	)
for and on behalf of	)
NATIXIS	)

SIGNED by	)
for and on behalf of	)
ROYAL BANK OF CANADA EUROPE	)
LIMITED	)


SIGNED by	)
for and on behalf of	)
UNICREDIT GROUP (BAYERISCHE)	)
HYPO- UND VEREINSBANK AG	)

SIGNED by	)
for and on behalf of	)
NOMURA INTERNATIONAL PLC	)

SCHEDULE 8
CO-BOOKRUNNER


Name	Address

Lloyds TSB Bank plc	25 Gresham Street, London EC2V 7AE

SCHEDULE 9
CO-LEAD MANAGERS


Name	Address	Agent for service of process	Notice Details

Banca IMI S.p.A.	Banca IMI S.p.A.	Intesa Sanpaolo S.p.A.,	FAO: Marco Graffigna
	Piazzetta Giordano	London Branch,
	dell’Amore, 3	90 Queen Street	Banca IMI S.p.A.
	20121 Milan	London EC4N 1SA	Piazzetta Giordano
	Italy		dell’Amore, 3
			20121 Milano
			Italy

			Fax: +39 02 87940012

Barclays Bank plc	1 Churchill Place	N/A	FAO: Equity Capital
	London E14 5HP		Markets

			5 The North
			Colonnade, London
			E14 4BB

			Fax: 02075163404

CALYON	9, quai du Président Paul	CALYON	FAO: Syndicate
	Doumer	Broadwalk House	Actions
	92920 Paris	5 Appold Street
	France	London EC2A 2DA	CALYON, 9, quai du
			President Paul Doumer,
			92920 Paris la Defense
			France

			Fax: +33141897115

COMMERZBANK	Commerzbank AG	Commerzbank	FAO: Chris Simpson
Aktiengesellschaft	Corporates & Markets	30 Gresham street
	Mainzer Landstrasse 153	London	30 Gresham St,
	DLZ 2, 60261	EC2V 7PG	London,EC2V 7PG,
	Frankfurt am Main		United Kingdom
	Germany
			Fax: +44 207 475 8822

ING Bank N.V.	Bijlmerplein 888	ING Bank N.V. London	FAO: Kim Balt
	1102 MG Amsterdam	Branch
	The Netherlands	60 London Wall,	ING Equity Capital
		London EC2M 5TQ	Markets, Foppingadreef
			7, 1102 BD
			Amsterdam, The


Name	Address	Agent for service of process	Notice Details

			Netherlands

			Fax: +31205638502

RBS Hoare Govett	250 Bishopsgate	N/A	FAO: Alex Reynolds
Limited	London EC2M 4AA
			250 Bishopsgate,
			London EC2M 4AA

			Fax: +44 207 678 7064

Banco Santander,	Paseo de Pereda 9-12	Abbey Santander 2	Avenida de Cantabria
S.A.	39004 Santander	Trinton Swuare 1st	S/n. Edificio Encinar
	Spain	floor	1aPlanta 28660
		Regent’s Place	Boadilla del Monte,
		London NW13AN	Madrid, Spain

			Fax: +34912571812

Macquarie Capital	Level 35, 1 Ropemaker	N/A	FAO: Antony Isaacs
(Europe) Limited	Street
	London EC2Y 9HD		Level 31, CityPoint, 1
			Ropemaker Street,
			London EC2Y 9HD

			Fax: +442030372557

NATIXIS	30, Avenue Pierre Mendès	Natixis London Branch	FAO: Jean-Francois
	75013 Paris	Cannon Bridge house	Tine
	France	25 Dowgate Hill
		London EC4R	47, quai d’Austerlitz,
			75013 Paris, France

			Fax +33158550581

Royal Bank of	71 Queen Victoria Street	N/A	FAO: Jason Wright
Canada Europe	London EC4V 4DE
Limited			RBC Capital Markets,
			71 Queen Victoria
			Street, London EC4V
			4DE

			Fax: +44 2073320316

UniCredit Group	Kardinal-Faulhaber-Str. 1	Bayerische Hypo-und	FAO: Christain
(Bayerische Hypo-	80333 Munich	Vereinsbank AG,	Steffens


Name	Address	Agent for service of process	Notice Details

und Vereinsbank AG)	Germany	London Branch, Moor
		House, 120 London	Bayerische Hypo-und
		Wall, London EC2Y	Vereinsbank AG,
		5ET	London Branch, Moor
			House, 120 London
			Wall, London EC2Y
			5ET

			Fax: +44 207 826 7992

Nomura International	Nomura House, 1 St	N/A	FAO: Julia Pearce
Plc	Martin’s-le-Grand London
	EC1A 4NP		Head of Capital
			Markets, Transaction
			Legal 3rd Floor 25
			Bank street London
			E14 5LS

			Fax: +44 20 7067 8132

SCHEDULE 10
INVESTOR LETTER

Form of Cover Letter to QIB Holders

Lloyds Banking Group plc
( Registered in Scotland No. 95000 )

November [ ], 2009

[ Pre-identified US QIB Shareholder ]

[ Address ]

[ Control Number ]

Dear [ ],

You are receiving the enclosed document in connection with the proposed rights issue (the Rights Issue ) of nil paid rights, fully paid rights, and new shares (the Securities ) being offered by Lloyds Banking Group plc (the Company ) as described in the prospectus relating to the Rights Issue (the Prospectus ). The Prospectus is available on a password protected section of the Company’s website, www.lloydsbankinggroup.com/investors.asp . The password will be or has been communicated to you under separate cover.

The Securities offered in the Rights Issue have not been and will not be registered under the United States Securities Act of 1933 (the Securities Act ) or with any securities regulatory authority of any state or other jurisdiction of the United States and may not be offered, sold or transferred in the United States, subject to the terms of the following paragraph.

The Rights Issue is being extended in the United States in a private placement exempt from the registration requirements of the Securities Act only to certain qualified institutional buyers (within the meaning of Rule 144A under the Securities Act) ( QIBs ). New shares cannot be subscribed for in the Rights Issue by the Company’s shareholders in the United States who are not QIBs. The terms and conditions of the Rights Issue permit the Company to allow certain QIBs, who are holders of the Company’s shares and who sign an Investor Representation Letter certifying that they are QIBs, to participate.

However, if you do not wish to take up your rights pursuant to the Rights Issue, you may instead receive a pro rata share of any proceeds of the placing of nil paid rights which are not taken up, to the extent such nil paid rights are placed at a premium to the Issue Price (plus related expenses), as described in the Prospectus.

As described in the Prospectus, you will be able to take up your entitlements to new shares in the Rights Issue if you are a QIB and you are or were a holder of the Company’s ordinary shares (the Existing Ordinary Shares ) on the record date of 20 November, 2009 (the Record Date ) and have not subsequently disposed of such shares. Your entitlement to subscribe for

new shares in the Rights Issue will be in proportion to your holding of Existing Ordinary Shares of the Company, as described in the Prospectus.

If you are a QIB and wish to take up your rights pursuant to the Rights Issue, you should return your executed Investor Representation Letter in accordance with the procedures set out in this document. ¹

Procedures for holders

Please note that the procedures applicable to you vary depending upon whether you hold Existing Ordinary Shares in certificated or uncertificated form.

1. If you hold Existing Ordinary Shares in certificated form, please follow the procedures set out in Section 1 below.

2. If you hold Existing Ordinary Shares in uncertificated form, please follow the procedures set out in Section 2 below.

3. All holders should review the information in Section 3 below.

Section 1 – Existing Ordinary Shares Held in Certificated Form

If you hold your Existing Ordinary Shares in certificated form, you should comply with the instructions below:

As your Existing Ordinary Shares are held on your behalf by a nominee, no Application Form will be sent to you. An Application Form will be sent to such nominee. If this is the case, you are requested to:


(i)	return the Investor Representation Letter to your nominee with a copy to the Company and to Merrill Lynch International and UBS Limited (together, the *Joint Bookrunners* ) for information purposes; and

(ii)	instruct your nominee to complete the Application Form on your behalf with respect to your entitlements to the new shares.

Your nominee must receive your Investor Representation Letter (by mail or by pdf/email showing the signature or fax, with originals to follow) as soon as possible. Please note that if your nominee does not receive your Investor Representation Letter, it will not be able to complete the Application Form on your behalf. Please also note that if you do not return your Investor Representation Letter to your nominee promptly, it may not be able to complete an Application Form in time for you to be able to take up any of your entitlements to the new shares.



¹	As stated in the Investor Representation Letter, the new shares will be “restricted securities” within the meaning of Rule 144(a)(3) under the Securities Act and for so long as such securities are “restricted securities”, they may not be deposited into any unrestricted depositary facility established or maintained by any depositary bank, including the Company’s current American Depositary Receipt facility maintained by Bank of New York Mellon.

Completed Application Forms, together with payment in pounds sterling for the number of new shares for which you apply, should be sent, in accordance with the instructions printed on the Application Form, by post to Equiniti Limited, Aspect House, Spencer Road, Lancing, West Sussex BN99 6DA or by hand (during normal office hours only) to Equiniti Limited, The Causeway, Worthing, West Sussex BN99 6DA so as to arrive not later than 11 a.m. London time, on 11 December, 2009.

Section 2 – Existing Ordinary Shares Held in Uncertificated Form

If you hold your Existing Ordinary Shares in uncertificated form – that is, through the CREST system as operated by Euroclear UK and Ireland Limited ( CREST ) – you should comply with the instructions below:

As your Existing Ordinary Shares are held on your behalf by a nominee, entitlements to new shares to which you are beneficially entitled will be credited to the CREST account of the nominee. You are requested to:


(i)	return the Investor Representation Letter to your nominee with a copy to the Company and to the Joint Bookrunners for information purposes; and

(ii)	instruct your nominee to take up on your behalf all or part of your entitlement to the new shares and undertake the necessary action in accordance with the instructions set out in the Prospectus.

Your nominee must receive your Investor Representation Letter (by mail or by pdf/email showing the signature or fax, with originals to follow) as soon as possible. Please note that if your nominee does not receive your Investor Representation Letter, it will not be able to take up on your behalf any of your entitlements to the new shares. Please also note that if you do not return your Investor Representation Letter to your nominee promptly, you may not be in time to be able to take up any of your entitlements to the new shares.

The latest time and date for shareholders whose nominees hold their Existing Ordinary Shares in uncertificated form to take up their rights and allow for settlement of relevant CREST instructions is 11 a.m. London time, on 11 December, 2009.

Section 3 – General Information

The Prospectus is personal to you and does not constitute an offer to any other person or to the public generally to participate in the Rights Issue. Distribution of the Prospectus to any person other than those persons, if any, retained to advise you with respect thereto is unauthorized, and any disclosure of any of its contents, without the prior written consent of the Company, is strictly prohibited. You hereby agree to the foregoing and undertake not to print out or to make photocopies of the Prospectus or any documents referred to therein other than for yourself and any persons retained to advise you. You agree not to forward the Prospectus to any person, including by electronic means, other than as set forth in the Investor Representation Letter.

You must not construe the contents of the Prospectus as legal, business, accounting, tax, investment or other professional advice. There may be certain significant US tax consequences resulting from an investment in the Company. The summary of the material

US federal income tax consequences of the acquisition, ownership and disposition of the Securities under the Rights Issue that is set out in the Prospectus is for your information only. You should consult your own counsel, accountant or business advisor as to legal, tax and related matters pertaining to participation in the Rights Issue.

During the course of the Rights Issue, please direct your questions concerning the Rights Issue and the information furnished in the Prospectus to the Shareholder Helpline at +44 20 8495 4632 between the hours of 9 a.m. to 5 p.m., London time, Monday to Friday (except UK bank holidays). Please note that the Shareholder Helpline is unable to give advice on the merits of the Rights Issue or to provide legal, business, accounting, tax, investment or other professional advice.

In the event that a validly executed Investor Representation Letter in the form of Annex A is not received in accordance with the terms of this letter, the Company may treat any purported acceptance in respect of the Rights Issue by you as invalid, and in such circumstances, no Securities will be issued to you.

Very truly yours,

Lloyds Banking Group plc

ANNEX A
FORM OF US QIB INVESTOR REPRESENTATION LETTER

[ If you hold ordinary shares, you must insert the name, address and contact details of the relevant nominee below and send a copy of this letter by pdf/email or by fax to the nominee through which your existing ordinary shares are held .]

[ Name, address and contact details of relevant nominee ]


cc:		Lloyds Banking Group plc
		25 Gresham Street
		London EC2V 7HN
		United Kingdom
		Attn.: Investor Relations
		Facsimile No.: +44 (0)20 7356 1014
		Email: investor.relations@ltsb-finance.co.uk

		Merrill Lynch International
		Merrill Lynch Financial Centre
		2 King Edward Street
		London EC1A 1HQ
		[Attn:
		Facsimile No.:
		Email]

		UBS Limited (on behalf of its affiliates)
		2 Finsbury Avenue
		London EC2M 2PP
		United Kingdom
		[Attn: Chris Madderson
		Facsimile No.: 44 207 568 1081
		Email: chris.madderson@ubs.com]

Ladies and Gentlemen:

In connection with our proposed acquisition of any nil paid rights, fully paid rights or new shares (the Securities ) of Lloyds Banking Group plc (the Company ), which are being offered by way of a rights issue (the Rights Issue ), we represent, warrant, agree and confirm that:

1. To the extent we are an existing holder of ordinary shares of the Company (the Ordinary Shares ), we are the beneficial holder of and/or exercise full investment discretion with respect to our Ordinary Shares.

2. We are an institution that (a) has such knowledge and experience in financial and business matters that we are capable of evaluating the merits and risks of our investment in the Securities, and (b) is, and any accounts for which we are acting are, able to bear the economic risk, and sustain a complete loss, of such investment in the Securities.

3. We are a “qualified institutional buyer” (a QIB ) as defined in Rule 144A ( Rule 144A ) under the US Securities Act of 1933, as amended (the Securities Act ). Further, if we are acquiring the Securities as a fiduciary or agent for one or more investor accounts, (a) each such account is a QIB, (b) we have investment discretion with respect to each account, and (c) we have full power and authority to make the representations, warranties, agreements and acknowledgements herein on behalf of each such account.

4. We will base our investment decision on a copy of the Company’s prospectus dated 3 November, 2009, including the documents incorporated by reference therein (the Prospectus ). We acknowledge that neither the Company nor any of its affiliates nor any other person (including Merrill Lynch International, UBS Limited, Citigroup Global Markets U.K. Equity Limited, Goldman Sachs International, HSBC Bank plc, J.P. Morgan Cazenove Limited or J.P. Morgan Securities Ltd. (together, the Banks )) has made any representations, express or implied, to us with respect to the Company, the Rights Issue, the Securities or the accuracy, completeness or adequacy of any financial or other information concerning the Company, the Rights Issue or the Securities, other than (in the case of the Company and its affiliates only) the information contained or incorporated by reference in the Prospectus. We acknowledge that we have not relied on any information contained in any research reports prepared by the Banks or any of their respective affiliates. We understand that the Prospectus has been prepared in accordance with UK format, style and content, which differs from US format, style and content. In particular, but without limitation, the financial information contained in the Prospectus has been prepared in accordance with International Financial Reporting Standards, and thus may not be comparable to financial statements of US companies prepared in accordance with US generally accepted accounting principles. We will not distribute, forward, transfer or otherwise transmit the Prospectus, or any other presentational or other materials concerning the Rights Issue (including electronic copies thereof) to any person within the United States (other than a QIB on behalf of which we act). We acknowledge that we have read and agreed to the matters set forth under the heading “ Terms and Conditions of the Rights Issue ” in the Prospectus.

5. We will make our own independent investigation and appraisal of the business, results, financial condition, prospects, creditworthiness, status and affairs of the Company and we will make our own investment decision to acquire the Securities. We understand that there may be certain consequences under US and other tax laws resulting from an investment in the Securities, including that we must bear the economic risk of an investment in the Securities for an indefinite period of time, and we will make such investigation and consult such tax and other advisors with respect thereto as we deem appropriate.

6. Any Securities we acquire will be for our own account (or for the account of a QIB as to which we exercise sole investment discretion and have authority to make the statements contained in this letter) for investment purposes, and not with a view to resale or distribution within the meaning of the US securities laws, subject to the understanding that the disposition of our property shall at all times be and remain within our control.

7. We understand that the Securities are being offered in a transaction not involving any public offering in the United States within the meaning of the Securities Act and that the Securities are not being and will not be registered under the Securities Act or with any State or other jurisdiction of the United States. We acknowledge and agree that we are not taking up the Securities as a result of any general solicitation or general advertising (as those terms

are defined in Regulation D under the Securities Act). We understand and agree that, although offers and sales of the Securities are being made in the United States to QIBs, they are not being made under Rule 144A, and that the Securities are not eligible for resale pursuant to Rule 144A.

8. We understand that the Securities will be “restricted securities” within the meaning of Rule 144(a)(3) under the Securities Act and we agree that for so long as such securities are “restricted securities” (as so defined), they may not be deposited into any unrestricted depositary facility established or maintained by any depositary bank, including the current American Depositary Receipt ( ADR ) facility maintained by The Bank of New York Mellon, as depositary for the Company’s ADR facility (the Depositary ).

9. As long as the Securities are “restricted securities” within the meaning of Rule 144(a)(3) under the Securities Act, we will not reoffer, resell, pledge or otherwise transfer the Securities, except in an offshore transaction in accordance with Rule 903 or Rule 904 of Regulation S under the Securities Act (which, for the avoidance of doubt, includes a sale over the London Stock Exchange) and in accordance with any applicable securities laws of any state or other jurisdiction of the United States.

10. We understand that, to the extent the Securities are delivered in certificated form, the certificate delivered in respect of the Securities will bear a legend substantially to the following effect for so long as the securities are “restricted securities” within the meaning of Rule 144(a)(3) under the Securities Act:

THE SHARES REPRESENTED HEREBY HAVE NOT BEEN AND WILL NOT BE REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE “ SECURITIES ACT ”), OR WITH ANY SECURITIES REGULATORY AUTHORITY OF ANY STATE OR OTHER JURISDICTION OF THE UNITED STATES, AND MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH RULE 903 OR RULE 904 OF REGULATION S UNDER THE SECURITIES ACT AND IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION OF THE UNITED STATES. NOTWITHSTANDING ANYTHING TO THE CONTRARY IN THE FOREGOING, THE SHARES MAY NOT BE DEPOSITED INTO ANY UNRESTRICTED DEPOSITARY RECEIPT FACILITY IN RESPECT OF SHARES ESTABLISHED OR MAINTAINED BY A DEPOSITARY BANK SO LONG AS THEY REMAIN RESTRICTED SECURITIES. EACH HOLDER, BY ITS ACCEPTANCE OF THESE SHARES, REPRESENTS THAT IT UNDERSTANDS AND AGREES TO THE FOREGOING RESTRICTIONS.

11. We are not, nor are we applying as nominee or agent for, a person who is or may be liable to account for tax under the UK Stamp Duty Reserve Tax Regulations 1986 at any of the increased rates referred to in Section 93 (depositary receipts) or Section 96 (clearance services) of the UK Finance Act 1986 (a Specified Person ). If any stamp duty, stamp duty reserve tax, or any other transfer, issuance tax or related interest and penalties ( Stamp Tax ) arises in connection with our acquisition of the Securities or any subsequent transfer by us, or our agent, of such shares to a Specified Person or a nominee or agent for such person, we agree that we will pay and bear, or procure the payment of, the cost of such Stamp Tax.

12. We understand and acknowledge that the Company shall have no obligation to recognise any offer, sale, pledge or other transfer made other than in compliance with the restrictions on transfer set forth and described herein and that the Company may make notation on its records or give instructions to Equiniti Limited and any transfer agent of the Securities in order to implement such restrictions.

13. We understand that the foregoing representations, warranties, agreements and acknowledgements are required in connection with United States and other securities laws and that the Company, its affiliates, the Banks and their respective affiliates, and others are entitled to rely upon the truth and accuracy of the representations, warranties, agreements and acknowledgements contained herein. We agree that if any of the representations, warranties, agreements and acknowledgements made herein are no longer accurate, we shall promptly notify the Company and the Banks. All representations, warranties, agreements and acknowledgements we have made in this letter shall survive the execution and delivery hereof.

14. We confirm that, to the extent we are purchasing the Securities for the account of one or more other persons, (a) we have been duly authorized to sign this letter and make the confirmations, acknowledgements and agreements set forth herein on their behalf and (b) the provisions of this letter constitute legal, valid and binding obligations of us and any other person for whose account we are acting.

15. We irrevocably authorise the Company, its affiliates, the Banks and their respective affiliates and any person acting on their behalf to produce this letter or a copy hereof to any interested party in any administrative or legal proceedings, dispute or official inquiry with respect to the matters covered hereby.

16. This letter shall be governed by, and construed in accordance with, the laws of the State of New York.

17. We agree to promptly notify you if, at any time prior to [14 December], 2009, any of the foregoing ceases to be true.

Yours truly,



Signature of Authorised Signatory


ON BEHALF OF

	Name of Institution

DATE ________________, 2009

Returned by/on behalf of :
(Complete in Block Capitals)

Name of Organization:

Address and Control Number:

Name of Individual:

Title / Position:

Contact Telephone Number:

Contact email address:

[IMPORTANT NOTICE: WE CANNOT PROCESS THIS INVESTOR REPRESENTATION LETTER UNLESS THE CONTACT INFORMATION REQUESTED ABOVE HAS BEEN PROVIDED]


SIGNED by	)	ARCHIE KANE
for and on behalf of	)
LLOYDS BANKING GROUP PLC	)


SIGNED by	)	DAVID JAMES
for and on behalf of	)
CITIGROUP GLOBAL	)
MARKETS U.K. EQUITY LIMITED	)


SIGNED by	)	RICHARD BUCKINGHAM
for and on behalf of	)
GOLDMAN SACHS INTERNATIONAL	)


SIGNED by	)	NICK DONALD
for and on behalf of	)
HSBC BANK PLC	)


SIGNED by	)	IAN HANNAM
for and on behalf of	)
J.P. MORGAN CAZENOVE LIMITED	)


SIGNED by	)	IAN HANNAM
for and on behalf of	)
J.P. MORGAN SECURITIES LTD.	)


SIGNED by	)	JAMES O’NEIL
for and on behalf of	)
MERRILL LYNCH INTERNATIONAL	)


SIGNED by	)	MICHAEL O’BRIEN
and	)
SIGNED by	)	DANIEL HOLMES
for and on behalf of	)
UBS LIMITED	)


SIGNED by	)	ROBERT PIERCE
for and on behalf of	)
LLOYDS TSB BANK PLC	)


SIGNED by	)	JAMES O’NEIL
for and on behalf of	)	(under power of attorney)
BANCA IMI S.P.A.	)


SIGNED by	)	JAMES O’NEIL
for and on behalf of	)	(under power of attorney)
BARCLAYS BANK PLC	)


SIGNED by	)	JAMES O’NEIL
for and on behalf of	)	(under power of attorney)
CALYON	)


SIGNED by	)	JAMES O’NEIL
for and on behalf of	)	(under power of attorney)
COMMERZBANK	)
AKTIENGESELLSCHAFT	)


SIGNED by	)	JAMES O’NEIL
for and on behalf of	)	(under power of attorney)
ING BANK N.V.	)


SIGNED by	)	JAMES O’NEIL
for and on behalf of	)	(under power of attorney)
RBS HOARE GOVETT LIMITED	)


SIGNED by	)	JAMES O’NEIL
for and on behalf of	)	(under power of attorney)
BANCO SANTANDER, S.A.	)


SIGNED by	)
for and on behalf of	)	JAMES O’NEIL
MACQUARIE CAPITAL (EUROPE)	)	(under power of attorney)
LIMITED	)


SIGNED by	)	JAMES O’NEIL
for and on behalf of	)	(under power of attorney)
NATIXIS	)


SIGNED by	)	JAMES O’NEIL
for and on behalf of	)	(under power of attorney)
ROYAL BANK OF CANADA EUROPE	)
LIMITED	)


SIGNED by	)	JAMES O’NEIL
for and on behalf of	)	(under power of attorney)
UNICREDIT GROUP (BAYERISCHE	)
HYPO- UND VEREINSBANK AG)	)


SIGNED by	)	JAMES O’NEIL
for and on behalf of	)	(under power of attorney)
NOMURA INTERNATIONAL PLC	)

CONFORMED COPY

3 November 2009

LLOYDS BANKING GROUP PLC

CITIGROUP GLOBAL MARKETS U.K. EQUITY LIMITED

GOLDMAN SACHS INTERNATIONAL

HSBC BANK PLC

J.P. MORGAN CAZENOVE LIMITED

J.P. MORGAN SECURITIES LTD.

MERRILL LYNCH INTERNATIONAL

UBS LIMITED

LLOYDS TSB BANK PLC

THE CO-LEAD MANAGERS




	RIGHTS ISSUE UNDERWRITING AGREEMENT

(FRESHFIELDS BRUCKHAUS DERINGER)

Freshfields Bruckhaus Deringer LLP
65 Fleet Street
London EC4Y 1HS

CONFORMED COPY

CONTENTS


CLAUSE		PAGE

1.	DEFINITIONS	2
2.	CONDITIONS	17
3.	APPLICATION FOR LISTING, ADMISSION TO TRADING AND TO CREST	21
4.	APPROVAL, RELEASE AND DELIVERY OF DOCUMENTS	22
5.	APPOINTMENTS	25
6.	ALLOTMENT	26
7.	PLACING OF FRACTIONAL ENTITLEMENTS	27
8.	UNDERWRITTEN SHARES NOT TAKEN UP	29
9.	UNDERWRITING	31
10.	COMMISSIONS AND EXPENSES	35
11.	RESTRICTIONS ON ACTIONS AND ANNOUNCEMENTS	37
12.	REPRESENTATIONS, WARRANTIES AND UNDERTAKINGS	40
13.	EXCLUSIONS OF LIABILITY	42
14.	INDEMNITIES	43
15.	CONTRIBUTION	47
16.	TERMINATION	48
17.	WITHHOLDING AND GROSSING UP	51
18.	MISCELLANEOUS	52
19.	RECEIVING AGENT	55
20.	TIME OF THE ESSENCE	56
21.	WAIVER	56
22.	THIRD PARTY RIGHTS	56
23.	SEVERABILITY	57
24.	NOTICES	57
25.	FURTHER ASSURANCES	58
26.	ASSIGNMENT	58
27.	ENTIRE AGREEMENT	58
28.	COUNTERPARTS	58
29.	GOVERNING LAW	59
SCHEDULE 1 NEW SHARES TAKEN UP		61
SCHEDULE 2 DELIVERY OF DOCUMENTS		65

CONFORMED COPY


SCHEDULE 3 REPRESENTATIONS, WARRANTIES AND UNDERTAKINGS	74
SCHEDULE 4 LETTER OF CONFIRMATION	92
SCHEDULE 5 SELLING RESTRICTIONS	95
SCHEDULE 6 THE UNDERWRITERS	98
SCHEDULE 7 FORM OF RE-PRICING MEMORANDUM	100
SCHEDULE 8 CO-BOOKRUNNER	105
SCHEDULE 9 CO-LEAD MANAGERS	106
SCHEDULE 10 INVESTOR LETTER	109
ANNEX A FORM OF US QIB INVESTOR REPRESENTATION LETTER	113

Conformed Copy

TOP UP ISSUES UNDERWRITING AGREEMENT

3 November 2009

LBG CAPITAL NO. 2 PLC

LLOYDS TSB BANK PLC

LLOYDS BANKING GROUP PLC

MERRILL LYNCH INTERNATIONAL

UBS LIMITED

CITIGROUP GLOBAL MARKETS LIMITED

GOLDMAN SACHS INTERNATIONAL

HSBC BANK PLC

J.P. MORGAN SECURITIES LTD.

(ALLEN & OVERY)

Allen & Overy LLP


CONTENTS

Clause		Page

1.	Definitions	3
2.	Terms and Conditions	14
3.	Application for Listing and Admission to Trading	18
4.	Approval, Release and Delivery of Documents	19
5.	Appointments	20
6.	Closing	20
7.	Underwriting and Settlement	20
8.	Commissions and Expenses	22
9.	Restrictions on Actions and Announcements	25
10.	Representations, Warranties and Undertakings	27
11.	Exclusions of Liability	30
12.	Indemnities	31
13.	Contribution	34
14.	Termination	35
15.	Miscellaneous	37
16.	Time of the Essence	39
17.	Waiver	39
18.	Third Party Rights	39
19.	Severability	40
20.	Notices	40
21.	Further Assurances	41
22.	Assignment	41
23.	Entire Agreement	41
24.	Counterparts	41
25.	Governing Law	41

Schedule

1.	Book Value of Target Securities	44
2.	Basic Terms of the Top Up Securities	47
3.	Delivery of Documents	55
	Part A Settlement Date	55
	Part B Prospectus Publication Date	56
4.	Representations, Warranties and Undertakings of the Company	58
5.	Representations, Warranties and Undertakings of the Issuer and the Guarantor	73
6.	Letter of Confirmation	75
7.	Selling Restrictions	77
8.	Form of Investor Certification for Top Up Issues	82
9.	The Joint Bookrunners	84

Signatories		86


THIS AGREEMENT is made on 3 November 2009

BETWEEN:

(1)	LBG CAPITAL NO. 2 PLC , a company registered in England and Wales with number 07045669 and whose registered office is at 10 Gresham Street, London EC2V 7AE (the Issuer );

(2)	LLOYDS TSB BANK PLC , a company registered in England and Wales with number 00002065 and whose registered office is at 25 Gresham Street, London, EC2V 7HN (the Guarantor );

(3)	LLOYDS BANKING GROUP PLC , a company registered in Scotland with number 095000 and whose registered office is at Henry Duncan House, 120 George Street, Edinburgh, Scotland EH2 4LH (the Company );

(4)	MERRILL LYNCH INTERNATIONAL , a company registered in England and Wales with number 02312079 and whose registered office is at Merrill Lynch Financial Centre, 2 King Edward Street, London EC1A 1HQ;

(5)	UBS LIMITED , a company registered in England and Wales with number 2035362 and whose registered office is at 1 Finsbury Avenue, London EC2M 2PP;

(6)	CITIGROUP GLOBAL MARKETS LIMITED , a company registered in England and Wales with number 01763297 and whose registered office is at Citigroup Centre, Canada Square, Canary Wharf, London E14 5LB;

(7)	GOLDMAN SACHS INTERNATIONAL , a company registered in England and Wales with number 02263951 and whose registered office is at Peterborough Court, 133 Fleet Street, London EC4A 2BB;

(8)	HSBC BANK PLC , a company registered in England and Wales with number 00014259 and whose registered office is at 8 Canada Square, London E14 5HQ; and

(9)	J.P. MORGAN SECURITIES LTD ., a company registered in England and Wales with number 02711006 and whose registered office is at 125 London Wall, London EC2Y 5AJ.

WHEREAS:

(A)	The Company and other members of the Group (as defined below) propose on the date of this Agreement to launch the First Tranche of the LME (as defined below).

(B)	To the extent that the LME does, or is expected to, result in a Shortfall (as defined herein) this Agreement records the agreement between the parties hereto whereby the Joint Bookrunners have agreed, on a several basis, on the terms and subject to the conditions referred to in this Agreement, to underwrite any Top up Issues (as defined herein) in such aggregate amounts as are required to reduce the Shortfall to zero.

NOW IT IS AGREED as follows:

1.	DEFINITIONS

1.1	In this Agreement:

	Accounts means the audited consolidated accounts of the Group, excluding the HBOS Accounts, for the three financial years ended on the Company Current Year End Date (including, without


	limitation, the related directors’ and auditors’ reports, the consolidated income statement, the balance sheets, the consolidated cashflow statement, the consolidated statement of total recognised gains and losses, the reconciliation of movements in shareholders’ funds and all related notes);

	Accounts Date means 31 December 2008;

	Admission means, in relation to each Top up Issue, the admission of the Top up Securities to the Official List becoming effective (and where such admission does not become effective, references to Admission in this Agreement shall mean the date on which Admission was proposed to take place) in accordance with the Listing Rules and the admission of such Top up Securities to trading on the London Stock Exchange’s regulated market becoming effective in accordance with the Admission and Disclosure Standards;

	Admission and Disclosure Standards means, at any time, the then-current Admission and Disclosure Standards published by the London Stock Exchange;

	Adverse Interest means any option, lien, mortgage, charge, equity, trust, any other right or interest of any third party and any other encumbrance of any kind;

	affiliate has the meaning given in Rule 501(b) of Regulation D or Rule 405 under the Securities Act, as applicable;

	Agency Agreement means in relation to any Top up Issue, any agency agreement entered into by the Issuer, the Guarantor and other parties to such Top up Issue for the appointment of any paying agent, conversion agent, registrar, FX agent, transfer agent, agent bank or calculation agent in relation to such Top up Issue, such agreement to be dated the Settlement Date for such Top up Issue;

	associate has the meaning ascribed to it by section 256 of the Companies Act 2006;

	Auditors means PricewaterhouseCoopers LLP;

	Board means the board of directors of the relevant company or a duly constituted and authorised committee thereof;

	Book Value in relation to any Target Security means the aggregate nominal amount of such Target Security multiplied by the percentage relating to such Target Security as specified in Schedule 1 of this Agreement;

	Business Day means any day which is not a Saturday, a Sunday or a bank or public holiday in England and Wales;

	Cap means 18 per cent.;

	Capital Resources Requirement has the meaning given in the FSA Rules;

	Circular means the shareholder circular to be published in connection with the Rights Issue, the Share Capital Subdivision, the Top up Issues and the LME, including the notice convening the GM;

	Claims means any and all claims, actions, liabilities, demands, proceedings, regulatory or governmental investigations, judgements or awards whatsoever (and in each case whether or not successful, compromised or settled and whether joint or several) threatened, asserted, established or instituted against or otherwise involving any person and Claim shall be construed accordingly;


	Commission Decision means any decision of the European Commission under Article 87 of the EC Treaty regarding the restructuring plan for the Company submitted pursuant to the Company’s participation in the Financial Support Measures to the Banking Industry in the UK approved by the European Commission on 13 October 2008 (Case N507/2008) and on 22 December 2008 (Case N650/2009) as modified and, if applicable, regarding the Company’s proposed participation in the UK asset protection scheme, or any other financial support or investment in the Company by the government of the UK, or any public announcement or statement by or attributable to the European Commission or any of its commissioners or staff in relation to these matters;

	Companies Act means the Companies Act 1985 or the Companies Act 2006, as the context requires;

	Companies’ Counsel means Linklaters LLP;

	Company Current Interim End Date means at any time the date to which the latest published interim consolidated accounts of the Company have been prepared;

	Company Current Year End Date means at any time the date to which the latest published audited annual consolidated accounts of the Company have been prepared;

	Dealing Day means a day on which dealings in domestic equity market securities may take place on the London Stock Exchange;

	Deed Poll means, in relation to any Top up Issue, any deed poll entered into by the Company as further described in the terms and conditions of such Top up Issue;

	Defaulted Top up Securities shall have the meaning set out in Clause 7.2;

	Directors means, at any time, the directors of the Company;

	Disclosure Rules and Transparency Rules means the Disclosure Rules and Transparency Rules of the FSA made under section 73A of FSMA, as amended from time to time;

	Disclosure Package means, in relation to any Unlisted Top up Issue, the relevant term sheet for such Top up Issue, the Presentation Materials, the announcement of the proposed Top up Issue and any offering documentation for the Top up Issue issued or approved by the Issuer;

	Disclosure Package Publication Date means the first date on which the relevant Disclosure Package is provided to potential investors in the relevant Top up Issue;

	Documents of Title means in relation to any Top up Issue each Global Security or Global Certificate defined in (and delivered in accordance with) clause 7;

	ECNs means Enhanced Capital Notes with terms as described in Schedule 2;

	European Dealer Manager Agreement means the Dealer Manager Agreement entered into on the date hereof in relation to the European Exchange Offer;

	European Exchange Offer means the part of the First Tranche of the LME which is not targeted at holders of securities in the United States;

	European Exchange Offer Memorandum means the Exchange Offer Memorandum prepared in respect of the European Exchange Offer;

	Exchange Act means the US Securities Exchange Act of 1934, as amended;


	Exchange Offer Memoranda means the two exchange offer memoranda published as at the date hereof relating to the First Tranche of the LME;

	Expiration Date means the date on which any offer by any member of the Group pursuant to an LME expires;

	FCPA has the meaning given to it in Schedule 4, paragraph 20.11;

	Final Terms means any final terms completed in connection with a Top up Issue issued pursuant to a Programme;

	First Tranche has the meaning given within the term LME;

	FSA means the Financial Services Authority and, if any successor governmental authority succeeds to the regulatory functions of the Financial Services Authority, such successor governmental authority;

	FSA Rules means the FSA Handbook of Rules and Guidance as amended from time to time;

	FSMA means the Financial Services and Markets Act 2000, as amended;

	GM means the general meeting of the Company convened for the GM Date at which, inter alia , the Resolutions and the Share Capital Reorganisation Resolutions will be proposed;

	GM Date means 26 November 2009;

	Group means the Company and its subsidiary undertakings from time to time (and for the avoidance of doubt, references in this Agreement to the Group, Group company and members of the Group include, without limitation, HBOS and the HBOS Group, except where otherwise stated);

	Group company means any company that is a member of the Group;

	HBOS means HBOS plc;

	HBOS Accounts means the audited consolidated accounts of the HBOS Group for the three financial years ended the HBOS Current Year End Date (including, without limitation, the related directors’ and auditors’ reports, the consolidated income statement, the consolidated balance sheet, the consolidated cashflow statement, the consolidated statement of recognised income and expense and all related notes);

	HBOS Current Year End Date means at any time the date to which the latest published audited annual consolidated accounts of HBOS have been prepared;

	HBOS Group means HBOS and its subsidiaries and subsidiary undertakings;

	Heads of Terms means the document entitled “Term sheet for UK state aid commitments in respect of LBG” submitted by the Company to Commissioner Kroes on 2 November 2009;

	HMRC means the United Kingdom HM Revenue & Customs;

	HM Treasury means the Commissioners of Her Majesty’s Treasury;

	HMT Resolution means resolution 4, as set out in the notice of GM contained in the Circular, regarding certain transactions involving HM Treasury;


	HMT Transactions has the meaning given in the Circular;

	IFRS means International Financial Reporting Standards as adopted by the European Union;

	Indemnified Persons means, in relation to any Joint Bookrunner:


	(a)	such Joint Bookrunner and any subsidiary, branch or affiliate of such Joint Bookrunner;

	(b)	a person who is, on or at any time after the date of this Agreement, a director, officer, partner or employee of an undertaking specified in sub paragraph (a) above; and

	(c)	such Joint Bookrunner’s respective selling agents and each person, if any, who controls such Joint Bookrunner within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act and such Joint Bookrunner’s respective affiliates, subsidiaries, branches, associates and holding companies and the subsidiaries of such subsidiaries, branches, affiliates, associates and holding companies and each of such person’s respective directors, officers, employees and agents,

	and Indemnified Person shall be construed accordingly;

	Intellectual Property Rights means patents, trade marks, service marks, logos, get-up, trade names, rights in designs, copyright (including rights in computer software), internet domain names, moral rights, utility models, rights in know how, rights in databases and other intellectual property rights, in each case whether registered or unregistered and including applications for the grant of any such rights and all rights or forms of protection having equivalent or similar effect anywhere in the world;

	Interim Accounts means the unaudited financial information relating to the Group for the period ended the Company Current Interim End Date;

	Interim Assessment Date means 21 November 2009;

	Issue Price means (subject to the Joint Bookrunners’ obligations under Clause 2.4) the issue price for each Top up Issue (which shall not be below par, except with the consent of the Company), as agreed between the Company and the Joint Bookrunners to be determined by reference to the following:

	(i)	the observable market yield on ECNs of comparable maturity (issued pursuant to the LME or issued as Top up Issues), provided there is sufficient liquidity in the ECNs, plus a margin of 1.5 per cent., such aggregate amount being subject to the Cap (provided that if the Shortfall at such time is greater than £1,500,000,000 there shall be deemed not to be sufficient liquidity in the ECNs and this (i) shall not apply); or

	(ii)	if there is no observable market yield on ECNs of comparable maturity (issued pursuant to the LME or issued as Top up Issues), or if there is (or there is deemed to be) not sufficient liquidity in the ECNs of comparable maturity (issued pursuant to the LME or issued as Top up Issues), the new issue yield of such ECNs, subject to the Cap.

	For the purposes of the definition of Issue Price:

	(a)	a security shall be deemed to have sufficient liquidity for the purposes of the definition of “Issue Price” if it has an outstanding nominal amount of at least 300,000,000 of the relevant currency unit in which such security is denominated (or, in the case of a security denominated in Japanese Yen, an outstanding nominal amount equivalent to £300,000,000)


		or as otherwise agreed between the Company and the Joint Bookrunners (each acting reasonably); and

	(b)	the new issue yield means the yield determined as the best available market clearing price for such ECNs through a bookbuild process conducted by the Joint Bookrunners in consultation with the Company and taking account of the Company’s reasonable requirements so as to seek to establish the best available market clearing price for such ECNs;

	Joint Bookrunners means Merrill Lynch International, UBS Limited, Citigroup Global Markets Limited, Goldman Sachs International, HSBC Bank plc and J.P. Morgan Securities Ltd. and shall include each of their respective affiliates (including, for the avoidance of doubt, in the case of an issue of Top up Securities to QIBs, their respective United States broker-dealer affiliates) and Joint Bookrunner shall mean any one of them and its affiliates;

	Joint Bookrunners’ Counsel means Allen & Overy LLP;

	Joint Global Co-ordinators means Merrill Lynch International and UBS Limited and Joint Global Co-ordinator shall mean either one of them. The Joint Global Co-ordinators shall also be named as the Joint Structuring Advisers in the Disclosure Package and Prospectus in relation to any Top up Issue;

	KPMG means KPMG Audit plc of 8 Salisbury Square, London EC4Y 8BB;

	Limitation has the meaning given in Clause 12.7;

	Limited Voting Shares means limited voting shares of 25 pence each in the capital of the Company;

	Listing Rules means the Listing Rules of the FSA made under section 73A of the FSMA;

	Listed Top up Issue means (i) any Top up Issue in respect of which Admission is to take place not later than one Business Day following Settlement or (ii) any Top up Issue which it is intended will be offered on a basis which is not exempt from the requirements of the Prospectus Directive;

	LME means the liability management exercise launched on the date hereof (the First Tranche of the LME) by the Offeror and described in the Exchange Offer Memoranda pursuant to which the Joint Global Co-ordinators have been appointed as lead dealer managers and the Joint Bookrunners have been appointed as dealer managers and any subsequent liability management exercise(s) (which may include, without limitation, US LMEs and bilaterally negotiated transactions between the Company and other members of the Group and individual holders of securities) (involving either the same or different tier 1 or upper tier 2 capital securities as those which were targeted in the First Tranche) undertaken by the Company or other members of the Group, acting reasonably in consultation with the Joint Global Co-ordinators (the Company acknowledging that the Joint Global Co-ordinators may make requests or proposals in such regard from time to time and the Joint Global Co-ordinators acknowledging that the decision to undertake any such liability management exercise or enter into any such bilaterally negotiated transactions shall be at the sole discretion of the Company);

	London Stock Exchange means London Stock Exchange Group plc;

	Longstop Date means 30 April 2010 or such other date as the Company and the Joint Bookrunners may agree pursuant to an amendment to this Agreement;


	Losses means any and all loss, damage, cost, liability, demand, charge or expense (including legal fees), in each case whether joint or several, which any person may suffer or incur (including, but not limited to all Losses suffered or incurred in investigating, preparing for or disputing or defending or settling any Claim and/or in establishing its right to be indemnified pursuant to Clause 12 or to receive a contribution pursuant to Clause 13 and/or in seeking advice regarding any Claim or in any way related to or in connection with the indemnity contained in Clause 12 or the provisions of Clause 13) and Loss shall be construed accordingly;

	MAC Event means the occurrence of any of the following events: (i) any material adverse change, or any development reasonably likely to result in a material adverse change, in the condition of the financial markets in the United Kingdom, the United States, any member state of the EEA or the international financial markets, any outbreak of hostilities or escalation thereof, any act of terrorism or war or other calamity or crisis or any change or development involving a prospective change in national or international political, financial or economic conditions, exchange rates or exchange controls; or (ii) trading in any securities of the Company being suspended or materially limited by the London Stock Exchange or the New York Stock Exchange on any exchange or over the counter market or any development reasonably likely to result in trading in any securities of the Company being suspended or materially limited by the London Stock Exchange or the New York Stock Exchange on any exchange or other the counter market, or trading generally on the American Stock Exchange, the New York Stock Exchange, the NASDAQ National Market or the London Stock Exchange being suspended or materially limited or any development reasonably likely to result in trading generally on the American Stock Exchange, the New York Stock Exchange, the NASDAQ National Market or the London Stock Exchange being suspended or materially limited, or minimum or maximum prices for trading being fixed or any development reasonably likely to result in minimum or maximum prices for trading being fixed, or maximum ranges for prices being required, by any of such exchanges or by such system or by order of the SEC, the National Association of Securities Dealers, Inc. or any governmental authority, or a material disruption occurring in commercial banking or securities settlement or clearance services in the United States or in the EEA or any development reasonably likely to result in a material disruption occurring in commercial banking or securities settlement or clearance services in the United States or in the EEA; or (iii) a banking moratorium being declared by the United States, the United Kingdom, a member state of the EEA, or New York authorities; or (iv) an adverse change or the official announcement by any governmental authority of a prospective adverse change in United States or United Kingdom taxation materially affecting the Top up Securities or the transfer thereof or exchange controls being imposed by the United States, the United Kingdom or a member state of the EEA; or (v) any adverse Commission Decision having been publicly announced or publicly communicated;

	Material Adverse Effect means a material adverse change (whether individually or in the aggregate) in, or any development reasonably likely to result in a material adverse change (whether individually or in the aggregate) in or effect on (including, for the avoidance of doubt, any development reasonably likely to result in a material adverse change arising as a result of a Commission Decision having been publicly announced or publicly communicated subsequent to the publication of the Press Announcement) the condition (financial, operational, legal or otherwise) or in the earnings, business affairs, business prospects or financial prospects of any of (i) the Company, (ii) any member of the Group or (iii) the Group taken as a whole, in any such case whether or not arising in the ordinary course of business (including, without limitation, any rating downgrade, notice of prospective downgrade or any indication by rating agencies that such downgrade will take place);

	Money Laundering Laws has the meaning given to it in paragraph 20.8 of Schedule 4;

	OECD Convention has the meaning given to it in paragraph 20.11 of Schedule 4;


	Offeror means, in relation to the First Tranche of the LME, LBG Capital No.1 plc and in relation to any subsequent LME, the member of the Group who makes the relevant offer;

	Official List means the Official List of the UK Listing Authority;

	Overall Financial Adequacy Rule has the meaning given in the FSA Rules;

	Passporting Jurisdiction means each jurisdiction (if any) in the European Economic Area as may be agreed between the Company and the Joint Bookrunners, each acting reasonably into which it is intended that Top up Securities will be offered on a basis which is not exempt from the requirements of the Prospectus Directive;

	Presentation Materials means any written materials to be used by the Issuer, the Guarantor or the Company in presentations to institutional investors in connection with any Top up Issue;

	Press Announcement means the press announcement dated 3 November 2009 giving details of, inter alia , the Rights Issue, the HMT Transactions and the Share Capital Subdivision, as published through a Regulatory Information Service;

	Previous Announcements means all documents issued and announcements (other than the Press Announcement) made by or on behalf of the Company or any member of the Group to the public or the press since the Accounts Date and before the date of this Agreement;

	Profit Forecast Report means any profit (or loss) forecast report prepared by the Auditors relating to any forecast loss before tax, before the recognition of negative goodwill or any other forecast of loss or profit, for the Group which appears in the Prospectus;

	Programme means any programme for the issuance of ECNs which is set up by the Company in consultation with the Joint Bookrunners;

	Proportionate Share means, in relation to each Joint Bookrunner, the percentage set against its name in column 3 of the table at Schedule 9;

	Prospectus means in relation to every Top up Issue the relevant prospectus for such Top up Issue (constituting a prospectus for the purposes of the FSMA, the Listing Rules and the Prospectus Rules) as to be agreed between the Company and the Joint Bookrunners and to be published by the Issuer and shall, in the case of Top up Issues issued pursuant to a Programme, include the relevant Final Terms. In the case of Top up Issues issued pursuant to a Programme, any references in this Agreement to the date of publication of any Prospectus shall be deemed to be a reference to the date of publication of any Final Terms;

	Prospectus Directive means Prospectus Directive 2003/71/EC;

	Prospectus Publication Date means, in relation to each Top up Issue, the date of approval of the relevant Prospectus by the UK Listing Authority or (in the case of Top up Issues issued pursuant to a Programme) the date on which the relevant Final Terms are submitted to the UK Listing Authority;

	Prospectus Rules means the Prospectus Rules of the FSA made under section 73A of the FSMA;

	QIB or qualified institutional buyer has the meaning given in Rule 144A promulgated under the Securities Act;

	Regulatory Information Service means any of the services set out in Appendix 3 to the Listing Rules;


	Relevant Documents means, in relation to any Top up Issue, the Prospectus, any Supplementary Prospectus, any translation of the summary contained in the Prospectus, the Presentation Materials and any other documents, announcements or communications issued in connection with such Top up Issue (including, for the avoidance of doubt, any preliminary Prospectus and, in the case of an Unlisted Top up Issue only, the Disclosure Package and any supplement to the Disclosure Package); provided that references to Relevant Documents in Schedule 4 shall be references only to those Relevant Documents that have been issued, published or provided prior to or at the time at which the relevant Warranty is given or repeated, as the case may be;

	Relevant Person means HM Treasury, the Solicitor for the Affairs of Her Majesty’s Treasury, any of Her Majesty’s Secretaries of State (and any other Minister of the Crown), UK Financial Investments Limited, the Asset Protection Agency, and any and all directors, officers, officials, employees and agents of the foregoing;

	Resolutions means the resolutions set out in the notice of GM contained in the Circular to authorise the Directors to allot shares of the Company, to authorise the Directors pursuant to section 571 of the Companies Act to allot such number of ordinary shares in the Company as if section 561 of the Companies Act did not apply to any such allotment and to disapply rights of pre-emption in each case, so as to enable compliance with the requirements of the Trust Deed or Deed Poll relating to any such Top up Issue and of Schedule 2 in relation to the terms of the relevant Top up Securities to be implemented;

	Restriction Date means the earliest of:


	(a)	the Longstop Date or, if later, in the event of any LME being launched by the Company prior to the Longstop Date and subsequent to the First Tranche, two calendar months following the settlement of such LME; or

	(b)	the date on which the Shortfall has been reduced to zero; or

	(c)	the date on which the Joint Bookrunner’ obligations under this Agreement are terminated pursuant to the terms of this Agreement;

	Rights Issue means the rights issue launched by the Company simultaneously with the launch of the LME;

	Rights Issue Prospectus means the prospectus prepared by the Company relating to the Rights Issue;

	Rights Issue Resolutions means the resolutions relating to the Rights Issue set out in the notice of GM contained in the Circular;

	Rights Issue Underwriting Agreement means the underwriting agreement dated the date hereof executed by the Company and the other parties thereto relating to the Rights Issue;

	Securities Act means the US Securities Act of 1933, as amended, and the rules promulgated thereunder;

	Selling Restrictions means the selling restrictions set out in Schedule 7;

	Senior Manager means each of Tom Murphy, Alex Pietruska, Andrew Geczy and Ian Smith;

	Settlement means, in relation to a Top up Issue, the settlement of the Joint Bookrunners’ payment obligations to the Issuer;


	Settlement Date means in relation to a Top up Issue, the date for Settlement as provided for under the terms of this Agreement;

	Share Capital Reorganisation Resolutions means the resolutions set out in the notice of GM contained in the Circular relating to the Share Capital Subdivision;

	Share Capital Subdivision means the proposed subdivision and conversion of the Company’s ordinary share capital described in the Circular and the Rights Issue Prospectus;

	Shortfall means, at any time, any difference between £7,500,000,000 and the sum of (i) the aggregate principal amount (being, in the case of any amounts not in sterling, the sterling equivalent as at the settlement date of the relevant ECN) of the ECNs due for delivery (based on the number of Target Securities notified by the Offeror as having been accepted for exchange immediately following the Expiration Date) pursuant to the LME, plus (ii) the aggregate Book Value (being, in the case of any amounts not in sterling, the sterling equivalent as at the Expiration Date of the relevant LME) of Target Securities due for delivery (other than in the exchange referred to in (i)) based on the number of Target Securities notified as having been accepted for exchange by the Offeror immediately following the Expiration Date, plus (iii) (if at the time of calculation of the Shortfall any Top up Securities have been issued) the aggregate net proceeds (being, in the case of any amounts not in sterling, the sterling equivalent as at the relevant Settlement Date) of any Top up Securities issued pursuant to the terms of this Agreement at the time of the calculation of such Shortfall;

	Specified Circumstance means (a) fraud, wilful misconduct or dishonest concealment on the part of the Company, any Group company, any Director or any Senior Manager, or (b) any breach by the Company of its undertakings in Clauses 9.3, 10.6 or 10.7 of this Agreement at any time prior to the relevant Settlement Date;

	Supplementary Prospectus means any supplementary prospectus published by the Issuer pursuant to section 87G of the FSMA;

	sterling equivalent shall be calculated by reference to FX fixings appearing at 1.15 p.m. on Bloomberg page BFIX;

	Target Securities means any securities at which the LME is targeted;

	tax or taxes means all taxes, levies, imposts, duties, charges or withholdings of any nature whatsoever, together with all penalties, charges and interest relating to any of the foregoing and regardless of whether the person concerned is primarily liable or not, including (without limitation) corporation tax, advance corporation tax, income tax, capital gains tax, VAT, duties of customs and excise, national insurance contributions, capital duty, stamp duty, stamp duty reserve tax, stamp duty land tax and any other transfer tax or duty, all taxes, duties or charges replaced by or replacing any of them, and all other taxes on gross or net income, profits or gains, distributions, receipts, importations, sales, use, occupation, franchise, value added, and personal property imposed by a tax authority of any jurisdiction;

	Time of Sale means a time as is notified to the Issuer by the Joint Bookrunners as the time of sale with respect to their endeavours to procure subscribers for any Top up Issue;

	Top up Issue means any issue of Top up Securities underwritten pursuant to this Agreement;

	Top up Securities means each security forming part of a Top up Issue, such security to have terms complying with the requirements set out in Schedule 2;


	Trust Deed means in relation to any Top up Issue, any trust deed, indenture or supplemental trust deed or indenture entered into by the Issuer, the Guarantor and other parties to such Top up Issue for the appointment of any trustee in relation to such Top up Issue, such deed to take effect on the Settlement Date for such Top up Issue;

	UK Listing Authority means the Financial Services Authority acting in its capacity as the competent authority for the purposes of Part VI of the FSMA and in the exercise of its functions in respect of the admission of securities to the Official List otherwise than in accordance with Part VI of the FSMA;

	United Kingdom means Great Britain and Northern Ireland;

	United States means the United States of America, its territories and possessions, any state of the United States of America and the District of Columbia;

	Unlisted Top up Issue means any Top up Issue other than a Listed Top up Issue;

	US LMEs means any subsequent liability management exercise(s) targeted at the following preference shares issued by members of the Group and sold into the United States: ISIN: US539439AB54/US539439AA71; ISIN: USG5533WAB30/US539439AD11; ISIN: US539439AE93/US539439AF68; and ISIN: USG5533WAA56/US539439AC38;

	VAT means value added tax or any similar sales or turnover tax or levy imposed in any jurisdiction; and

	Warranties means the representations, warranties and undertakings set out in Clause 10.1, 10.2, 10.3 and/or 10.4 and Schedule 4 and Schedule 5 and Warranty shall be construed accordingly.


1.2	In this Agreement unless the context otherwise requires:

	(a)	words and expressions defined in the Companies Act shall bear the same meaning;

	(b)	headings are for convenience only and shall not affect the construction of this Agreement;

	(c)	any reference to an enactment is a reference to it as from time to time amended, consolidated or re-enacted (with or without modification) (but, in relation to each Top up Issue, in the case of any amendment, consolidation or re-enactment effected after the relevant date of Admission, only insofar as it applies in relation to a period before such Admission and provided that no such amendment, consolidation or re-enactment shall increase or extend the liability of any party to this Agreement) and includes all instruments or orders made under the enactment;

	(d)	any reference in this Agreement to any document expressed to be in the agreed form or to be agreed means a document in the form initialled, for the purpose of identification only, by Companies’ Counsel and Joint Bookrunners’ Counsel or (in the case of documents to be agreed) in such form as may be initialled for the purpose of identification only, in due course with the agreement of the Company and the Joint Bookrunners, in each case subject to any changes which the Company and the Joint Bookrunners may agree, such agreement not to be unreasonably withheld or delayed; no such initialling shall imply approval of all or any part of its contents by or on behalf of the person initialling it or any of the parties to this Agreement;


	(e)	any reference to recitals, clauses and schedules are to recitals, clauses and schedules to this Agreement, and references to paragraphs are to paragraphs in the schedule in which such references appear, and the schedules to this Agreement form part of the Agreement;

	(f)	each reference in this Agreement to the Joint Bookrunners by any description or in any capacity includes a reference to it in each other capacity in which it may act pursuant to this Agreement or otherwise with the agreement of the Company in connection with any Top up Issue;

	(g)	any reference herein to any matter being contained or disclosed in the Prospectus or Disclosure Package for any Top up Issue shall include any such matter as is incorporated by reference in such Prospectus or Disclosure Package; and

	(h)	any reference to the Joint Bookrunners approving or agreeing the form of a Relevant Document, shall be a reference to such approval or agreement being given solely for the purposes of this Agreement.

1.3	Unless otherwise stated, references to time are references to London time.

1.4	The expressions holding company , subsidiary undertaking and subsidiary shall have the meaning in this Agreement as in the Companies Act.

2.	TERMS AND CONDITIONS

2.1	To the extent (as reasonably determined by the Company following consultation with the Joint Global Co-ordinators) at any time the LME has resulted, or is expected to result, in a Shortfall which has not been, or is not expected to be, reduced to zero as at the Longstop Date, the Joint Bookrunners agree, on a several basis, as described herein on the terms and subject to the conditions referred to in this Agreement, to underwrite Top up Issues in an aggregate amount equating to the Shortfall, (subject as provided in Clause 2.2) such Top up Issues to be issued prior to the Longstop Date. The underwriting commitments of the Joint Bookrunners will amortise such that the aggregate outstanding commitment of the Joint Bookrunners at any given time will be equal to the Shortfall at such time and the underwriting commitment of each Joint Bookrunner at such time shall amount to its Proportionate Share of such Shortfall. Without prejudice to the other provisions of this Agreement, the Joint Bookrunners’ underwriting commitments pursuant to this Agreement will cease earlier than the Longstop Date if at such time the Shortfall has been reduced to zero.

2.2	Top up Issues (each being underwritten by the Joint Bookrunners) may be issued in one or more series at such times (following the Interim Assessment Date and prior to the Longstop Date) and on such terms as are reasonably determined by the Joint Bookrunners after consultation with the Company (subject to any applicable legal or regulatory constraints) and otherwise on such terms as comply with the requirements set out in Schedule 2. If at the Longstop Date there is a Shortfall, the Joint Bookrunners severally agree, if and to the extent that the Joint Bookrunners are unable to procure subscribers, to subscribe such amount of Top up Securities at such times (provided such time is no later than 2 Business Days after the Longstop Date) and on such terms as may be reasonably determined by the Joint Global Co-ordinators after consultation with the Company (such terms to be subject always to the terms of this Agreement and to any legal or regulatory constraints applicable to the Company) so as to discharge the Shortfall provided that for any such issue, the definition of “Issue Price” shall be deemed to be amended to mean the issue price for such Top up Issue (which shall not be below par, except with the consent of the Company), as agreed between the Company and the Joint Bookrunners to be determined by reference to a yield equal to, or (pursuant to the Joint Bookrunner’s obligations under Clause 2.4) less than, the Cap.


2.3	Any Top up Issues that are proposed to be offered or sold to QIBs in the United States shall be subject to the agreement of the Company, such agreement not to be unreasonably withheld or delayed, taking into account the requirements of the Securities Act and the documentary requirements of this Agreement in respect of any such Top up Issues. The parties shall consult with each other and, acting reasonably and practicably, shall seek to agree whether or not a Top up Issue shall be a Listed Top up Issue or not. Subject to any agreement to the contrary, the Issuer agrees that Top up Issues in an amount in excess of £300,000,000 (or its equivalent in any other currency) shall be Listed Top up Issues. In the case of an Unlisted Top up Issue, the Issuer agrees to use all reasonable endeavours to procure Admission for the relevant Top up Securities on or prior to the earlier of (i) the first interest payment date in respect of the relevant Top up Securities and (ii) the Longstop Date.

2.4	The Joint Bookrunners, as co-ordinated by the Joint Global Co-ordinators, agree to use all reasonable endeavours (including, where practicable in the circumstances and having regard to the intended Settlement Date of such Top up Securities, taking account of alternative identifiable methods of achieving more efficient pricing which may be proposed by the Company) in order to obtain the best market clearing prices for the Top up Issues and for the avoidance of doubt, the provisions of this Clause 2.4 shall apply at all times to Top up Issues under the terms of this Agreement, including as to Top up Issues contemplated under Clause 2.2.

2.5	Without prejudice to their obligations to underwrite or subscribe any subsequent Top up Issue, in relation to each Top up Issue, the Joint Bookrunners’ obligations under this Agreement are conditional on:

	(a)	in the case of a Listed Top up Issue, approval of a Prospectus for such Top up Issue as a prospectus by the UK Listing Authority and such Prospectus being filed with the FSA in accordance with the Prospectus Rules and the FSMA and made available to the public. on the Prospectus Publication Date for that Top up Issue (or such later time and/or date as the Joint Bookrunners may agree in writing);

	(b)	in the case of a Listed Top up Issue, the UK Listing Authority having granted permission for the relevant Top up Securities to be admitted to the Official List and the London Stock Exchange having granted permission for the Top up Securities to be admitted to trading on its regulated market;

	(c)	execution of the Trust Deed, Deed Poll and Agency Agreement by all the parties thereto;

	(d)	in the case of a Listed Top up Issue, no event referred to in section 87G(1) of the FSMA arising between the time of publication of the relevant Prospectus and Admission and no Supplementary Prospectus being published by or on behalf of the Issuer before Admission and (in the case of an Unlisted Top up Issue) no supplement to the Disclosure Package being published by or on behalf of the Issuer before the relevant Settlement Date:

		(i)	other than where such event or the publication of the Supplementary Prospectus or supplement to the Disclosure Package is:

			(A)	directly or indirectly, as a result of a MAC Event or a Material Adverse Effect having occurred subsequent to the publication of the Press Announcement; or

			(B)	directly or indirectly, as a result of a Commission Decision having been publicly announced or publicly communicated subsequent to the publication of the Press Announcement,


		provided that Clause 2.5(d)(i)(A) shall not apply in circumstances where the MAC Event or Material Adverse Effect occurred as a direct or indirect consequence of a Specified Circumstance; or

		(ii)	save to an extent which the Joint Global Co-ordinators do not consider, in their sole judgement, acting in good faith, to be (singly or in the aggregate) material in the context of such Top up Issue or the underwriting of such Top up Issue or the issue of the relevant Top up Securities or dealings post the issue of the relevant Top up Securities;

	(e)	no termination right having arisen pursuant to Clause 14 of this Agreement;

	(f)	(if applicable) the competent authority of each Passporting Jurisdiction having been notified in accordance with the procedures set out in Articles 17 and 18 of the Prospectus Directive and all requirements under those Articles having been satisfied;

	(g)	the Top up Securities receiving a rating from at least one internationally recognised credit rating agency:

		(i)	other than a failure to receive such a rating, directly or indirectly, as a result of a MAC Event or a Material Adverse Effect having occurred subsequent to the publication of the Press Announcement; and/or

		(ii)	other than a failure to receive such a rating, directly or indirectly, as a result of a Commission Decision having been publicly announced or publicly communicated subsequent to the publication of the Press Announcement,

		provided that Clause 2.5(g)(i) shall not apply in circumstances where the MAC Event or Material Adverse Effect occurred as a direct or indirect consequence of a Specified Circumstance;

	(h)	the Company having used reasonable endeavours to procure that the ratings assigned to the Top up Securities are at least equal to those then applicable to the ECNs issued in the LME; or

	(i)	the fulfilment by the Issuer, the Guarantor and the Company of their respective obligations under Clauses 3.1, 3.3, 4.3 and 4.4 by the times (if any) specified therein.

2.6	The Joint Global Co-ordinators may, in their absolute discretion:

	(a)	extend the time or date for satisfaction of any condition set out in Clause 2.5 or 2.9 below, in which case a reference in this Agreement to the satisfaction of such condition shall be to its satisfaction by the time or date as so extended; or

	(b)	waive the satisfaction of any such condition other than Clause 2.5(a) or Clause 2.9 below, in whole or in part,

	by giving written notice to the Company. For the avoidance of doubt, the rights of the Joint Global Co-ordinators under this Clause 2.6:


	(i)	may be exercised by the Joint Global Co-ordinators, acting jointly for whatever reason or on whatever basis that they consider to be practicable, appropriate or advisable to them; and

	(ii)	are conferred on the Joint Global Co-ordinators, and may be exercised by the Joint Global Co-ordinators, acting jointly, in their respective capacities as such, and not in any representative or fiduciary capacity.

2.7	If, in relation to any Top up Issue, any condition set out in Clause 2.5 is not satisfied (or waived by the Joint Global Co-ordinators in their absolute discretion in accordance with Clause 2.6), or becomes incapable of being satisfied, by the required time and date therefor then:

	(a)	the Joint Bookrunners’ obligations under this Agreement shall cease and determine in relation to such Top up Issue (but, for the avoidance of doubt, no other Top up Issues), without prejudice to any liability for any prior breach of this Agreement (including, without limitation, breach of any of the representations, warranties and undertakings contained herein); and

	(b)	the Issuer’s, the Guarantor’s and the Company’s respective obligations and agreements under Clauses 8, 9, 10, 11, 12, 13 and 16 to 25 inclusive shall remain in full force and effect in relation to such Top up Issue and the Issuer’s, the Guarantor’s and the Company’s other respective obligations under this Agreement shall cease and determine in relation to such Top up Issue (but, for the avoidance of doubt, no other Top up Issues), without prejudice to any liability for any prior breach of this Agreement (including, without limitation, breach of any of the representations, warranties and undertakings contained herein),

	provided that, for the avoidance of doubt, the Joint Bookrunners’ obligations in relation to such Top up Issue under this Agreement shall not be capable of termination at any time after the issue of the relevant Top up Securities and such obligations shall be deemed to have become unconditional upon the issue of the relevant Top up Securities (but, for the avoidance of doubt, without prejudice to any of the rights and remedies of the Joint Bookrunners in respect of any breach by the Issuer, the Guarantor or the Company of their respective obligations under this Agreement (including without limitation under this Clause 2)).

2.8	Each of the Issuer, the Guarantor and the Company shall use all reasonable endeavours to procure that each of the conditions set out in Clause 2.5 and Clause 2.9 below is satisfied within the relevant time.

2.9	The Joint Bookrunners’ obligations under this Agreement are conditional on the passing of the Resolutions, the Share Capital Reorganisation Resolutions, the HMT Resolution and the Rights Issue Resolutions (in each case, without amendment, save as may be made by the Company with the consent of the Joint Global Co-ordinators, acting in good faith) at the GM on the GM Date (and not, except with the written agreement of the Joint Global Co-ordinators (not to be unreasonably withheld or delayed), at any adjournment of such meeting) (such condition, the Pre-Condition ). In the event that the Pre-Condition is not satisfied, or becomes incapable of being satisfied, by the required time and date therefore then the Joint Bookrunners’ obligations under this Agreement shall cease and determine, without prejudice to any liability for any prior breach of this Agreement (including, without limitation, breach of any of the representations, warranties and undertakings contained herein).

2.10	The Joint Bookrunners hereby agree to work together in a co-ordinated manner in connection with any Top up Issue acknowledging their common (but several) obligations in respect of any Shortfall.

2.11	The Joint Bookrunners hereby agree amongst themselves that the section headed “2. Top up Underwriting - Authorities” of the document headed “Memorandum of Understanding in relation to


	the proposed LME and Top up Underwriting” dated 29 October 2009 is deemed to be included herein.

2.12	Each of the Joint Bookrunners hereby agree severally (and not jointly or jointly and severally) that they shall not enter into sub-underwriting commitments.

2.13	Subject to clause 8.9 hereof, the Company hereby agrees that the Joint Bookrunners shall be appointed as sole dealer managers in connection with any LME (other than bilaterally negotiated transactions, in respect of which the Joint Bookrunners shall act as advisors to the Company) until the earlier of the Longstop Date or the Shortfall is reduced to zero.

2.14	The Joint Bookrunners shall consult with the Company: (i) from the Interim Assessment Date and on an on-going basis thereafter with respect to their strategy for the issuance of Top up Securities from time to time (such strategy to be consistent with the Joint Bookrunners’ obligations under Clause 2.1 and 2.4); and (ii) following feedback from investors in connection with any proposed Top up Issue. The Joint Bookrunners shall allow the Company, on its request, the opportunity to establish if better terms can be obtained in the market in connection with any proposed Top up Issue and any further Top up Issues required to reduce the Shortfall to zero (including, for the avoidance of doubt, any further Top up Issues required to be issued in the event that there is a Shortfall on the Longstop Date) (together the Remaining Issues ). To the extent, in the good faith opinion of the Company, that better terms can be obtained on an underwritten basis in the market, the Company may give notice to the Joint Bookrunners that it wishes to proceed with the alternative proposal for such Remaining Issues. Following such notice, the Shortfall shall be reduced to zero and each such Remaining Issue shall not be a Top up Issue under the terms of this Agreement. In the event of such notice being given by the Company to the Joint Bookrunners, this Agreement shall cease to have any further effect (including as to the appointment of the Joint Bookrunners under Clause 2.13) in each case except to the extent specified in Clause 14.2.

2.15	In the event that the Group’s published core tier 1 capital ratio falls to less than 5 per cent. and Top up Securities automatically convert into ordinary shares of the Company in accordance with their requirements as set out in Schedule 2, the Joint Bookrunners severally agree, if and to the extent that the Joint Bookrunners are unable to procure subscribers, to subscribe such number of ordinary shares of the Company as is equal to (i) the aggregate amount of ECNs that would otherwise have been required to be issued to reduce the Shortfall to zero, divided by (ii) the conversion price at such time (as described in Schedule 2). In such event, the terms and conditions in this Agreement shall apply mutatis mutandis , and the conditions to such issue and the representations and warranties given by the Company shall be on such terms as are reasonably agreed between the Company and the Joint Global Co-ordinators (acting on behalf of the Joint Bookrunners) as at such time (provided that any offering of ordinary shares of the Company in the United States shall only be to QIBs in transactions exempt from the registration requirements of the Securities Act for transactions not involving a public offering under section 4(2) thereof), by reference to the terms of the Rights Issue Underwriting Agreement.


3.	APPLICATION FOR LISTING AND ADMISSION TO TRADING

3.1	Pursuant to the Issuer’s obligations under Clause 2.2, the Issuer undertakes to apply, before any Prospectus Publication Date, to:


	(a)	the UK Listing Authority for admission of the relevant Top up Securities to the Official List;

	(b)	the London Stock Exchange for admission to trading of the relevant Top up Securities on the London Stock Exchange’s regulated market.


	In relation to each Top up Issue the Issuer shall use all reasonable endeavours to obtain permission (a) for the admission of the relevant Top up Securities to the Official List, and (b) for admission to trading of the relevant Top up Securities on the London Stock Exchange’s regulated market (subject only to the delivery of Documents of Title in respect of the relevant Top up Securities).

3.2	In relation to each Top up Issue the Issuer undertakes to apply for formal approval of the relevant Prospectus for the purposes of, and in accordance with, the Listing Rules and the Prospectus Rules and shall use all reasonable endeavours to obtain such approval and passporting as soon as practicable and in any event in relation to approval, before publication of the relevant Prospectus.

3.3	Each of the Issuer, the Guarantor and the Company shall supply all information, give all undertakings, execute all documents, pay all fees and do or procure to be done all things in each case as may be necessary or required (a) by the UK Listing Authority and the London Stock Exchange for the purposes of obtaining formal approval of the Prospectus and obtaining Admission, and (b) to comply with the Listing Rules, the Prospectus Rules, the Admission and Disclosure Standards, the FSMA and the Companies Act.

3.4	Each of the Issuer, the Guarantor and the Company shall notify the Joint Bookrunners immediately of any matter referred to in section 87G(1) of the FSMA which arises between the time that the Prospectus is formally approved by the UK Listing Authority and 11.00 a.m. on the relevant Settlement Date. Each of the Issuer, the Guarantor and the Company shall deal with every such matter in accordance with section 87G of the FSMA, the Listing Rules and the Prospectus Rules.

3.5	In relation to any Top up Issue the Issuer shall use all reasonable endeavours to procure the delivery of a certificate of approval by the Financial Services Authority to the competent authority in each Passporting Jurisdiction (if applicable) and will promptly notify the Joint Bookrunners, following receipt of confirmation that such certificate of approval has been so delivered

3.6	Each of the Joint Bookrunners irrevocably waives any statutory right to withdraw acceptances which may arise pursuant to Section 87Q(4) of the FSMA on the publication of a Supplementary Prospectus and the Joint Bookrunners undertake not to rely on Section 87Q(4) of the FSMA in such circumstances to avoid their obligations under Clauses 7.1, 7.2, 7.3 and 7.4 other than where the Supplementary Prospectus has been published as a direct or indirect consequence of a Specified Circumstance. For the avoidance of doubt, this Clause 3.6 does not affect the conditions set out under Clause 2.5, Clause 2.9 or the termination rights of the Joint Bookrunners under Clause 14.

4.	APPROVAL, RELEASE AND DELIVERY OF DOCUMENTS

4.1	Each of the Issuer, the Guarantor and the Company confirms to the Joint Bookrunners that a meeting or meetings of the Board or a duly authorised committee of the Board has been held (and/or, in the case of (b), (c), (d) and (e) below, undertakes to hold such a meeting) which has (or will have, as the case may be):

	(a)	authorised the Issuer, the Guarantor and the Company (as applicable) to enter into and perform their respective obligations under this Agreement;

	(b)	in relation to each Top up Issue approved the form of the Prospectus and authorised and approved the publication of the Prospectus, each of the other Relevant Documents and all other documents connected with the applicable Top up Issue and Admission, as appropriate;

	(c)	approved the making of the relevant Top up Issue;

	(d)	approved the making of the applications for Admission; and


	(e)	authorised (or authorise, as the case may be) all necessary steps to be taken by the Issuer, the Guarantor and the Company (as applicable) in connection with each of the above matters.

4.2	In relation to each Top up Issue, subject to the UK Listing Authority having formally approved the Prospectus for the purpose of the Listing Rules and the Prospectus Rules, the Issuer shall make such Prospectus available in accordance with paragraph 3.2 of the Prospectus Rules and make available to the Joint Bookrunners such number of copies of the Prospectus as they may reasonably require.

4.3	On each Settlement Date, the Issuer, the Guarantor and the Company will deliver the documents referred to in Part A of Schedule 3 to the Joint Bookrunners (in each case in form and substance satisfactory to the Joint Global Co-ordinators acting reasonably).

4.4	Before publishing any Prospectus, the Issuer, the Guarantor and the Company shall deliver the documents referred to in Part B of Schedule 3 to the Joint Bookrunners (in each case in form and substance satisfactory to the Joint Global Co-ordinators acting reasonably).

5.	APPOINTMENTS

5.1	Each of the Issuer, the Guarantor and the Company acknowledges and agrees that none of the Joint Bookrunners are responsible for and have not authorised and will not authorise the contents of any Disclosure Package or Prospectus and that the Joint Bookrunners have not been requested to verify, nor are, nor shall be, responsible for verifying, the accuracy, completeness or fairness of any information in any of the Relevant Documents (or any supplement or amendment to any of the foregoing).

5.2	Each of the Issuer, the Guarantor and the Company confirms the appointment of the Joint Bookrunners as joint bookrunners for the purposes of each Top up Issue on the terms and in the manner described in the Relevant Documents and upon and subject to the terms and conditions set out in this Agreement.

5.3	Each of the Issuer, the Guarantor and the Company confirms that the appointment in Clause 5.2 confers on each of the Joint Bookrunners all powers, authorities and discretions which are necessary for, or incidental to, the performance of its functions as joint bookrunner to the Top up Issues (including the appointment of such agents and affiliates as it deems appropriate) in accordance with the terms of this Agreement. Each of the Issuer, the Guarantor and the Company will ratify and confirm all actions which each of the Joint Bookrunners properly and lawfully takes pursuant to this appointment.

6.	CLOSING

6.1	In relation to each Top up Issue, subject to the provisions of Clause 2, the Issuer shall arrange for delivery of the Top up Securities in accordance with Clause 7.

6.2	Each Joint Bookrunner severally agrees to comply with the terms of the Selling Restrictions in seeking to procure subscribers for the Top up Securities. Subject to compliance with the Selling Restrictions, each Joint Bookrunner shall have absolute discretion to use its reasonable endeavours to procure such subscribers in the manner and otherwise as it thinks fit. The Joint Bookrunners shall, by agreement between themselves, determine the number of Top up Securities which each such subscriber subscribes.

7.	UNDERWRITING AND SETTLEMENT

7.1	In relation to each Top up Issue if and to the extent that the Joint Bookrunners are unable to procure subscribers, the Joint Bookrunners shall subscribe for the Top up Securities at the Issue Price for the


	Top up Issue. The obligations of the Joint Bookrunners in this Clause 7.1 are several (and not joint or joint and several) and (save as provided in Clause 7.2) each Joint Bookrunner shall be responsible only for its Proportionate Share of the Top up Securities not otherwise taken up and for the avoidance of doubt no Joint Bookrunner shall have any liability or obligation in respect of any default by another Joint Bookrunner.

7.2	In the event that one of the Joint Bookrunners defaults or, in the reasonable opinion of the Joint Global Co-ordinators, is likely to default in the performance of its obligations to subscribe for Top up Securities (the Defaulted Top up Securities ) on the Settlement Date as required pursuant to Clause 7.1, then each of the non-defaulting Joint Bookrunners shall be obliged, severally and not jointly or jointly and severally, to procure subscribers for or to subscribe for themselves the Defaulted Top up Securities in the proportions that their respective underwriting obligations bear to the underwriting obligations of all non-defaulting Joint Bookrunners, provided, in each case, that the aggregate number of Defaulted Top up Securities for which any Joint Bookrunner subscribes pursuant to this Clause 7.2 shall not exceed 10 per cent. of the Shortfall as at the time that any such default or likely default first occurs.

7.3	The net subscription money in respect of any issue of Top up Securities denominated in sterling or US dollars which is not to be consolidated with a previously issued series of ECNs, (representing the agreed Issue Price, less the amount of the commissions and/or expenses as separately agreed in the agreement referred to in Clause 8 or any other agreement between the parties hereto applied toward discharge of the agreed Issue Price) will be paid by a Joint Bookrunner identified to the Issuer before the relevant Settlement Date for such Top up Issue as handling “billing and delivery” on behalf of the Joint Bookrunners to the Issuer at 10.00 a.m. (London time in the case of a Top up Issue denominated in sterling or New York City time in the case of Top Securities denominated in US dollars) on the relevant Settlement Date against delivery of:

	(a)	in the case of a Top up Issue in bearer form denominated in sterling or US dollars to be settled in Euroclear Bank S.A./N.V. and for Clearstream Banking, société anonyme, and not to be offered in whole or in part in the United States to QIBs, a duly executed temporary global security (the Temporary Global Security ) initially representing the Top up Securities and a duly executed permanent global security (the Permanent Global Security and, together with the Temporary Global Security, the Global Securities ), each in or substantially in the form provided in the Trust Deed, to a common depositary or as agreed before the relevant Settlement Date for such Top up Issue a common safekeeper for Euroclear Bank S.A./N.V. and for Clearstream Banking, société anonyme to be held, in the case of the Permanent Global Security, on terms agreed between the Joint Bookrunners, the Issuer and such common depositary or common safekeeper; or

	(b)	in the case of a Top up Issue denominated in US dollars to be sold in whole or in part in the United States to QIBs, a global certificate (the Unrestricted Global Certificate ) and a global certificate (the Restricted Global Certificate and, together with the Unrestricted Global Certificate, the Global Certificates ), duly executed and registered in the name of a nominee of a common depositary and in or substantially in the form provided in the Trust Deed, to a common depositary for Euroclear Bank S.A./N.V. and for Clearstream Banking, société anonyme, and the registration of the holdings of the Top up Securities represented by the Global Certificates in the register maintained by the registrar for the Top up Securities.

7.4	In the case of a Top up Issue denominated in euro which is not to be consolidated with a previously issued series of ECNs, not later than 3.00 p.m. (London time) (or such other time as may be agreed) on the date (the Payment Instruction Date ) that is the Business Day prior to the relevant Settlement Date, the Issuer will deliver duly executed Global Securities, each in or substantially in the form provided in the Trust Deed, to a common depositary or, if agreed before the relevant Settlement Date to a common safekeeper for Euroclear Bank S.A./N.V. and for Clearstream Banking, société


	anonyme, to be held on terms agreed between the Issuer and the common depositary or common safekeeper. Against delivery and effectuation of the Global Securities, the Joint Bookrunner identified to the Issuer before the relevant Settlement Date for such Top up Issue as handling “billing and delivery” will, on the Payment Instruction Date, give instructions to the common depositary or a common service provider to arrange for the payment to the Issuer on the relevant Settlement Date of the net subscription money for the Top up Issue, (representing the agreed Issue Price, less the amount of the commissions and/or expenses as separately agreed in the agreement referred to in Clause 8 or any other agreement between the parties hereto applied toward discharge of the agreed Issue Price).

7.5	In any other case, the settlement arrangements shall be those agreed prior to the relevant Settlement Date for the relevant Top up Issue.

8.	COMMISSIONS AND EXPENSES

8.1	In respect of Joint Bookrunners’ role as joint bookrunners, subject to the satisfaction of the Pre-Condition and the performance by each of them of their obligations under this Agreement, the Joint Bookrunners shall be entitled to:

	(a)	an aggregate underwriting fee of 1 per cent. of £7,500,000,000, to be paid to the Joint Bookrunners pro rata to their respective underwriting commitments;

	(b)	an aggregate participation fee of 0.20 per cent. of the notional amount of the securities submitted and accepted by the Company in exchange for an issue of securities on terms no less advantageous to the Company than (or for exchange consideration with a value no greater than) the initially offered securities or other exchange consideration (unless otherwise agreed by the Issuer at its sole discretion) in the LME, to be paid to the Joint Bookrunners pro rata to their respective underwriting commitments;

	(c)	a discretionary success fee (to be paid at the sole discretion of the Company, as to payment and allocation) of an aggregate amount for allocation amongst all Joint Bookrunners of 0.15 per cent. of the notional amount of the securities submitted and accepted by the Company in exchange for an issue of securities on terms no less advantageous to the Company than (or for exchange consideration with a value no greater than) the initially offered securities or other exchange consideration (unless otherwise agreed by the Issuer at its sole discretion) in the LME; and

	(d)	on each Top up Issue and subject to the satisfaction or waiver of any conditions precedent to such issue and such issue completing in accordance with its terms, a placement fee of 0.75 per cent. of the gross proceeds raised by the Company or a member of the Group (if any) and underwritten by the Joint Bookrunners, to be paid to the Joint Bookrunners pro rata to their respective underwriting commitments.

	The Company shall procure that it or an appropriate member of the Group shall make payment of the fees set out in paragraph (a) to (d) above, where and when payable. A portion of the fees set out in paragraph (a) above shall be payable on the settlement date for each LME or Top up Issue, as the case may be, such portion being is equal to 1 per cent. of the amount of the underwriting commitment of the Joint Bookrunners that is discharged as at each such settlement date (up to an aggregate of such discharged commitment of £7,500,000,000), the fees set out in paragraph (b) above shall be payable at settlement of each LME by reference to the amount of securities which settle and on which such fees are payable; the fees set out in paragraph (c) above shall be payable on the earlier of


	the Longstop Date and the date on which the underwriting commitment of the Joint Bookrunners is discharged in full under this Agreement; and the fees set out in paragraph (d) above shall be payable at the time of settlement of each Top up Issue.

	On any termination of this Agreement under Clause 2.9 or Clause 14, no fees under this Clause 8 shall be payable save that the Joint Bookrunners shall be entitled to fees under Clause 8.1 (a), (b) and (d) to the extent that the settlement under the relevant LME or Top up Issue has taken place or to the extent that the relevant LME or Top up Issue has been launched prior to such termination and settlement takes place after such termination. This Clause 8 shall survive any termination of this Agreement under Clause 2.14 and any unpaid portion of the fee provided under Clause 8.1(a) shall be payable immediately on such termination but, for the avoidance of doubt, no fee shall be payable pursuant to Clause 8.1(d) in such circumstances.

8.2	The Guarantor shall, or shall procure that an appropriate member of the Group shall, bear and pay all out of pocket costs and expenses properly incurred in connection with the structuring, making and completion of the Top up Issues (including but not limited to filing, printing, pre-marketing, marketing and roadshow costs and expenses) and the consummation of the transactions contemplated herein including but not limited to all legal fees and expenses properly incurred by the Joint Bookrunners in connection with the performance of their obligations hereunder except that to the extent a Joint Bookrunner’s expenses constitute amounts in respect of Transfer Duties these shall be dealt with in accordance with Clause 8.8 below.

8.3	The amounts referred to in Clauses 8.1 and 8.2 shall be paid together with an additional amount in respect of any applicable VAT in accordance with Clause 8.7 (such VAT to be paid within 10 Business Days after the issue by any Joint Bookrunner of a valid VAT invoice).

8.4	All payments by the Issuer, the Guarantor or the Company (as applicable) under this Agreement shall be paid without set-off or counterclaim, and free and clear of and without deduction or withholding for or on account of, any present or future taxes, levies, imports, duties, fees, assessments or other charges of whatever nature, imposed by the United Kingdom or by any department, agency or other political subdivision or taxing authority thereof or therein, and all interest, penalties or similar liabilities with respect thereto ( Taxes ). If any Taxes are required by law to be deducted or withheld in connection with any such payment, the Issuer (failing whom the Guarantor), the Guarantor or the Company (as applicable) will increase the amount paid so that the amount of such payment received by the payee will equal the full amount which would have been received by the payee if no such deduction or withholding had been made.

8.5	If the Issuer, the Guarantor or the Company (as applicable) makes such an increased payment under Clause 8.4 and the payee subsequently obtains a refund of tax or credit against tax by reason of the Issuer, the Guarantor or the Company (as applicable) making such a deduction or withholding, the payee shall reimburse the Issuer, the Guarantor or the Company (as applicable) as soon as reasonably practicable with an amount such as the payee shall determine (with such determination in good faith being final and conclusive) to be such proportion of the said refund or credit as shall leave the payee after such reimbursement in no better or worse position (having regard to the time value of money) than it would have been in had no deduction or withholding been required. Nothing in this Clause 8.5 shall oblige a payee to disclose any information it reasonably considers confidential.

8.6	If any sum payable by the Issuer, the Guarantor or the Company (as applicable) under this Agreement (other than any commissions or fees payable) shall be subject to Taxes in the hands of a Joint Bookrunner, the sum payable shall be increased so as to ensure that after payment of any Taxes which would not have arisen but for that sum, the relevant Joint Bookrunner (after giving credit for any tax relief obtained by such Joint Bookrunner in respect of the losses, costs, expenses or other


	items giving rise to such payment) shall be left with a sum equal to the sum that it would have received in the absence of such Taxes.

8.7	Where, pursuant to this Agreement, a sum is paid or reimbursed to a Joint Bookrunner or an Indemnified Person, the relevant payor shall pay to that Joint Bookrunner or Indemnified Person in respect of VAT:

	(a)	where the payment or reimbursement constitutes the consideration or part of it for any supply of services by that Joint Bookrunner to the relevant payor, such amount as equals any VAT properly payable thereon and on such irrecoverable VAT, if any, as is referred to in (b) below (which shall be payable upon receipt of a valid VAT invoice);

	(b)	such amount as equals any VAT charged to that Joint Bookrunner in respect of any cost, charge or expense which gives rise to or is reflected in the payment or reimbursement and which that Joint Bookrunner certifies is not recoverable by it, or the representative member of the VAT group which it is a member of, by repayment or credit, that certificate to be conclusive save in the case of manifest error; and

	(c)	on any payment or reimbursement in respect of or indemnification for costs, charges or expenses incurred by that Joint Bookrunner as agent for the Issuer, the Guarantor or the Company and except where section 47(2A) or section 47(3) of the Value Added Tax Act 1994 applies, such amounts as equals the amount included in the costs, charges or expenses in respect of VAT, provided that in such case the Joint Bookrunner will use reasonable endeavours to procure that the actual supplier of the goods or services which the Joint Bookrunner received as agent issues its own VAT invoice directly to the Issuer, the Guarantor or the Company, as applicable.

8.8	Each of the Issuer, the Guarantor and the Company agrees with the Joint Bookrunners and each of them that it will bear and pay any documentary, stamp, issue or other similar issuance or transfer duties or taxes (including any interest or penalties) (each a Transfer Duty ) (if any) imposed by any government department or other tax authority in the United Kingdom, Belgium or Luxembourg on or in connection with the Top up Issues as contemplated by this Agreement, the creation, allotment, issue and delivery of the Top up Securities and the execution and delivery of this Agreement and any Trust Deed, Agency Agreement and Deed Poll relating to any Top up Issue, in all cases other than any and all duties and taxes for which subscribers for Top up Securities are liable, as set out in the terms and conditions of the Top up Securities and/or as described or set out in the Exchange Offer Memoranda, provided that (aa) (for the avoidance of doubt) it will not be liable under this Clause 8.8 for any Transfer Duties arising as a result of any transfer of, or agreement to transfer, Top up Securities by any Joint Bookrunner or any subscriber for Top up Securities); (bb) (for the avoidance of doubt) it shall not be liable under this Clause 8.8 for any Transfer Duty arising on or in connection with any conversion of Top up Securities (except as otherwise provided in the terms and conditions of the Top up Securities and/or in the Exchange Offer Memoranda); and (cc) it shall not be liable for Transfer Duty imposed in Belgium or Luxembourg except to the extent that such Transfer Duty arises solely as a result of any Top up Securities being held, traded or delivered in or through Euroclear N.V./S.A. or Clearstream, Luxembourg.

8.9	For the avoidance of doubt, the Joint Bookrunners are not acting under this Agreement as bookrunners or dealer managers for any US LME. No compensation is being paid or given under this Agreement, directly or indirectly, for soliciting exchange in any such US LME.


9.	RESTRICTIONS ON ACTIONS AND ANNOUNCEMENTS

9.1	Each of the Issuer, the Guarantor and the Company undertakes that it will not (and the Company will use all reasonable endeavours to procure that no member of the Group will) (i) in the case of paragraphs (a) and (c) below, without the Joint Global Co-ordinators’ prior written consent (such consent not to be unreasonably withheld or delayed) prior to the date 60 Dealing Days after, as appropriate, the Acceptance Date (as defined in the Rights Issue Underwriting Agreement) or the date that the Banks’ (as defined in the Rights Issue Underwriting Agreement) obligations under the Rights Issue Underwriting Agreement cease in accordance with its terms (the Consent Period ), and (ii) without prior consultation with the Joint Bookrunners for the period from the final day of the Consent Period up to and including the Restriction Date (the Consultation Period ); and (ii) in the case of paragraph (b) below, without the Joint Global Co-ordinators’ prior written consent (such consent not to be unreasonably withheld or delayed) prior to the Restriction Date:

	(a)	enter into any commitment or agreement, or put itself in a position where it is obliged to announce that any commitment or agreement may be entered into, which is or is reasonably likely to be material in the context of the Top up Issue or the underwriting of the Top up Securities or Admission or post-Admission dealings in the Top up Securities, save in each case for any commitment or agreement referred to in or contemplated by the Press Announcement or the Rights Issue Prospectus or the Exchange Offer Memoranda; or

	(b)	allot, issue (or contract to allot or issue) or grant any rights in respect of any shares or other subordinated securities or equity linked securities (including for the avoidance of doubt any ECNs) of the Company or of a Group company, except for (i) the issue by the Company of shares under the Rights Issue or other subordinated or contingent capital securities referred to in or contemplated by the Press Announcement, the Rights Issue Prospectus or the Exchange Offer Memoranda, (ii) the issue by the Company (or any Group company) of any ordinary shares upon the exercise of an option or warrant or the conversion of a security outstanding on the date of this Agreement and disclosed in the Press Announcement, the Rights Issue Prospectus or the Exchange Offer Memoranda, (iii) the grant of options or rights under, and the allotment and issue of ordinary shares pursuant to options or grants granted under, the Company’s existing share schemes, in each case in accordance with normal practice, (iv) any other issue of ordinary shares pursuant to an obligation entered into prior to the date hereof and disclosed in the Rights Issue Prospectus), (v) any intra-group issues between wholly-owned subsidiaries, (vi) any issues required by relevant regulatory authorities where such requirement could not be met by the issue of ECNs pursuant to this Agreement, (vii) any issue to holders of Limited Voting Shares of: (A) Limited Voting Shares in respect of the Company’s capitalisation issue of May 2009; and (B) ordinary shares of the Company in respect of the Company’s placing and open offer of November 2008 and compensatory open offer of May 2009, or (viii) the issue by the Company or any Group company of such instruments constituting core tier 1, tier 1, lower tier 2 or upper tier 2 capital as are expressly referred to in the Press Announcement, the Rights Issue Prospectus or the Exchange Offer Memoranda or the issue by the Company of any ordinary shares upon the conversion of such securities; or

	(c)	circulate, distribute, publish, issue or make (nor authorise any other person to circulate, distribute, publish, issue or make) any press or other public announcement or any advertisement, statement or public communication concerning the Issuer, the Guarantor, the Company and their respective subsidiary undertakings which is or is reasonably likely to be material in the context of the Top up Issue or the underwriting of the Top up Securities or Admission or post-Admission dealings in the Top up Securities (other than (i) an announcement, advertisement, statement or communication required by law or any regulatory body (provided that in that event (1) the Issuer, the Guarantor or the Company (as the case may be) will consult, to the extent practicable, with the Joint Bookrunners before


		making any such release; and (2) will obtain the prior consent of any Joint Bookrunner whose name is included in the announcement, advertisement, statement or public communication in question for such inclusion); and (ii) in respect of any public announcement, advertisement, statement or public communication in connection with any matter arising in the ordinary course of business of the Group that is not material in the context of a Top up Issue or the underwriting of Top up Securities or Admission or post-Admission dealings in the Top up Securities, but subject always to Clause 9.2).

9.2	Each of the Issuer, the Guarantor and the Company undertakes that it will not at any time during the period ending on the Restriction Date make any public announcement, advertisement, statement or communication as is referred to in Clause 9.1 or relating to any matters, events or circumstances which may be necessary to be made known to the public in order to enable the shareholders or other securityholders of the Issuer, the Guarantor or the Company (as the case may be) and the public to appraise the position of the Issuer, the Guarantor or the Company or to avoid the establishment of a false market in its securities, either individually or jointly with any other person (including, without limitation, any matter whatsoever which would require notification by the Issuer, the Guarantor or the Company to a Regulatory Information Service in accordance with the provisions of the Listing Rules), without first, where reasonably practicable (a) notifying the Joint Bookrunners as to the content, form and manner of publication of such announcement, advertisement, statement or communication, (b) making available drafts of any such announcement, advertisement, statement or communication to the Joint Bookrunners in sufficient time prior to its publication to allow the Joint Bookrunners an opportunity to consider and comment on the same, and (c) consulting with the Joint Bookrunners as to the content, form and manner of publication of such announcement, advertisement, statement or communication.

9.3	Each of the Issuer, the Guarantor and the Company shall use reasonable endeavours not to, and the Company shall use reasonable endeavours to procure that no member of the Group will (a) in the Consent Period, without the prior written consent of the Joint Global Co-ordinators (such consent not to be unreasonably withheld or delayed); and (b) in the Consultation Period, without having first consulted with the Joint Bookrunners (and taken into account any of their requests which are reasonable in the context of the Top up Issue or the Joint Bookrunners’ obligations under this Agreement), enter into any commitment, agreement or arrangement which is or is reasonably likely to be material and adverse to the condition of the Issuer, the Guarantor, the Company or the Group taken as a whole or which is materially inconsistent with, or represents a material departure from or new development in, any disclosure or expression of policy or intention or statement contained in the Rights Issue Prospectus, subject in each case to applicable law and regulation (including the Directors’ fiduciary duties) but provided that where the Issuer, the Guarantor, the Company or any Group company considers itself bound by applicable law or regulation to enter into any such commitment, agreement or arrangement, it shall not do so without having first consulted with the Joint Global Co-ordinators to the extent that it is practicable to do so.

9.4	If it shall be necessary, in the reasonable opinion of the Issuer, the Guarantor, the Company and their advisers or the Joint Bookrunners or their legal advisers, at any such time, until the Restriction Date to amend or supplement any Relevant Documents in order to comply with the requirements of the FSMA, the Listing Rules and/or the Prospectus Rules (as the case may be) and/or ensure that the Relevant Documents remain true and accurate in all respects and not misleading up to the Restriction Date, the Issuer will promptly prepare and file with the FSA (or procure the filing with the FSA of) such amendment or supplement as may be necessary to correct such statement or omission or to make such Relevant Documents comply with such requirements. Before amending or supplementing any Relevant Documents, the Issuer, the Guarantor or the Company will furnish the Joint Bookrunners with a copy of each such proposed amendment or supplement, and will not make any such proposed amendment or supplement without the prior written consent of the Joint Global Co-ordinators, provided always that, subject to the terms of Clause 3.4, (i) nothing in this paragraph


	shall prevent the Issuer, the Guarantor, the Company or the Directors from complying with their obligations at law or under the Prospectus Rules, the Listing Rules or the FSMA having taken into account any requests of the Joint Bookrunners acting in good faith; and (ii) this paragraph shall be without prejudice to the rights of the Joint Global Co-ordinators and the Joint Bookrunners pursuant to Clauses 2.7 and 14.

9.5	Each of the Issuer, the Guarantor and the Company undertakes to make all such announcements concerning a Top up Issue as shall be necessary to comply with the Listing Rules, the Disclosure Rules and Transparency Rules, the Prospectus Rules, the Admission and Disclosure Standards and section 118, sections 118A to 118C inclusive and section 397 of the FSMA, or which any of the Joint Bookrunners otherwise reasonably considers to be necessary or desirable (including, without limitation, for the purposes of procuring any potential subscribers for any Top up Securities in accordance with this Agreement) and any of the Joint Bookrunners shall be entitled to make any such announcement if the Issuer, the Guarantor or the Company fails (in the opinion of such Joint Bookrunner acting in good faith) promptly to fulfil their respective obligations under this Clause 9.5

9.6	For the avoidance of doubt, the restrictions on actions or announcements contained in this Clause 9 shall not operate to restrict or limit any action which the Issuer, the Guarantor, the Company or the Group takes in accordance with the terms of this Agreement, the Rights Issue Underwriting Agreement or in furtherance of the proposals described in the Press Announcement, the Rights Issue Prospectus, the Circular or the Exchange Offer Memoranda or as is required in order to give effect to the proposals described in such documents or limit any action which the Issuer, the Guarantor, the Company or the Group takes in the ordinary course of the business or banking operations of the Group, as described in the Rights Issue Prospectus, provided that, to the extent reasonably practicable, the Company shall have consulted with the Joint Bookrunners prior to any such action or announcement and given the Joint Bookrunners a reasonable period of time to consider such proposed action or announcement.

10.	REPRESENTATIONS, WARRANTIES AND UNDERTAKINGS

10.1	Subject to matters fairly disclosed in the European Exchange Offer Memorandum, the Company represents, warrants and undertakes to each Joint Bookrunner that each statement set out in Schedule 3 to the European Dealer Manager Agreement is true and accurate and not misleading immediately prior to the publication of the Press Announcement on the basis that defined terms used in such Schedule 3 to the European Dealer Manager Agreement will have the meanings ascribed to such terms in the European Dealer Manager Agreement save that any reference in such Schedule 3 or such definitions to “this Agreement” shall be construed as a reference to this Agreement

10.2	Subject to matters fairly disclosed in the European Exchange Offer Memorandum, each of the Issuer (in respect of itself), the Guarantor (in respect of itself and the Issuer) and the Company (in respect of itself) represents, warrants and undertakes to each Joint Bookrunner that each statement set out in clause 6.3 to the European Dealer Manager Agreement is true and accurate and not misleading immediately prior to the publication of the Press Announcement on the basis that (i) defined terms used in such clause 6.3 will have the meanings ascribed to such terms in the European Dealer Manager Agreement save that any reference in clause 6.3 or such definitions to “this Agreement” shall be construed as a reference to this Agreement; and (ii) references to LBG Capital No. 1 and the LBG Capital No. 1 ECNs shall be deemed removed for the purposes of this Clause 10.

10.3	The Company represents, warrants and undertakes to each Joint Bookrunner that:

	(a)	(in the case of a Listed Top up Issue) each statement set out in Schedule 4 is true and accurate and not misleading in relation to any Top up Securities, on the date of publication of any Prospectus and shall be repeated on the date of publication of any Supplementary Prospectus, at Admission, at any Time of Sale and at the relevant Settlement Date, and


	(b)	(in the case of an Unlisted Top up Issue) each statement set out in Schedule 4 is true and accurate and not misleading in relation to any Top up Securities:

		(i)	on the Disclosure Package Publication Date and shall be repeated at the date of publication of any supplement to the Disclosure Package, at any Time of Sale and at the relevant Settlement Date provided that for the purposes of this Clause 10.3(b)(i): (x) the statements set out in each of paragraphs 2.4, 2.5, 4, 5.5 and 20.3 shall be disregarded; (y) references to the “Prospectus” in Schedule 4 shall be deemed to be references to the “Disclosure Package”; and (z) references to information having been “incorporated by reference into” in Schedule 4 shall be deemed to be references to information having been “provided as part of”; and

		(ii)	on the Prospectus Publication Date and shall be repeated at Admission,

	in each case by reference to the facts and circumstances then existing (subject to any such matters and facts fairly disclosed in any Supplementary Prospectus (in the case of a Listed Top up Issue) or supplement to the Disclosure Package (in the case of an Unlisted Top up Issue) published prior to the relevant date) on the basis that references to the “Top up Issue” and the “Top up Securities” in Schedule 4 shall be to the relevant Top up Issue and Top up Securities.

10.4	Each of the Issuer (in respect of itself) and the Guarantor (in respect of the Issuer and the Guarantor) represents, warrants and undertakes to each Joint Bookrunner that:

	(a)	(in the case of a Listed Top up Issue) each statement set out in Schedule 5 is true and accurate and not misleading in relation to any Top up Securities, on the date of publication of any Prospectus and shall be repeated on the date of publication of any Supplementary Prospectus, at Admission, at any Time of Sale and at the relevant Settlement Date; and

	(b)	(in the case of an Unlisted Top up Issue) each statement set out in Schedule 5 is true and accurate and not misleading in relation to any Top up Securities:

		(i)	on the Disclosure Package Publication Date and shall be repeated at the date of publication of any supplement to the Disclosure Package, at any Time of Sale and at the relevant Settlement Date provided that for the purposes of this Clause 10.4(b)(i): (y) the statements set out in paragraph 2 shall be disregarded; and (z) references to the “Prospectus” in Schedule 4 shall be deemed to be references to the “Disclosure Package”; and

		(ii)	on the Prospectus Publication Date and shall be repeated at Admission,

	in each case by reference to the facts and circumstances then existing (subject to any such matters and facts fairly disclosed in any Supplementary Prospectus (in the case of a Listed Top up Issue) or supplement to the Disclosure Package (in the case of an Unlisted Top up Issue) published prior to the relevant date) on the basis that references to the “Top up Issue” and the “Top up Securities” in Schedule 5 shall be to the relevant Top up Issue and Top up Securities.

10.5	Each of the Issuer, the Guarantor and the Company acknowledges that each of the Joint Bookrunners is entering into this Agreement in reliance on such representations, warranties and undertakings. Each representation, warranty and undertaking shall be construed separately and shall not be limited or restricted by reference to or inference from the terms of any other representation, warranty and undertaking or any other term of this Agreement. Warranties shall be deemed to be given under this Clause 10 in relation to the relevant document, announcement or event on the basis that any reference in any such Warranty to something being done or something being the case in relation to


	such document, announcement or event which is expressed in the future tense shall be regarded, to the extent the context requires, as being expressed in the present tense.

10.6	Each of the Issuer, the Guarantor or the Company shall use reasonable endeavours not to cause or permit and to procure that no other member of the Group nor any of its or their respective directors, officers, employees or agents shall cause or permit, without the prior consent of the Joint Global Co-ordinators, such consent not to be unreasonably withheld or delayed, any event to occur or omit to do anything in each period between any Prospectus Publication Date (in the case of a Listed Top up Issue) or the Disclosure Package Publication Date (in the case of an Unlisted Top up Issue) and the relevant Admission Date or (if earlier) the date on which the Joint Bookrunners’ obligations under this Agreement cease in accordance with Clauses 2.7 and/or Clause 14.1, as relevant, and shall consult with the Joint Global Co-ordinators from the relevant Admission Date up to and including the date which falls 60 days after the relevant Admission Date before taking any actions (a) which would make any statement in Schedule 4 or Schedule 5 untrue, inaccurate or misleading if, in such case, such statement were repeated at such date by reference to the facts and circumstances then existing, or (b) which would result in a breach by the Issuer, the Guarantor or the Company of any of their respective obligations or undertakings under this Agreement, which in any such case would be material in the context of the relevant Top up Issue.

10.7	In relation to any Top up Issue each of the Issuer, the Guarantor and the Company shall promptly notify the Joint Bookrunners (giving reasonable details) if it comes to the knowledge of the Issuer, the Guarantor, the Company or any Director that (and the Issuer, the Guarantor and the Company undertakes to make all reasonable enquiries to ascertain whether (a) any of the Warranties was (or the Issuer, the Guarantor, the Company or the relevant Director reasonably believes it may have been) breached or untrue, inaccurate or misleading in any respect when given, or (b) any of the Warranties referred to in Clauses 10.3 and Clause 10.4 hereof has ceased (or the Issuer, the Guarantor, the Company or the relevant Director reasonably believes it may have ceased) to be true and accurate or has become (or the Issuer, the Guarantor, the Company or the relevant Director reasonably believes it may have become) misleading in any respect, or if it becomes aware of any circumstance which would or is reasonably likely to cause any of the Warranties referred to in Clauses 10.3 and Clause 10.4 hereof to be breached or become untrue, inaccurate or misleading in any respect if repeated by reference to the facts and circumstances existing at any time during the period between the date of this Agreement and the date which is 60 days after Admission or, if earlier, the date on which the Joint Bookrunners’ obligations under the Agreement cease in accordance with this Agreement, or if the Issuer, the Guarantor or the Company is in breach of any of their respective obligations under this Agreement, which, in any such case, would be material in the context of the relevant Top up Issue.

10.8	Subject always to Clause 15.10, each of the Issuer, the Guarantor and the Company agrees that the Joint Bookrunners shall be entitled to the same remedies and rights of action against the Issuer, the Guarantor and the Company, and to the same extent, as any person who subscribes for any Top up Securities on the basis of a Disclosure Package or Prospectus.

10.9	References in this Agreement to a representation, warranty or undertaking being (or not being) true and accurate or not being (or being) misleading “ in any material respect ” or “ in all material respects ” (or similar expressions) shall mean material in the context of a Top up Issue and/or the underwriting of any Top up Securities and/or Admission and/or post-Admission dealings in any Top up Securities. In that connection and otherwise in this Agreement (including, without limitation, the statements set out in Schedule 4 and Schedule 5) in relation to references to a matter which would or might be “ material in the context of the Top up Issue or the underwriting of the Top up Securities or Admission or post-Admission dealings in the Top up Securities ” (or similar expressions) a matter shall, without limitation, be deemed to be so material if (i) it would have been material for disclosure to potential subscribers of such Top up Securities had such matter existed


	when such subscribers for such Top up Securities were sought for such Top up Securities and/or (ii) it would be reasonably likely to have a Material Adverse Effect.

10.10	The representations, warranties and undertakings referred to in this Clause 10 shall remain in full force and effect notwithstanding completion of all matters and arrangements referred to in, or contemplated by, this Agreement.

10.11	Where any of the representations, warranties and undertakings are qualified by reference to awareness and/or knowledge and/or information and/or belief, that reference shall be deemed to include a statement to the effect that it has been given after making due and careful enquiries within the Group.

11.	EXCLUSIONS OF LIABILITY

11.1	Without prejudice to Clause 11.2, no claim shall be made by the Issuer, the Guarantor, the Company or any of their respective subsidiary undertakings, affiliates or associates, or any of the directors, officers or employees of any of them in any jurisdiction against any Indemnified Person to recover any Loss or Claim suffered or incurred by any person and which arises out of the carrying out by any Indemnified Person of obligations or services in connection with this Agreement or any other agreements relating to any Top up Issue, or in connection with any Top up Issue itself except (otherwise than in connection with the matters referred to in Clauses 12.1(a), (b), (c) and (d) and otherwise than as a result of a payment made or an obligation or liability to make payment arising under Clause 12.1) to the extent only that the Loss or Claim is determined by a court of competent jurisdiction to have resulted from the fraud, gross negligence or wilful default of the relevant Indemnified Person.

11.2	Each of the Issuer, the Guarantor and the Company agrees that no Indemnified Person is acting as a financial adviser or fiduciary to the Issuer, the Guarantor, the Company or any other person in providing the services contemplated in this Agreement (including, without limitation, in respect of the timing, terms, structure or price of the Top up Issue), irrespective of whether any such Indemnified Person has provided input to the Issuer, the Guarantor or the Company with respect thereto. Subject to the Joint Bookrunners’ obligations under Clause 2.4, no claim shall be made under this Agreement by the Issuer, the Guarantor, the Company or any of their respective subsidiary undertakings, affiliates or associates or any of the directors, officers or employees of any of them against any Indemnified Person in respect of the timing, terms or structure of the Top up Issue, including the setting of an Issue Price for any Top up Issue at a level that is too high or too low. Nothing in this Clause shall exclude or restrict any duty or liability of any Indemnified Person which it has under the FSMA or arrangements for regulating any such Indemnified Person thereunder to any extent prohibited by those arrangements. It is acknowledged by all parties that:

	(a)	subject to compliance by the relevant Indemnified Persons with the rules of the FSA, the Indemnified Persons may be engaged in a broad range of transactions that involve interests that differ from those of the Issuer, the Guarantor, the Company or any other person;

	(b)	no Indemnified Person has advised the Issuer, the Guarantor, the Company or any other person as to any general financial or strategic advice or any legal, tax, investment, accounting or regulatory matters in any jurisdiction; and

	(c)	the Issuer, the Guarantor, the Company and any other person have consulted its own legal, tax, investment, accounting or regulatory advisers to the extent they deem appropriate, and no Indemnified Person shall have any responsibility to the Issuer, the Guarantor, the Company or any other person with respect thereto.


11.3	Without prejudice to any rights or claims which the Issuer, the Guarantor, the Company or any of their respective subsidiary undertakings, affiliates or associates or any of the directors, officers or employees of any of them may have or assert against any of the Joint Bookrunners in connection with this Agreement, any Top up Issue, or any of the other arrangements contemplated by the Relevant Documents, or any of them, or this Agreement, no claim will be brought by the Issuer, the Guarantor or the Company or by any of their respective subsidiary undertakings, affiliates or associates or any of the directors, officers, partners or employees of any of them against any director or any other officer and/or partner and/or employee of any Indemnified Person in respect of any conduct, action or omission by the individual concerned in connection with this Agreement or any Top up Issue, or any of the other arrangements contemplated by the Relevant Documents, or any of them, or this Agreement.

12.	INDEMNITIES

12.1	Each of the Issuer, the Guarantor and the Company jointly and severally agrees to fully and effectively indemnify and hold harmless each Indemnified Person (and whether or not the relevant Loss or Claim is suffered or incurred or arises in respect of circumstances or events existing or occurring before, on or after the date of this Agreement and regardless of the jurisdiction in which such Loss or Claim is suffered or incurred) from and against any and all Losses or Claims, whatsoever, as incurred, if such Losses or Claims, arise, directly or indirectly, out of, or are attributable to, or connected with, anything done or omitted to be done by any person (including by the relevant Indemnified Person) in connection with any Top up Issue, Admission or the arrangements contemplated by the Relevant Documents, or any of them (or any amendment or supplement to any of them), or this Agreement or any other agreement relating to any Top up Issue, to which the Issuer, the Guarantor or the Company is a party including but not limited to:

	(a)	any and all Losses or Claims whatsoever, as incurred, arising out of the Relevant Documents, or any of them (or any amendment or supplement to any of them) not containing or fairly presenting, or being alleged not to contain or not to fairly present, all information required to be contained therein, or arising out of any untrue or inaccurate statement or alleged untrue or inaccurate statement of a material fact contained in the Relevant Documents, or any of them (or any amendment or supplement to any of them), or the omission or alleged omission therefrom of a fact necessary in order to make the statements therein not misleading in any material respect, or any statement therein being or being alleged to be in any respect not based on reasonable grounds, in the light of the circumstances in which they were made; and/or

	(b)	any and all Losses or Claims whatsoever, as incurred, arising out of any breach or alleged breach by the Issuer, the Guarantor or the, Company of any of their respective obligations under this Agreement, including any of the Warranties, covenants and undertakings set out in this Agreement or out of the arrangements contemplated by the Relevant Documents, or any of them (or any amendment or supplement to any of them) or this Agreement or any other agreement relating to any Top up Issue to which the Issuer, the Guarantor or the Company is a party; and/or

	(c)	any and all Losses or Claims whatsoever, as incurred, in connection with or arising out of the issue, publication or distribution of the Relevant Documents, or any of them (or any amendment or supplement to any of them) and/or any other documents or materials relating to the application for Admission; and/or

	(d)	any and all Losses or Claims whatsoever, as incurred, in connection with or arising out of any failure or alleged failure by the Issuer, the Guarantor, the Company or any of the Directors or any of their or his agents, employees or advisers to comply with the Companies Act, the FSMA, the Listing Rules, the Prospectus Rules, the Disclosure Rules and


		Transparency Rules, the rules and regulations of the London Stock Exchange and the Admission and Disclosure Standards, or any other requirement or statute or regulation in any jurisdiction in relation to the application for Admission, any Top up Issue, or the arrangements contemplated by the Relevant Documents, or any of them (or any amendment or supplement to any of them), or this Agreement or any other agreement relating to any Top up Issue to which the Issuer, the Guarantor or the Company is a party; and/or

	(e)	any and all Losses or Claims whatsoever, as incurred or suffered by such Indemnified Person as a person who has communicated or approved the contents of any financial promotion (other than the Relevant Documents, or any of them, or any amendment or supplement to any of them) made in connection with any Top up Issue or the application for Admission for the purpose of section 21 of the FSMA,

	PROVIDED THAT , the indemnity contained in this Clause 12.1 shall not apply to any Losses or Claims (i) (otherwise than in connection with the matters referred to in Clauses 12.1(a), (b), (c) and (d)) to the extent determined by a court of competent jurisdiction to have arisen as a result of the fraud, gross negligence or wilful default of that Indemnified Person, (ii) if and to the extent arising out of a decline in market value of the relevant Top up Securities suffered or incurred by any Indemnified Person as a result of it having been required to subscribe for Top up Securities pursuant to Clause 2 save to the extent such decline is caused by or results from or is attributable to or would not have arisen but for (in each case directly or indirectly) (aa) the neglect or default of the Issuer, the Guarantor or the Company in relation to the content, publication, issue or distribution of the Relevant Documents or any breach by the Issuer, the Guarantor or the Company of any of their respective obligations under this Agreement, including any of the Warranties, undertakings or covenants, or (bb) any of the matters referred to in Clause 12.1(a), or (iii) to the extent they include any tax liability of an Indemnified Person in respect of its actual net income, profits or gains, recoverable VAT or any Transfer Duty of the type which is not recoverable under Clause 8. This Clause 12.1 shall not apply to any Loss or Claim in respect of tax which is recoverable pursuant to Clause 8.

12.2	Each Joint Bookrunner shall and shall use reasonable endeavours to procure that its Indemnified Persons shall (i) give notice as promptly as reasonably practicable to the Issuer, the Guarantor and the Company of any action commenced against it after receipt of a written notice of any Claim or the commencement of any action, claim, suit, investigation or proceeding in respect of which a Claim for indemnification may be sought under this Clause 12, and (ii) as promptly as reasonably practicable notify the Issuer, the Guarantor and the Company after any such action is formally commenced (by way of service with a summons or other legal process giving information as to the nature and basis of the claim) and shall keep the Issuer, the Guarantor and the Company informed of, and, to the extent reasonably practicable, consult with the Issuer, the Guarantor and the Company in relation to, all material developments in respect thereof, but in each case, only insofar as may be consistent with the terms of any relevant insurance policy and provided (in each case) that to do so would not, in such Indemnified Person’s view (acting in good faith), be prejudicial to it (or to any Indemnified Person connected to it) or to any obligation of confidentiality or other legal or regulatory obligation which that Indemnified Person owes to any third party or to any regulatory request that has been made of it. However, the failure to so notify the Issuer, the Guarantor or the Company and keep the Issuer, the Guarantor or the Company informed shall not relieve the Issuer, the Guarantor or the Company from any liability hereunder to the extent it is not materially prejudiced as a result thereof and in any event shall not relieve the Issuer, the Guarantor or the Company from any liability which it may have otherwise than on account of the indemnity set out in this Clause 12, provided that non-disclosure by reason of a legal or regulatory restriction shall not constitute a failure to notify by an Indemnified Person.

12.3	Legal advisers for Indemnified Persons shall be selected by the relevant Joint Bookrunner(s) connected with such Indemnified Persons. Each of the Issuer, the Guarantor and/or the Company


	may participate at its own expense in the defence of any action commenced against the Issuer, the Guarantor or the Company provided however that legal advisers for the Issuer, the Guarantor or the Company shall not (except with the consent of the relevant Indemnified Person) also be legal advisers for the Indemnified Person.

12.4	In no event shall the Issuer, the Guarantor or the Company be liable for fees and expenses of more than one legal adviser (in addition to any local legal advisers) separate from its own legal advisers for all Indemnified Persons in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances.

12.5	Each of the Issuer, the Guarantor and the Company agrees that if it becomes aware of any Claim relevant for the purposes of this Clause 12 or any matters which may give rise to a Claim, it shall (i) promptly notify the Joint Bookrunners thereof and (ii) subject to, and to the extent of, any duties of confidentiality and any requirements of the Issuer’s, the Guarantor’s or the Company’s insurers or any legal or regulatory obligations which the Group owes to any third party or any regulatory request that has been made of it, promptly provide the Joint Bookrunners with such information and copies of such documents relating to the claim as the Joint Bookrunners may reasonably request.

12.6	None of the Issuer, the Guarantor or the Company shall, without the prior written consent of the relevant Indemnified Persons (acting in good faith), settle or compromise or consent to the entry of any judgment with respect to any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever in respect of which indemnification or contribution could be sought under this Clause 12 or Clause 13 (whether or not the Indemnified Persons are actual or potential parties thereto), unless such settlement, compromise or consent:

	(a)	includes an unconditional release of each Indemnified Person from all liability arising out of such litigation, investigation, proceeding or claim; and

	(b)	does not include a statement as to or an admission of fault, culpability or a failure to act by or on behalf of any Indemnified Person.

12.7	Each of the Issuer, the Guarantor and the Company will promptly notify each of the Joint Bookrunners of any limitation (whenever arising) on the extent to which the Issuer, the Guarantor, the Company and/or any of their respective subsidiary undertakings, affiliates, or associates may claim against any third party or parties and/or of any waiver or release of any right of the Issuer, the Guarantor or the Company to so claim (each a Limitation ) in respect of anything which may arise, directly or indirectly, out of or is based upon or is in connection with any Top up Issue, Admission or the subject matter of the obligations or services to be performed under this Agreement, or in connection with any Top up Issue, by any of the Joint Bookrunners or on its or their behalf. Where any damage or loss is suffered by the Issuer, the Guarantor or the Company for which any Indemnified Person would otherwise be jointly and severally liable with any third party or third parties to the Issuer, the Guarantor or the Company, or any of their respective relevant subsidiary undertakings, affiliates, or associates, the extent to which such damage or loss will be recoverable from the Indemnified Person shall be limited so as to be in proportion to the contribution of the Indemnified Person to the overall fault for such damage or loss, as agreed between the parties, or, in the absence of agreement, as determined by a court of competent jurisdiction, but in any event, the Indemnified Person shall have no greater liability than if the Limitation did not apply.

12.8	The degree to which any Indemnified Person shall be entitled to rely on the work of any adviser to the Issuer, the Guarantor, the Company or any other third party will be unaffected by any Limitation which the Issuer, the Guarantor or the Company may have agreed with any third party.


12.9	The provisions of this Clause 12 will remain in full force and effect notwithstanding the completion of all matters and arrangements referred to in or contemplated by this Agreement.

13.	CONTRIBUTION

13.1	If the indemnification provided for in Clause 12 is for any reason (including because such indemnification would be contrary to public policy), unavailable to or insufficient to hold harmless an Indemnified Person in respect of any Losses, liabilities, Claims, damages or expenses referred to therein, then the Issuer, the Guarantor and the Company, in lieu of indemnifying such Indemnified Person hereunder, shall jointly and severally contribute to the aggregate amount of such Losses, liabilities, Claims, damages or expenses incurred by such Indemnified Person, as incurred:

	(a)	in such proportion as is appropriate to reflect the relative benefits received by the Issuer, the Guarantor and the Company on the one hand and the Joint Bookrunners on the other hand from any Top up Issue and offering of Top up Securities pursuant to this Agreement; or

	(b)	if the allocation provided by Clause 13.1(a) is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in Clause 13.1(a) above but also the relative fault of the Issuer, the Guarantor and the Company on the one hand and of the Joint Bookrunners on the other hand in connection with the acts or statements or omissions which resulted in such Losses, liabilities, Claims, damages or expenses, as well as any other relevant equitable considerations.

13.2	The relative benefits received by the Issuer, the Guarantor and the Company on the one hand and the Joint Bookrunners on the other hand in connection with any Top up Issue and the offering of such Top up Securities pursuant to this Agreement shall be deemed to be in the same respective proportions as the total net proceeds from the offering of such Top up Securities pursuant to this Agreement (before deducting commissions or expenses) received by the Issuer and the total fees and commissions received by the Joint Bookrunners bear to the total gross proceeds from the offering of such Top up Securities.

13.3	The relative fault of the Issuer, the Guarantor and the Company on the one hand and the Joint Bookrunners on the other hand will be determined by reference to, among other things, whether any such act or alleged act or untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Issuer, the Guarantor or the Company or by the Joint Bookrunners and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such act, statement or omission.

13.4	Each of the Issuer, the Guarantor, the Company and the Joint Bookrunners agree that it would not be just and equitable if contribution pursuant to this Clause 13 were determined by pro rata allocation (even if the Joint Bookrunners were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this Clause 13. The aggregate amount of Losses, liabilities, Claims, damages and expenses incurred by an Indemnified Person and referred to above in this Clause 13 will be deemed to include any legal or other expenses reasonably incurred by such Indemnified Person in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such act or alleged act or untrue or inaccurate or alleged untrue or inaccurate statement or omission or alleged omission.

13.5	Notwithstanding the provisions of this Clause 13, none of the Joint Bookrunners will be required to contribute any amount in excess of the underwriting commission received by it (and which it is not liable to pay to any other Joint Bookrunner or intermediary under this Agreement or otherwise) in relation to any Top up Securities underwritten or subscribe for (by direct issue) by such Joint Bookrunner pursuant to this Agreement.


13.6	No person guilty of negligence, wilful default, fraud or fraudulent misrepresentation (whether within the meaning of Section 11(f) of the Securities Act or otherwise) will be entitled to contribution from any person who was not guilty of such negligence, wilful default, fraud or fraudulent misrepresentation.

13.7	For the purposes of this Clause 13, each Indemnified Person shall have the same rights to contribution as the Joint Bookrunners’ respective obligations to contribute pursuant to this Clause 13 are several (and are not joint or joint and several), in proportion to their respective Proportionate Shares.

13.8	Notwithstanding the provisions of this Clause 13, no Indemnified Person will be entitled to recover from the Issuer, the Guarantor or the Company by way of contribution under Clause 13 any amount in excess of the amount that the Issuer, the Guarantor or the Company (as applicable) would have been liable to pay such Indemnified Person had the indemnification provided for in Clause 12 been available to the extent provided in that Clause in respect of the relevant Loss or Claim.

14.	TERMINATION

14.1	Subject to Clause 14.2, 14.3, 14.4 and 14.5, if:

	(a)	immediately prior to the publication of the Press Announcement, the Warranties on the part of the Issuer, the Guarantor or the Company contained in or given pursuant to Clause 10.1 and 10.2 are not true and accurate in all respects or are misleading in any respect which, in any such case, the Joint Global Co-ordinators consider, in their sole judgement, acting in good faith, to be (singly or in the aggregate) material in the context of the Top up Issues or the underwriting of the Top up Securities or Admission or post-Admission dealings in the Top up Securities;

	(b)	following the publication of the Press Announcement, the Warranties on the part of the Issuer, the Guarantor or the Company contained in or given pursuant to Clause 10.3 and 10.4 are not on the respective dates on which they are given true and accurate in all respects or are misleading in any respect which, in any such case, the Joint Global Co-ordinators consider, in their sole judgement, acting in good faith, to be (singly or in the aggregate) material in the context of the Top up Issues or the underwriting of the Top up Securities or Admission or post-Admission dealings in the Top up Securities; or

	(c)	the Issuer, the Guarantor or the Company does not comply with those respective conditions, undertakings or covenants under this Agreement which fall to be performed on or after the publication of the Press Announcement which, in any such case, the Joint Global Coordinators consider, in their sole judgement, acting in good faith, to be (singly or in the aggregate) material in the context of the Top up Issues or the underwriting of the Top up Securities or Admission or post-Admission dealings in the Top up Securities,

	the Joint Global Co-ordinators (acting together on behalf of the Joint Bookrunners) may, in their absolute discretion (after consultation with the Company to the extent reasonably practicable; provided that a failure to do so will not invalidate any notice given under this Clause 14), by notice in writing given to the Company, terminate this Agreement in its entirety and, in the event of such termination, this Agreement shall cease to have any further effect in each case except to the extent specified in Clause 14.2. For the avoidance of doubt, the rights of the Joint Global Co-ordinators (acting jointly) under this Clause 14.1:

	(i)	may be exercised by the Joint Global Co-ordinators, acting jointly only on behalf of the Joint Bookrunners, for whatever reason or on whatever basis that they reasonably consider to be practicable, appropriate or advisable to them; and


	(ii)	are conferred on the Joint Global Co-ordinators, acting jointly only, and may be exercised by the Joint Global Co-ordinators, acting jointly only, on behalf of the Joint Bookrunners, in their capacities as such, and not in any representative or fiduciary capacity.

14.2	The termination of this Agreement pursuant to Clause 14.1 (save to the extent specified in this Clause 14.2) shall be without prejudice to:

	(a)	any claim in respect of a breach of this Agreement prior to the termination;

	(b)	any obligation of the Issuer, the Guarantor or the Company in respect of Top up Securities which have already been issued, subscribed for and paid for, at the time of such termination; and

	(c)	the provisions of Clauses 1, 8, 9, 10, 11, 12, 13, this 14.2 and Clauses 16 to 25 (inclusive), which will continue to apply.

14.3	Notwithstanding any other provision of this Agreement:

	(a)	a MAC Event or a Material Adverse Effect occurring subsequent to the publication of the Press Announcement (or any direct or indirect result thereof); or

	(b)	a Commission Decision having been publicly announced or publicly communicated subsequent to the publication of the Press Announcement (or any direct or indirect result thereof),

	shall not entitle any of the Joint Bookrunners, at any time, to terminate any or all of their obligations under this Agreement pursuant to Clauses 14.1(b) or (c) (other than in the case of a breach of Clause 14.1(b) due to a breach of Warranties made by the Issuer, the Guarantor or the Company on the date of publication of any Prospectus, Disclosure Package, Supplementary Prospectus or supplement to any Disclosure Package provided that any such breach of Warranty specifically relates to the content of such document not being true and accurate in all respects or being misleading in any respect as at the date of publication of such document), unless such matter, event or circumstance arose, directly or indirectly, as a result of a MAC Event or a Material Adverse Effect that occurred as a direct or indirect consequence of a Specified Circumstance.

14.4	To the extent that any right to terminate this Agreement pursuant to Clause 14.1 would have otherwise arisen, directly or indirectly, as a result of:

	(a)	the occurrence of a MAC Event and/or a Material Adverse Effect having occurred subsequent to the publication of the Press Announcement; and/or

	(b)	a Commission Decision having been publicly announced or publicly communicated subsequent to the publication of the Press Announcement; and/or

	then such right to terminate this Agreement pursuant to Clauses 14.1(b) or (c) (other than in the case of a breach of Clause 14.1(b) due to a breach of Warranties made by the Issuer, the Guarantor or the Company on the date of publication of any Prospectus, Disclosure Package, Supplementary Prospectus or supplement to any Disclosure Package provided that any such breach of Warranty specifically relates to the content of such document not being true and accurate in all respects or being misleading in any respect as at the date of publication of such document), (but for no other purpose and without prejudice to any other rights that the Joint Bookrunners may have under this Agreement) shall, unless, in any of the cases referred to in Clause 14.4(a) or (b) such matter, event or circumstance arose, directly or indirectly, as a result of a MAC Event or a Material Adverse Effect


	that occurred as a direct or indirect consequence of a Specified Circumstance, be deemed not to have arisen for the purposes of this Agreement.

14.5	The Joint Bookrunners, the Issuer, the Guarantor and the Company shall have no right to terminate this Agreement except as provided in this Clause 14 and any right of recission is hereby expressly waived and excluded by the Joint Bookrunners.

15.	MISCELLANEOUS

15.1	For the avoidance of doubt, each of the Issuer, the Guarantor and the Company acknowledges and agrees that it is responsible for any due diligence carried out in relation to any Top up Issue and that neither the Joint Bookrunners nor any of their advisers shall be responsible to the Issuer, the Guarantor or the Company or any Director for any due diligence in relation thereto or for verifying the accuracy or fairness of any information published by or on behalf of the Issuer, the Guarantor or the Company in connection with any Top up Issue unless it or they have agreed in writing to take specific responsibility for such due diligence or verification.

15.2	Each of the Issuer, the Guarantor and the Company agrees that for the purpose of any Top up Issue and of obtaining Admission, none of the Joint Bookrunners shall be responsible for the provision of or obtaining advice as to the requirements of any applicable laws or regulations of any jurisdictions nor shall any such person be responsible where it or the Issuer, the Guarantor or the Company has acted in the absence of such advice or in reliance on any advice obtained by the Issuer, the Guarantor or the Company in respect thereof.

15.3	Each of the Issuer, the Guarantor and the Company acknowledges that the representations, warranties, undertakings and indemnities contained in this Agreement are given to the Joint Bookrunners in connection with each Top up Issue in their capacities as Joint Bookrunners.

15.4	Notwithstanding that each of the Joint Bookrunners may act as the Issuer’s, the Guarantor’s or the Company’s agent in connection with any Top up Issue, each of such persons and its agents may:

	(a)	receive and keep for its own benefit any commissions, fees, brokerage or other benefits paid to or received by it in connection with such Top up Issue, and shall not be liable to account to the Issuer, the Guarantor or the Company for any such commissions, fees, brokerage or other benefits; and

	(b)	keep or deal in any Top up Securities for which it may subscribe for its own use and benefit.

15.5	For the avoidance of doubt, the obligations of each of the Joint Bookrunners under this Agreement are several, not joint or joint and several. Each of the Joint Bookrunners shall (except as otherwise agreed among them) have the right to protect and enforce its rights under this Agreement by whatever lawful means it deems fit, including, without limitation, commencing any legal proceeding, without joining any of the others in any proceedings.

15.6	Each of the Issuer, the Guarantor and the Company acknowledges and agrees that (i) each of the Joint Bookrunners are acting solely pursuant to a contractual relationship with the Issuer, the Guarantor and the Company on an arm’s length basis with respect to any Top up Issue (including in connection with determining the terms of the Top up Issue) and not, in relation to the Top up Issue, as a financial adviser or a fiduciary to the Issuer, the Guarantor, the Company or any other person, and (ii) none of the Joint Bookrunners owes any duties or obligations to the Issuer, the Guarantor or the Company of any nature whatsoever, save as expressly set out in this Agreement, provided however in each case that this shall not exclude or restrict any duty or liability that any of them have under FSMA or arrangements for regulating any of them thereunder to any extent prohibited thereby.


15.7	Each of the Issuer, the Guarantor and the Company understands (i) that Bank of America Corporation ( BAC ) is the parent company of Merrill Lynch & Co., Inc, of which Merrill Lynch International is a wholly-owned subsidiary and that BAC and its subsidiaries and affiliates are a financial services group, and (ii) that each of the other Joint Bookrunners is part of its own financial services group (for the purposes of this Clause 15.7, each referred to as a group). Each of the Joint Bookrunners and BAC is a full service securities firm and commercial bank engaged in activities and businesses, including among others, securities, commodities and derivatives trading, foreign exchange and other brokerage activities, research publication, and principal investing, as well as providing investment, corporate and private banking, asset and investment management, financing and financial advisory services and other commercial services and products to a wide range of corporations, governments and individuals from which conflicting interests or duties, or a perception thereof, may arise. Accordingly, in no circumstance shall any Joint Global Co-ordinator or Joint Bookrunner or any other member of their respective groups have any liability by reason of members of the group conducting such other businesses or activities, acting in their own interests or in the interests of other clients in respect of matters affecting the Issuer, the Guarantor, the Company, their respective affiliates or any other company, including where in so acting members of the group act in a manner which is adverse to the interests of the Issuer, the Guarantor, the Company or their respective affiliates. In addition, as a result of duties of confidentiality, each of the Joint Bookrunners and the other members of their respective groups may be prohibited from disclosing information to the Issuer, the Guarantor or the Company or such disclosure may be inappropriate and the Issuer, the Guarantor and the Company agrees that no member of the respective groups will be under a duty to use or to disclose any non-public information acquired from, or during the course of carrying on business for, any other person. Each of the Issuer, the Guarantor and the Company expressly acknowledges and agrees that, in the ordinary course of business, each of the Joint Bookrunners and other parts of their respective groups at any time (i) may invest on a principal basis or manage funds that invest, make or hold long or short positions, finance positions or trade or otherwise effect transactions, for their own accounts or the accounts of customers, in equity, debt or other securities or financial instruments (including derivatives, bank loans or other obligations) of the Issuer, the Guarantor, the Company or any other company that may be involved in any proposed transaction, and (ii) may provide or arrange financing and other financial services to other companies that may be involved in any proposed transaction or a competing transaction, in each case whose interests may conflict with those of the Issuer, the Guarantor or the Company.

15.8	None of the Joint Bookrunners shall be restricted pursuant to any term of this Agreement in carrying out transactions for the account of their customers, in customer facilitation transactions or in buying and selling securities of the Issuer, the Guarantor or the Company or derivatives related to the Issuer’s, the Guarantor’s or the Company’s securities for the Joint Bookrunner’s own account, provided that those transactions are carried out in the ordinary course of their businesses.

15.9	No variation of this Agreement shall be valid unless it is in writing and signed by or on behalf of each of the Joint Bookrunners, the Issuer, the Guarantor and the Company.

15.10	Notwithstanding any other provision of this Agreement but save as provided below, each of the Joint Bookrunners acknowledges, agrees and accepts (for itself and for and on behalf of each Indemnified Person with whom such Joint Bookrunners is connected) that (a) none of the Issuer, the Guarantor or the Company shall have any liability of any kind, whether in contract, tort or otherwise or for misrepresentation in respect of any Loss, and (b) none of the Joint Bookrunners shall have a claim for breach of Warranty in respect of any Loss, in either case suffered by any Joint Bookrunner which has subscribed for Top up Securities pursuant to Clause 7 as a result of any decline in the market value of any such Top up Securities which was caused by or resulted from or is attributable to or would not have arisen but for (in each case, directly or indirectly):

	(a)	a MAC Event and/or a Material Adverse Effect having occurred subsequent to the publication of the Press Announcement; and/or


	(b)	a Commission Decision having been publicly announced or publicly communicated subsequent to the Press Announcement,

	(other than in the case of a Loss which arises as a result of the content of the Prospectus, Disclosure Package, Supplementary Prospectus or supplement to any Disclosure Package not being true and accurate in all respects or being misleading in any respect as at the date of publication of such document) provided that the Issuer, the Guarantor and the Company (as applicable) shall be liable if and to the extent that (i) any such decline is caused by or results from or is attributable to or would not have arisen but for (in each case directly or indirectly) a MAC Event or a Material Adverse Effect having occurred as a direct or indirect consequence of a Specified Circumstance, or (ii) such Loss arises, directly or indirectly, out of a Loss or Claim of a person who is not acting in the capacity of a Joint Bookrunner (and for the purposes of this sub paragraph (ii) only, “Joint Bookrunner” includes any Indemnified Person to that extent that it acquires any Top up Securities from a Joint Bookrunner with whom it is connected solely for the purposes of enabling such Joint Bookrunner to satisfy its obligations under Clause 7 but solely in relation to any Loss or Claim that such Indemnified Person may have arising out of, directly or indirectly, the acquisition of those Top up Securities from that Joint Bookrunner).

16.11	The parties to this Agreement acknowledge and agree that: (i) no Relevant Person accepts any responsibility for the contents of, or makes any representation or warranty (express or implied) as to the accuracy, completeness or fairness of any information in, the Rights Issue Prospectus, the Circular, either of the Exchange Offer Memoranda, the Disclosure Package, the Final Terms, the Presentation Materials, any Previous Announcement or any Relevant Document (or any supplement or amendment to any of them); and (ii) no Relevant Person has authorised or will authorise the contents of any of the foregoing.

16.	TIME OF THE ESSENCE

	Any time, date or period mentioned in this Agreement may be extended by mutual agreement between the Issuer, the Guarantor, the Company and the Joint Bookrunners but as regards any time, date or period originally fixed, or any time, date or period so extended, time shall be of the essence.

17.	WAIVER

17.1	Any right or remedy of the Issuer, the Guarantor, the Company and the Joint Bookrunners under this Agreement shall only be waived or varied by an express waiver or variation in writing.

17.2	No failure or delay by the Issuer, the Guarantor, the Company or the Joint Bookrunners in exercising any right or remedy under this Agreement shall impair such right or remedy or operate or be construed as a waiver or variation of the right or remedy or preclude its exercise at any subsequent time. No single or partial exercise of any such right or remedy shall preclude any other or further exercise of such right or remedy or the exercise of any other right or remedy. The rights, powers and remedies of the Issuer, the Guarantor, the Company and the Joint Bookrunners provided in this Agreement are cumulative and not exclusive of any rights, powers and remedies provided by law.

18.	THIRD PARTY RIGHTS

18.1	Each Indemnified Person shall have the right under the Contracts (Rights of Third Parties) Act 1999 to enforce its rights against the Issuer, the Guarantor or the Company under Clause 12 and Clause 13 provided that each Joint Bookrunner (without obligation) will have the sole conduct of any action to enforce such rights on behalf of that Joint Bookrunner’s Indemnified Persons.

18.2	For so long as any Top up Issues are “restricted securities” within the meaning of Rule 144(a)(3) under the Securities Act, the Issuer, the Guarantor and the Company will, during any period in which


	it is neither subject to Section 13 or 15(d) of the Exchange Act nor exempt from reporting pursuant to Rule 12g3-2(b) thereunder, provide to any holder or beneficial owner of such Top up Issue or to any prospective purchaser of such Top up Issue designated by such holder or beneficial owner, upon the request of such holder, beneficial owner or prospective purchaser, the information required to be provided by Rule 144A(d)(4) under the Securities Act.

18.3	Each Relevant Person shall have the right under the Contracts (Rights of Third Parties) Act 1999 to enforce its rights under Clause 15.11, provided that HM Treasury will have the sole conduct of any action to enforce such rights on behalf of each Relevant Person.

18.4	Except as provided in Clause 18.1, 18.2 and 18.3, a person who is not a party to this Agreement has no rights under the Contracts (Rights of Third Parties) Act 1999 to enforce any term of this Agreement. The Joint Bookrunners and the Company may agree to terminate this Agreement or vary any of its terms, other than Clause 15.11 and Clause 18.3, without the consent of any Indemnified Person which is not party to this Agreement or any other third party. The Joint Bookrunners will have no responsibility to any Indemnified Person which is not party to this Agreement or any other third party under or as a result of this Agreement, except pursuant to Clause 15.11 and Clause 18.3.

19.	SEVERABILITY

	If any provision of this Agreement is or is held to be invalid or unenforceable, then so far as it is invalid or unenforceable it has no effect and is deemed not to be included in this Agreement. This shall not invalidate any of the remaining provisions of this Agreement. The parties shall use all reasonable endeavours to replace any invalid or unenforceable provision by a valid provision the effect of which is as close as possible to the intended effect of the invalid or unenforceable provision.

20.	NOTICES

20.1	Subject to Clause 20.2, any notice to be given under, or in connection with, this Agreement shall be in writing and be signed by or on behalf of the party giving it. It shall be served by sending it by fax to the number set out in Clause 20.3 or by delivering it by hand, or sending it by pre-paid recorded delivery, special delivery or registered post, to the address set out in Clause 20.3 marked for the attention of the relevant party (or as otherwise notified from time to time under this Agreement).

	Any notice so served shall be deemed to have been duly received:

	(a)	in the case of delivery by hand, when delivered;

	(b)	in the case of fax, at the time of transmission; and

	(c)	in the case of pre paid recorded delivery, special delivery or registered post, on the Dealing Day following the date of posting;

	provided that if delivery by hand or fax occurs on a day which is not a Dealing Day or after 6.00 p.m. on a Dealing Day, service shall be deemed to occur at 9.00 a.m. on the following Dealing Day.

20.2	Any notice given by the Joint Bookrunners under, or in connection with, this Agreement may also be given by any director or other authorised representative of the Joint Bookrunners to any Director either personally or by telephone (to be confirmed as soon as reasonably practicable in writing) and shall have immediate effect.


20.3	For the purposes of Clause 20.1, the fax numbers and addresses of each of the Joint Bookrunners are set out in Schedule 9 and the fax number and address of the Company (which shall also be used for provision of notices pursuant to this Agreement to the Issuer and the Guarantor) is:

	Lloyds Banking Group plc Henry Duncan House 129 George Street Edinburgh Scotland EH2 4LH


	Fax number:	+44 (0) 20 7356 2168
	For the attention of:	Company Secretary
	With a copy to:	Jeremy Parr
	Fax number:	+44 (0) 20 7456 2000


21.	FURTHER ASSURANCES

	The Company shall procure that the Directors shall provide, all information and assistance that the Joint Bookrunners may reasonably require for the purposes of this Agreement and execute (or procure to be executed) each document and do (or procure to be done) each act and thing that a Joint Global Co-ordinator or a Joint Bookrunner may reasonably request in order to give effect to the Top up Issue or Admission.

22.	ASSIGNMENT

	No party may assign, or purport to assign: (i) this Agreement; (ii) all or any of their respective rights or obligations arising under or out of this Agreement; or (iii) the benefit of all or any of the other parties’ obligations under this Agreement.

23.	ENTIRE AGREEMENT

	This Agreement constitutes the entire agreement between the parties relating to the subject matter of this Agreement and supersedes and replaces all agreements, understandings, undertakings, representations, warranties and arrangements of any nature whatsoever between the parties relating to the subject matter of this Agreement. In the event of any inconsistency between this Agreement or any other agreement referred to in, or entered into in connection with, this Agreement, the terms of this Agreement shall prevail.

24.	COUNTERPARTS

	This Agreement may be executed by any one or more of the parties hereto in any number of counterparts, each of which shall be deemed to be an original, but all such counterparts shall together constitute one and the same instrument. Delivery of an executed counterpart signature page of this Agreement by e-mail (PDF) or telecopy shall be as effective as delivery of a manually executed counterpart of this Agreement. In relation to each counterpart, upon confirmation by or on behalf of the signatory that the signatory authorises the attachment of such counterpart signature page to the final text of this Agreement, such counterpart signature page shall take effect together with such final text as a complete authoritative counterpart.

25.	GOVERNING LAW

25.1	This Agreement and the relationship among the parties to it, and any non-contractual obligations which may arise out of or in connection with this Agreement, shall be governed by and interpreted in accordance with English law.


25.2	All parties to this Agreement agree that the courts of England are (subject to Clause 25.3(a)) to have exclusive jurisdiction to settle any dispute (including claims for set-off and counterclaims) which may arise out of or is in connection with (i) the creation, validity, effect, interpretation or performance of, or of the legal relationships established by, this Agreement or otherwise arising out of or in connection with this Agreement, and (ii) any non-contractual obligations which may arise out of or in connection with this Agreement, and for such purposes all parties irrevocably submit to the exclusive jurisdiction of the English courts.

25.3	Notwithstanding the provisions of Clause 25.2, in the event that any Joint Bookrunner or any of such Joint Bookrunner’s Indemnified Persons becomes subject to proceedings brought by a third party (the Foreign Proceedings ) in the courts of any country other than England (including, without prejudice to the generality of the foregoing, in any court of competent jurisdiction in the United States) (the Foreign Jurisdiction ), such Joint Bookrunner shall be entitled, without objection by the Issuer, the Guarantor or the Company, either:

	(a)	to join the Issuer, the Guarantor, the Company and/or any other person to the Foreign Proceedings; and/or

	(b)	to bring separate proceedings for any breach of this Agreement and/or for a contribution or an indemnity against the Issuer, the Guarantor, the Company and/or any other person in the Foreign Jurisdiction, provided that such separate proceedings arise out of or are in connection with the subject matter of the Foreign Proceedings.

25.4	Each of the parties to this Agreement irrevocably waives any objection to the jurisdiction of any courts referred to in this Clause 25.

25.5	Each party to this Agreement irrevocably agrees that a judgment and/or order of any court referred to in this Clause 25 based on any matter arising out of or in connection with this Agreement (including but not limited to the enforcement of any indemnity) shall be conclusive and binding on it and may be enforced against it in any other jurisdiction, whether or not (subject to due process having been served on it) it participates in the relevant proceedings.

25.6	Each of the parties with an address outside England shall at all times maintain an agent for service of process and any other documents and proceedings in England or any other proceedings in connection with this Agreement. For the Company, such agent shall be the London office of the Company at 25 Gresham Street, London EC2V 7HN. Any writ, judgment or other notice of legal process shall be sufficiently served on the relevant party if delivered to such agent at its address for the time being. Each of the parties with an address outside England irrevocably undertakes not to revoke the authority of the above agent and if, for any reason, the Joint Bookrunners (for themselves or on behalf of the Indemnified Persons) request such party to do so it shall promptly appoint another such agent with an address in England and advise each of them. If, following such request, the relevant party fails to appoint another agent, the Joint Bookrunners shall be entitled to appoint one on the relevant party’s behalf and at such party’s expense.

25.7	Each of the Issuer, the Guarantor and the Company agrees to appoint an agent for service of process in any Foreign Jurisdiction other than England in which any other party is subject to legal suit, action or proceedings based on or arising under this Agreement within 14 days of receiving written notice of such legal suit, action or proceedings and the request to appoint such agent for service. In the event that the Issuer, the Guarantor or the Company (as the case may be) does not appoint such an agent within 14 days of the notice requesting it to do so, such other party may appoint a commercial agent for service for the Issuer, the Guarantor or the Company (as the case may be) on the Issuer’s, the Guarantor’s or the Company’s (as the case may be) behalf and at the Issuer’s (failing whom the Guarantor’s), the Guarantor’s or the Company’s (as the case may be) expense and the Issuer, the Guarantor and the Company agrees that, subject to being notified of such appointment in writing,


	service upon such commercial agent will constitute service upon the Issuer, the Guarantor or the Company (as the case may be).

IN WITNESS WHEREOF this Agreement has been duly executed under hand by the Issuer, the Guarantor, the Company, each Joint Bookrunner or its duly authorised attorneys the day and year first above written.

SCHEDULE 1

BOOK VALUE OF TARGET SECURITIES


			Currency Amount			Book Value
ISIN	Issuer	Currency	(outstanding)	Coupon	Maturity	(%)

XS0406095637	Lloyds Banking Group plc	EUR	500,000,000	7.875	29-Nov-13	100.00
XS0406095041	Lloyds Banking Group plc	USD	1,250,000,000	7.875	29-Nov-13	100.00
XS0408828803 / GB00B3KSB675	Lloyds Banking Group plc	GBP	745,431,000	6.0884	12-May-15	86.51
XS0265483064	Saphir Finance plc	GBP	600,000,000	6.369	25-Aug-15	100.00
USG5533WAB30 (Reg S) US539439AD11 (144a)	Lloyds Banking Group plc	USD	750,000,000	5.920	01-Oct-15	80.80
US539439AB54 (Reg S) US539439AA71 (144a)	Lloyds Banking Group plc	USD	1,000,000,000	6.267	14-Nov-16	100.00
XS0408826427	Lloyds Banking Group plc	GBP	334,951,000	6.3673	17-Jun-19	56.66
GB00B3KSB568	Lloyds Banking Group plc	GBP	186,190,532	6.475	15-Sep-24	64.94
USG5533WAA56 (Reg S) US539439AC38 (144a)	Lloyds Banking Group plc	USD	750,000,000	6.413	01-Oct-35	46.93
US539439AE93 (Reg S) US539439AF68 (144a)	Lloyds Banking Group plc	USD	750,000,000	6.657	21-May-37	48.10
GB00B3KS9W93	Lloyds Banking Group plc	GBP	299,987,729	9.250	Perpetual	85.50
GB00B3KSB238	Lloyds Banking Group plc	GBP	99,999,942	9.750	Perpetual	93.50
XS0156372343	LTSB Bank plc	USD	1,000,000,000	6.900	Perpetual	100.00
XS0109138536 (Reg S) / XS0109138882 (144a)	Bank of Scotland Capital Funding LP (CLASS A)	GBP	250,000,000	8.117	31-May-10	88.43
GB0058322420	HBOS Euro Finance (Jersey) LP	EUR	415,000,000	7.627	09-Dec-11	64.85
XS0107222258	LTSB Capital 1 LP	EUR	430,000,000	7.375	07-Feb-12	100.00
XS0156923913	LTSB Bank plc	EUR	500,000,000	6.350	25-Feb-13	100.00
USG43648AA57 (Reg S) US40411CAA09 (144a)	HBOS Capital Funding No.2 LP	USD	750,000,000	6.071	30-Jun-14	54.48
XS0107228024	LTSB Capital 2 LP	GBP	250,000,000	7.834	07-Feb-15	100.00

Currency
Amount

Book Value

ISIN

Issuer

Currency

(outstanding)

Coupon

Maturity

(%)

XS0255242769

HBOS Capital Funding No.3 LP

EUR

750,000,000

4.939

23-May-16

59.77

XS0125681345

Bank of Scotland (PROS Series A)

GBP

150,000,000

7.286

31-May-16

74.78

XS0218638236

LTSB Bank plc

EUR

750,000,000

4.385

12-May-17

100.00

XS0353590366

HBOS Capital Funding No.4 LP

GBP

750,000,000

9.540

19-Mar-18

100.00

XS0139175821

HBOS Capital Funding LP

GBP

600,000,000

6.461

30-Nov-18

64.92

XS0408620135

LTSB Bank plc

GBP

784,611,000

13.000

22-Jan-19

100.00

XS0408623311

LTSB Bank plc

EUR

532,111,000

13.000

22-Jan-19

100.00

XS0109139344 (Reg S) XS0109139427 (144a)

Bank of Scotland Capital Funding LP (CLASS B)

GBP

150,000,000

7.754

31-May-21

60.62

XS0125686229

Bank of Scotland (PROS Series B)

GBP

150,000,000

7.281

31-May-26

60.84

XS0408620721

LTSB Bank plc

GBP

700,022,000

13.000

22-Jan-29

100.00

GB0058327924

HBOS Sterling Finance (Jersey) LP

GBP

245,000,000

7.881

09-Dec-31

69.60

XS0165483164

HBOS Capital Funding No.1 LP

USD

1,000,000,000

6.850

Perpetual

100.00

XS0099508698

LTSB Bank plc

GBP

153,033,000

6.625

15-Jul-10

100.00

XS0111627112

HBOS Plc

EUR

72,598,000

3Mnth Euribor + 120

26-Aug-10

86.49

XS0138988042

HBOS Plc

EUR

75,380,000

6.050

23-Nov-11

69.72

US4041A3AF96 (Reg S) / US4041A2AG96 (144a)

HBOS Plc

USD

1,000,000,000

5.375

01-Nov-13

53.99

XS0125599687

HBOS Plc

JPY

42,500,000,000

3.500

Perpetual

91.60

XS0063730203

Bank of Scotland

JPY

17,000,000,000

4.250

Perpetual

101.77

XS0056390007

LTSB Bank plc

JPY

20,000,000,000

5.570

Perpetual

100.00

XS0046690961

Bank of Scotland

GBP

61,026,000

8.625

04-Nov-13

80.03

XS0188201536

HBOS Plc

EUR

187,049,000

4.875

13-Mar-14

67.45

XS0188201619

HBOS Plc

EUR

113,415,000

3Mnth Euribor + 60

13-Mar-14

70.65

XS0059171230

Bank of Scotland

GBP

58,170,000

10.250

10-Aug-15

94.36

XS0177955381

HBOS Plc

EUR

293,781,000

5.125

14-Oct-15

65.61

XS0111599311

HBOS Plc

GBP

4,478,000

7.500

26-May-16

79.33

XS0169667119

LTSB Bank plc

GBP

153,103,000

5.125

09-Dec-16

100.00

XS0099507534

LTSB Bank plc

GBP

97,457,000

6.500

15-Jul-19

100.00

Currency
Amount

Book Value

ISIN

Issuer

Currency

(outstanding)

Coupon

Maturity

(%)

XS0205326290

HBOS Plc

GBP

4,080,000

5.625

15-Nov-19

53.26

GB0000395094

Bank of Scotland

GBP

100,000,000

12.000

30-Jan-22

95.27

XS0166717388

HBOS Plc

GBP

3,509,000

5.750

14-Apr-22

49.57

XS0083932144

Bank of Scotland

GBP

57,815,000

7.375

10-Feb-23

69.41

GB0000395102

Bank of Scotland

GBP

100,000,000

8.750

14-Sep-23

87.38

XS0079927850

LTSB Bank plc

GBP

68,869,000

8.000

29-Sep-23

100.00

GB0005242879

Bank of Scotland

GBP

50,000,000

9.375

19-Apr-24

91.89

XS0158313758

HBOS Plc

GBP

8,530,000

5.750

28-Nov-25

58.75

XS0099507963

LTSB Bank plc

GBP

107,506,000

6.500

15-Jul-29

100.00

XS0145407507

Lloyds Banking Group plc

GBP

113,965,000

6.000

07-Jun-32

100.00

GB0000765403

Bank of Scotland

USD

237,200,000

Limean + 25

Perpetual

89.65

GB0001905362

LTSB Bank plc

GBP

100,000,000

11.750

Perpetual

100.00

GB0005205751

LTSB Bank plc

USD

423,810,000

L3 + 0.1875%

Perpetual

100.00

GB0005224307

LTSB Bank plc

USD

659,850,000

L6 + 0.25%

Perpetual

100.00

GB0005232391

LTSB Bank plc

USD

526,150,000

L6 + 0.10%

Perpetual

100.00

GB0000394915

Bank of Scotland

GBP

75,000,000

13.625

Perpetual

136.98

SCHEDULE 2

BASIC TERMS OF THE TOP UP SECURITIES

Unless otherwise agreed between the Company and the Joint Bookrunners, Top up Securities shall have the features set out below. Capitalised terms used but not otherwise defined herein shall have the same meanings as set out in the European Exchange Offer Memorandum.


Issuer		LBG Capital No.2, an indirect wholly owned subsidiary of Lloyds Banking Group, incorporated and tax resident in the United Kingdom.

Guarantor		The ECNs will be unconditionally and irrevocably guaranteed by Lloyds TSB Bank provided that any series of ECNs sold in whole or in part to QIBs will be unconditionally and irrevocably jointly and severally guaranteed by Lloyds TSB Bank and Lloyds Banking Group.

Currency		The currency of each series of ECNs will be determined pursuant to the provisions of this Agreement.

Final Maturity		Each series of ECNs will mature on the date determined pursuant to the provisions of this Agreement which shall be between five and ten years from the relevant Settlement Date.

Interest Rate		The rate of interest of each series of ECNs to their Final Maturity (or, in the case of ECNs with an Optional Call Date, to their Optional Call Date) will be the rate determined by reference to the same provisions as are referred to in the definition of “Issue Price” in this Agreement. From and including the Optional Call Date such rate of interest will be subject to the maximum step-up as permitted under the FSA Rules.

Interest Payment Dates		The Interest Payment Dates of each series of ECNs will be the dates determined pursuant to the provisions of this Agreement.

Status of the ECNs		The ECNs and related Coupons will constitute direct, unsecured and subordinated obligations of the Issuer and rank pari passu and without any preference among themselves. The rights and claims of the ECN Securityholders and Couponholders are subordinated.

Subordination of the ECNs		In the event of: (i) an order being made, or an effective resolution being passed, for the winding-up of the Issuer (except a solvent winding-up solely for the purposes of a reorganisation, reconstruction or amalgamation of the Issuer or the substitution in place of the Issuer of a successor in business of the Issuer, the terms of which reorganisation, reconstruction, amalgamation or substitution (x) have previously been approved in writing by the ECN Trustee or by an Extraordinary Resolution and (y) do not provide that the ECNs shall thereby become redeemable or repayable in accordance with the relevant Conditions); or (ii) an administrator of the Issuer being appointed and such administrator declaring, or giving notice that it intends to declare and distribute, a dividend, the rights and claims of the ECN Securityholders and the Couponholders against the Issuer in respect of or arising under (including any damages awarded for breach of any obligations under) the ECNs, the relevant Coupons and the relevant Trust Deed relating to them will be subordinated to the claims of all Issuer


		Senior Creditors but shall rank (A) at least pari passu with the claims of holders of all other subordinated obligations of the Issuer and (B) in priority to the claims of holders of all undated or perpetual subordinated obligations of the Issuer and to the claims of holders of all classes of share capital of the Issuer.

		Issuer Senior Creditors means creditors of the Issuer whose claims are admitted to proof in the winding-up or administration of the Issuer and who are unsubordinated creditors of the Issuer.

Status of the Guarantee		The Guarantor (or Guarantors, jointly and severally, as the case may be) will irrevocably and unconditionally guarantee the due and punctual payment of all principal, premium and interest and any other sums from time to time expressed to be payable by the Issuer in respect of the ECNs and the Coupons under the relevant Trust Deed in respect thereof. The obligations of a Guarantor under the Guarantee will constitute direct, unsecured and subordinated obligations of that Guarantor.

Subordination of the relevant Guarantee		In the event of: (i) an order being made, or an effective resolution being passed, for the winding-up of a Guarantor (except, in any such case, a solvent winding-up solely for the purposes of a reorganisation, reconstruction or amalgamation of such Guarantor or the substitution in place of such Guarantor of a successor in business of such Guarantor, the terms of which reorganisation, reconstruction, amalgamation or substitution (x) have previously been approved in writing by the ECN Trustee or by an Extraordinary Resolution and (y) do not provide that the relevant ECNs shall thereby become redeemable or repayable in accordance with their Conditions); or (ii) an administrator of such Guarantor being appointed and such administrator declaring, or giving notice that it intends to declare and distribute, a dividend, the rights and claims of the ECN Securityholders and the Couponholders against such Guarantor in respect of or arising under (including any damages awarded for breach of any obligations under) the relevant ECNs, the relevant Coupons and relevant Trust Deed relating to them will be subordinated to the claims of all Guarantor Senior Creditors, as the case may be, but shall rank (a) at least pari passu with all claims of all holders of obligations of such Guarantor which constitute, or would but for any applicable limitation on the amount of such capital constitute, Lower Tier 2 Capital of such Guarantor on a solo and/or consolidated basis; and (b) in priority to (01) the claims of holders of all obligations to such Guarantor which constitute, or would but for any applicable limitation on the amount of such capital constitute, Upper Tier 2 Capital or Tier 1 Capital of such Guarantor on a solo and/or consolidated basis, (02) the claims of all other undated or perpetual subordinated obligations of such Guarantor, and (03) the claims of holders of all classes of share capital of such Guarantor.

		Guarantor Senior Creditors means, in respect of a Guarantor (a) creditors of such Guarantor whose claims are admitted to proof in the winding-up or administration of such Guarantor and who are unsubordinated creditors of such Guarantor; and (b) creditors of such Guarantor whose claims are or are expressed to be subordinated to the claims of other creditors of such Guarantor (other than those whose claims relate to obligations which constitute, or would but for any applicable


		limitation on the amount of such capital constitute, Tier 1 Capital or Upper Tier 2 Capital or Lower Tier 2 Capital of the relevant Guarantor on a solo and/or consolidated basis, or whose claims rank or are expressed to rank pari passu with, or junior to, the claims of ECN Securityholders).

Optional Redemption		In the case of ECNs with a Final Maturity which will occur 10 years following the Settlement Date, the Issuer may (if such feature is so agreed between the Company and the Joint Bookrunners pursuant to the provisions of this Agreement) by giving not less than 10 nor more than 21 days’ notice to the Trustee, the Principal Paying Agent and Conversion Agent, the Registrar and the ECN Securityholders (which notice shall, subject to the same provisos as set out in the ECNs issued in the European Exchange Offer, be irrevocable), elect to redeem in accordance with the relevant Conditions at any time (in the case of a Fixed Rate ECN or in the fixed interest rate period in the case of a Fixed/Floating Rate ECN) or on any Interest Payment Date (in the case of a Floating Rate ECN or in the floating rate interest period of a Fixed/Floating Rate ECN), in each case from and including the Optional Call Date, all, but not some only, of the relevant series of ECNs at their principal amount, together with accrued but unpaid interest to (but excluding) the relevant redemption date. The Optional Call Date shall be the fifth anniversary of the Settlement Date.

Early Redemption Due to Taxation		If, immediately prior to the giving of the notice referred to below, a Tax Event has occurred and is continuing, then the Issuer may, subject to the same provisos as set out in the ECNs issued in the European Exchange Offer, having given not less than 10 nor more than 21 days’ notice to the relevant Trustee, the Principal Paying Agent and Conversion Agent, the Registrar and ECN Securityholders (which notice shall, subject to the same provisos as set out in the ECNs issued in the European Exchange Offer, be irrevocable), redeem in accordance with the relevant Conditions at any time (in the case of a Fixed Rate ECN or in the fixed interest rate period in the case of a Fixed/Floating Rate ECN) or on any Interest Payment Date (in the case of a Floating Rate ECN or in the floating rate interest period of a Fixed/Floating Rate ECN) all, but not some only, of the relevant series of ECNs at their principal amount, together with accrued but unpaid interest to (but excluding) the relevant redemption date.

Early Redemption for Regulatory Purposes		If, immediately prior to the giving of the notice referred to below, a Capital Disqualification Event has occurred and is continuing, then the Issuer may, subject to the same provisos as set out in the ECNs issued in the European Exchange Offer, and having given not less than 10 nor more than 21 days’ notice to the relevant Trustee, the Principal Paying Agent and Conversion Agent, the Registrar and the ECN Securityholders (which notice shall, subject to the same provisos as set out in the ECNs issued in the European Exchange Offer, be irrevocable), redeem in accordance with the relevant Conditions at any time (in the case of a Fixed Rate ECN or in the fixed interest rate period in the case of a Fixed/Floating Rate ECN) or on any Interest Payment Date (in the case of a Floating Rate ECN or in the floating rate interest period of a Fixed/Floating Rate ECN) all, but not some only, of the relevant series of ECNs at the make whole redemption price (to be determined pursuant to the provisions of this Agreement), together with any accrued but unpaid interest to (but excluding) the relevant redemption date.


		A Capital Disqualification Event is deemed to have occurred (1) if, at any time LBG or LTSB is required under Regulatory Capital Requirements to have regulatory capital, the ECNs would no longer be eligible to qualify in whole or in part (save where such non-qualification is only as a result of any applicable limitation on the amount of such capital) for inclusion in the Lower Tier 2 Capital of LBG or, as the case may be, LTSB on a consolidated basis; or (2) if as a result of any changes to the Regulatory Capital Requirements or any change in the interpretation or application thereof by the FSA, the ECNs shall cease to be taken into account in whole or in part (save where this is only as a result of any applicable limitation on the amount that may be so taken into account) for the purposes of any ‘‘stress test’’ applied by the FSA in respect of the Consolidated Core Tier 1 Ratio.

Mandatory Conversion		If the Conversion Trigger occurs at any time before the occurrence of a Relevant Event, each ECN shall be converted on the relevant Conversion Date into new and/or existing Ordinary Shares credited as fully paid.

		The ECNs are not convertible at the option of ECN Securityholders at any time.

		The Conversion Trigger shall occur if at any time, as disclosed in the latest published annual or semi-annual consolidated financial statements of Lloyds Banking Group or as otherwise publicly disclosed by Lloyds Banking Group at any time, Lloyds Banking Group’s Consolidated Core Tier 1 Ratio is less than 5 per cent.

		Consolidated Core Tier 1 Ratio means the ratio of the Core Tier 1 capital of Lloyds Banking Group to the risk weighted assets of Lloyds Banking Group, in each case, calculated on a consolidated basis.

Conversion Price		The initial Conversion Price will be the same as the ECNs issued in the European Exchange Offer and such conversion price will be subject to adjustment from time to time in the same manner as the ECNs issued in the European Exchange Offer. The number of Ordinary Shares to be delivered on Conversion of the ECNs will be determined by dividing the principal amount of such ECNs (where applicable, translated into pounds sterling at the Prevailing Rate on the second London business day prior to Conversion) by the Conversion Price prevailing on the relevant Conversion Date.

Conversion		In order to obtain delivery of the relevant Ordinary Shares on a Conversion of the ECNs (or, in certain circumstances as provided under “Relevant Event” below, Relevant Shares), an ECN Securityholders must give a notice to the Principal Paying and Conversion Agent in accordance with the standard procedures of Euroclear and Clearstream, Luxembourg prior to the Notice Cut-off Date (which may include notice being given on his instruction by Euroclear or Clearstream, Luxembourg or any common depositary for them to the Principal Paying and Conversion Agent by electronic means) in a form acceptable to Euroclear and Clearstream, Luxembourg from time to time with the following details: (1) the name of the ECN Securityholder; (2) the principal amount of ECNs held by it and the subject of the Conversion; (3) the CREST account details or, if on


		Conversion the Ordinary Shares are not a participating security in CREST, the address to which the Ordinary Shares should be delivered; and (4) such other details as Euroclear or Clearstream, Luxembourg may require.

		Subject to the same provisos as the ECNs issued in the European Exchange Offer, the relevant Ordinary Shares (or, in circumstances as provided under the “Relevant Event”, Relevant Shares) will be issued and delivered in accordance with the instructions given in the relevant Conversion Notice, provided the Conversion Notice and the relevant ECNs are delivered not later than the Notice Cut-off Date. If the Conversion Notice and relevant ECNs or the Certificate representing the same (in the case of a Registered ECN) are not delivered to the specified office of a Paying and Conversion Agent on or before the Notice Cut-off Date, then on the relevant settlement date, the relevant Ordinary Shares (or, as the case may be, Relevant Shares) will be issued or transferred and delivered to a person (the Relevant Person ) selected by LBG. LBG shall procure that all of such Ordinary Shares (or, as the case may be, Relevant Shares) shall be sold by or on behalf of the Relevant Person as soon as reasonably practicable based on advice from a reputable financial institution, investment or commercial bank or broker selected by LBG, and subject to any necessary consents being obtained and the deduction by the Relevant Person of any amount payable by it in respect of its liability to taxation and the payment of applicable capital, stamp, issue, registration and/or transfer taxes and duties (if any) and any fees or costs incurred by or on behalf of the Relevant Person in connection with the issue, allotment and sale thereof, and the net proceeds of sale shall as soon as reasonably practicable be distributed rateably to the relevant ECN Securityholders in the same manner as in the ECNs issued in the European Exchange Offer or in such other manner and at such time as LBG shall determine and notify to the ECN Securityholders.


Relevant Event		If a Qualifying Relevant Event occurs, the ECNs shall, where the Conversion Date falls on or after the New Conversion Condition Effective Date, be converted into Relevant Shares of the Approved Entity at a Conversion Price that shall be initially the New Conversion Price and where the principal amount of the ECNs (if not denominated in pounds sterling) shall be translated into pounds sterling at the Prevailing Rate on the second London business day prior to Conversion.

		If a Relevant Event occurs that is a Non-Qualifying Relevant Event, then with effect from the date falling eight days following the occurrence of such Relevant Event (if the Acquiror is an Approved Entity) or with effect from the occurrence of such Relevant Event (if the Acquiror is not an Approved Entity) and, in each case, unless the Conversion Trigger shall have occurred prior to such date, outstanding ECNs will not be subject to Conversion at any time notwithstanding that a Conversion Trigger may occur subsequently.

		Approved Entity means a body corporate that is incorporated or established under the laws of an OECD member state (other than an Excepted Person) and which, on the occurrence of the Relevant Event, has in issue Relevant Shares.

		Excepted Person means any of:


(i)	the United Kingdom Government;

(ii)	any agency of the United Kingdom Government;

(iii)	any person or entity (other than a body corporate) controlled by the United Kingdom Government or any such agency referred to in (ii) above; and

(iv)	a body corporate in which the United Kingdom Government and/or any agency of the United Kingdom Government and/or any person or entity referred to in (iii) is (directly or indirectly) the legal or beneficial owner of more than 75 per cent. of the issued Ordinary Shares (or equivalent) or of the votes that may ordinarily be cast at a general meeting of shareholders (or the like) of such body corporate.

The New Conversion Condition shall be satisfied if by not later than seven days following the occurrence of a Relevant Event where the Acquiror is an Approved Entity, Lloyds Banking Group shall have entered into arrangements to its satisfaction with the Approved Entity for delivery of Relevant Shares upon a Conversion of the ECNs.

Non-Qualifying Relevant Event means a Relevant Event that is not a Qualifying Relevant Event.

Qualifying Relevant Event means a Relevant Event where:

1.	the Acquiror is an Approved Entity; and

2.	the New Conversion Condition is satisfied.

A Relevant Event shall occur if any person or persons acting in concert (as defined in the Takeover Code of the United Kingdom Panel on Takeovers and Mergers), acquires control of Lloyds Banking Group (other than as a result of an Exempt Newco Scheme).

For the purposes of the definition of Relevant Event, control means:

(i)	where the Acquiror is not an Excepted Person:

	(a)	the acquisition or holding of legal or beneficial ownership of more than 50 per cent. of the issued Ordinary Shares of LBG; or

	(b)	the right to appoint and/or remove all or the majority of the members of the Board of Directors of LBG, whether obtained directly or indirectly and whether obtained by ownership of share capital, contract or otherwise; or

(ii)	where the Acquiror is an Excepted Person, the acquisition or holding of legal or beneficial ownership of 75 per cent. or more of the issued Ordinary Shares of LBG.


		Relevant Shares means ordinary share capital of the Approved Entity that constitutes equity share capital or the equivalent (or depositary or other receipts representing the same) which is listed and admitted to trading on a Recognised Stock Exchange.

Additional Amounts		All payments in respect of the ECNs will be made without withholding or deduction for, or on account of, taxes of the United Kingdom, unless the withholding or deduction is required by law. In such event, the Issuer or the relevant Guarantor will, subject to the same provisos as set out in the ECNs issued in the European Exchange Offer, pay such additional amounts as will be necessary to ensure that the net amount received by ECN Securityholders, after the withholding or deduction, will equal the amount which would have been receivable in the absence of the withholding or deduction.

Form		Each Series of ECNs will be issued in bearer or registered form.

		Each tranche of ECNs issued in bearer form will be represented initially by a Temporary Global Note which will be deposited with a common depositary for Clearstream, Luxembourg and Euroclear on or about the relevant Settlement Date. Each Temporary Global Note will be exchangeable for interests in a Permanent Global Note without interest coupons or talons on or after a date which is expected to be 40 days after the relevant Settlement Date upon certification as to non-U.S. beneficial ownership as required by U.S. Treasury regulations and as described in the relevant Temporary Global Note.

		Each tranche of ECNs issued in registered form will be represented by one or more Global Certificates which will be deposited with a common depositary for the Clearing Systems on or about the relevant Settlement Date.

Denomination		The denomination of each series of ECNs will be determined pursuant to the provisions of this Agreement provided that any series of ECNs sold in whole or in part to QIBs will have a minimum denomination of U.S.$100,000.

Ordinary Shares		The Ordinary Shares to be delivered following conversion will be delivered credited as fully paid and will rank pari passu in all respects with all fully paid Ordinary Shares in issue on the relevant Conversion Date, subject to the same provisos as set out in the ECNs issued in the European Exchange Offer.

ECN Trustee		BNY Corporate Trustee Services Limited.

Principal Paying and Conversion Agent		The Bank of New York Mellon.


Governing Law		The relevant Trust Deed, the ECNs, any related Coupons and any non-contractual obligations arising out of or in connection with them will be governed by, and construed in accordance with, English law, save that where Lloyds Banking Group is a Guarantor the provisions in the relevant Trust Deed relating to the status and subordination of its guarantee will be governed by, and shall be construed in accordance with, Scots law.

Listing and Trading		Applications will be made for the ECNs to be admitted to the Official List of the UK Listing Authority and to trading on the Regulated Market of the London Stock Exchange as further described in this Agreement.

Clearing		The ECNs will be accepted for clearing by Euroclear and Clearstream, Luxembourg.

SCHEDULE 3

DELIVERY OF DOCUMENTS

PART A

SETTLEMENT DATE

On or prior each Settlement Date the Issuer, the Guarantor and/or the Company shall deliver to each Joint Bookrunner:


(a)	A certified copy of an extract from the minutes of the meetings of the Board of the Issuer, the Guarantor and the Company, or a duly authorised committee thereof, approving the Relevant Documents, this Agreement, the Trust Deed, the Deed Poll, the Agency Agreement and (where appropriate) the other documents referred to in this Agreement and authorising the steps to be taken by the Issuer, the Guarantor and the Company in connection with the Top up Issue, including the execution, delivery and performance of this Agreement, in the agreed form.

(b)	An original of signed bring down UK ICMA comfort letters from the Auditors relating to the Issuer, the Guarantor and the Company dated the Settlement Date.

(c)	With respect to a Top up Issue offered and sold into the United States only, an original of signed bring down SAS 72 letters from the Auditors relating to the Issuer, the Guarantor and the Company dated the Settlement Date.

(d)	With respect to a Top up Issue offered and sold into the United States only, an original of signed bring down SAS 72 “look-a-like” letters from the Auditors relating to the Issuer, the Guarantor and the Company dated the Settlement Date.

(e)	With respect to a Top up Issue offered and sold into the United States only, an original of signed Rule 10b-5 disclosure letters of each United States legal advisers to the Issuer, the Guarantor and the Company and United States legal advisers to the Joint Bookrunners dated as of the Settlement Date and referring to the Time of Sale and the Settlement Date.

(f)	With respect to a Top up Issue offered and sold into the United States only, an original of a signed “no registration” opinion, an “investment company” opinion and an opinion in relation to United States taxation of United States legal advisers to the Issuer, the Guarantor and the Company dated as of the Settlement Date.

(g)	With respect to a Top up Issue offered and sold into the United States only, an original of a signed “no registration” opinion of United States legal advisers to the Joint Bookrunners dated as of the Settlement Date.

(h)	An original of a letter in the form of Schedule 6 signed by a director or secretary of each of the Issuer, the Guarantor and the Company authorised to do so.

(i)	A copy of an opinion of Scottish legal advisers to the Company in the agreed form.

(j)	A copy of an opinion of English legal advisers to the Joint Bookrunners, in the agreed form.

(k)	Conformed copies of the executed Trust Deed, the Deed Poll and Agency Agreement.

Each of the Guarantor and/or the Company is entitled to request that the Joint Global Co-ordinators agree

(such agreement not to be unreasonably withheld or delayed) that the delivery of any of the documents referred to in this Part A of Schedule 3 may be deferred and/or substituted with another document in a form reasonably satisfactory to the Joint Global Co-ordinators, it being understood that the form of any such deferred and/or substituted document will, if applicable, take account of the effect of any MAC Event or Material Adverse Effect that may have occurred on or prior to the date on which the relevant document is to be delivered.

PART B

PROSPECTUS PUBLICATION DATE

On each Prospectus Publication Date, the Issuer, the Guarantor and the Company shall deliver to each Joint Bookrunner:


(a)	A copy of the Prospectus bearing evidence of the formal approval of the UK Listing Authority, pursuant to the Listing Rules and the Prospectus Rules.

(b)	A completed ‘Form A’, to be submitted to the FSA in accordance with paragraph 3.1.1(1) of the Prospectus Rules for approval of a prospectus in accordance with Part VI of the FSMA.

(c)	In the event that the Prospectus contains pro forma financial information, an original copy of the pro forma financial information report in the form to be agreed duly signed by the Auditors and dated the date of the Prospectus.

(d)	An original copy of any Profit Forecast Report duly signed by the Auditors and dated the date of the Prospectus.

(e)	An original of letters in the form to be agreed duly signed by the Auditors relating to the Issuer, the Guarantor and the Company and dated the same date as the Prospectus:

	(i)	in relation to any capital resources table and capital and indebtedness statement included in the Prospectus;

	(ii)	confirming the correct extraction of financial information contained in the Prospectus;

	(iii)	relating to the statement in the Prospectus that there has been no significant change in the financial and trading position (including indebtedness) of the Issuer, the Guarantor, the Company or the Group; and

	(iv)	in relation to the accuracy of the tax information included in the Prospectus.

(f)	An original letter in the form to be agreed duly signed by the Auditors and dated the same date as the Prospectus in relation to the accuracy of the tax information included in the Prospectus.

(g)	An original letter in the form to be agreed duly signed by KPMG dated the same date as the Prospectus regarding the accuracy of extraction of financial information in respect of the HBOS Group.

(h)	An original letter in the form to be agreed duly signed by the Auditors dated the same date as the Prospectus consenting to the inclusion of any pro forma financial information report and of references thereto in the form and context in which they appear in the Prospectus.


(i)	A certified copy of each of the other documents stated in the Prospectus as being available for inspection.

(j)	An original letter in the form of Schedule 6 of the Underwriting Agreement signed by a director or secretary of each of the Issuer, the Guarantor and the Company authorised to do so.

(k)	A copy of the signed application for admission of the Top up Securities to the Official List certified by a Director or the Secretary of the Issuer.

(l)	A copy of the signed application for admission to trading issued by the London Stock Exchange certified by a Director or the Secretary of the Issuer (Form 1 of the Admission and Disclosure Standards).

Each of the Guarantor and/or the Company is entitled to request that the Joint Global Co-ordinators agree (such agreement not to be unreasonably withheld or delayed) that the delivery of any of the documents referred to in this Part B of Schedule 3 may be deferred and/or substituted with another document in a form reasonably satisfactory to the Joint Global Co-ordinators, it being understood that the form of any such deferred and/or substituted document will, if applicable, take account of the effect of any MAC Event or Material Adverse Effect that may have occurred on or prior to the date on which the relevant document is to be delivered.

SCHEDULE 4

REPRESENTATIONS, WARRANTIES AND UNDERTAKINGS OF THE COMPANY


1.	COMPLIANCE

1.1	Except as fairly disclosed in the Prospectus, each Group company, other than those undertakings in which the Company holds a proportion of the capital that is not likely to have a significant effect on the assessment of its own assets and liabilities, financial position or profits and losses, has been duly incorporated and is validly existing as a company with limited liability under the laws of the country of its incorporation with full corporate power and authority to own, lease and operate the properties which it owns, leases and operates and to own its other assets and carry on its business as presently carried on in all material respects and as intended to be carried on as described in the Prospectus.

1.2	Except as fairly disclosed in the Prospectus, each Group company has conducted its business in all material respects in accordance with all applicable laws and regulations of the United Kingdom and all relevant foreign countries or authorities, and there is no order, decree or judgment of any court or any governmental or other competent authority or agency of the United Kingdom or any foreign country outstanding against any Group company or any person for whose acts any Group company is vicariously liable, except for such orders, decrees or judgments that, either singly or in the aggregate, would not result in a Material Adverse Effect.

1.3	Except as fairly disclosed in the Prospectus, all licences, permissions, authorisations and consents which are material for carrying on the business of the Group have been obtained and are in full force and effect and, so far as the Company is aware, there are no circumstances which might lead to any of such licences, permissions, authorisations and consents being revoked, suspended, varied or refused renewal.

1.4	Except as fairly disclosed in the Prospectus, all sums due in respect of the issued share capital of the Company at the date of this Agreement have been paid to and received by the Company. None of the owners or holders of any of the share capital of the Company shall, with effect from Admission, have any pre-emptive or other rights, in his capacity as such, in relation to the Group other than as set out in the memorandum and articles of association of the Company.

1.5	Except as fairly disclosed in the Prospectus, the Company is the beneficial owner free from all Adverse Interests of the shares it holds in each Group company.

1.6	The Company and the Directors have at all times complied with the provisions of the Company’s memorandum and articles of association (save in relation to the offer of ordinary shares in the Company to certain holders of Limited Voting Shares pursuant to the placing and open offer agreement dated 13 October 2008 and the open offer agreement dated as of 7 March 2009, as amended and restated as at 20 March 2009 and as at 18 May 2009) and the Companies Act and have or will have the right, power and authority under the memorandum and articles of association of the Company, or pursuant to resolution passed in general meeting, to enter into and perform this Agreement (including, without limitation, the power to pay commissions, fees, costs and expenses provided for in this Agreement), to make the Top up Issue, to issue the Top up Securities, to issue the Relevant Documents in the manner proposed without any sanction or consent by members of the Company or any class of them and to enter into any other agreement in connection with the Top up Issue to which it is, or is to be, a party. Subject to Admission, there are no other consents, authorisations or approvals required by the Company in connection with the entering into and the performance of this Agreement, and the actions referred to in this paragraph 1.6 which have not been irrevocably and unconditionally obtained.


1.7	The giving of any guarantee in relation to the Top up Securities (if applicable), the issue and distribution of the Relevant Documents and (to the extent required) the execution and performance of this Agreement, the Trust Deed (if applicable), the Deed Poll, the Agency Agreement (if applicable) and any other document by or on behalf of the Company in connection with Admission or the Top up Issue complies with all agreements to which any Group company is a party or by which any such Group company is bound and, except where non-compliance would not either singly or in the aggregate result in a Material Adverse Effect, complies with (a) all applicable laws and regulations of the United Kingdom (including, without limitation, the Companies Act, the FSMA, Listing Rules, the Prospectus Rules, the Disclosure Rules and Transparency Rules, the Admission and Disclosure Standards) and (in all material respects) with, all applicable laws and regulations of any relevant jurisdiction; and (b) the memorandum and articles of association of the Company; and does not exceed or infringe any restrictions or the terms of any contract, indenture, security, obligation, commitment or arrangement by or binding upon the board of directors of any Group company or their respective properties, revenues or assets or result in the implementation of any right of pre emption or any other material provision thereof, or result in the imposition or variation of any material rights or obligations of any Group company.

1.8	The Relevant Documents contain all particulars and information required by, and comply in all material respects with the memorandum and articles of association of the Company, the Companies Act, the FSMA, the Listing Rules, the Disclosure Rules and Transparency Rules, the Prospectus Rules, all applicable rules and requirements of the London Stock Exchange and the FSA (in all material respects) and all other applicable requirements of statute, statutory regulation or any regulatory body.

1.9	The Top up Securities will, upon issue, be free from all Adverse Interests and will rank as described in the Prospectus.

1.10	This Agreement, the Trust Deed (if applicable), the Deed Poll, the Agency Agreement (if applicable) and any other agreements to be entered into, or as entered into (as the case may be) by the Company in connection with Admission and the Top up Issue have been or will be duly authorised, executed and delivered on behalf of the Company and assuming due authorisation, execution and delivery by the other parties thereto, constitute valid and binding obligations of the Company enforceable against it in accordance with their terms (subject to mandatory rules of law relating to insolvency and section 117 of the Stamp Act 1891).

1.11	The Top up Issue will be conducted in all material respects in accordance with the terms and conditions of this Agreement and the Relevant Documents and the Company has complied and will comply with all laws, rules and regulations applicable to the Top up Issue in each jurisdiction in which the Top up Securities are offered, except where non-compliance would not either singly or in the aggregate result in a Material Adverse Effect.

1.12	Except as fairly disclosed in the Prospectus and other than those undertakings in which the Company holds a proportion of the capital that is not (either singly or in the aggregate) likely to have a significant effect on the assessment of its own assets and liabilities, financial position or profits and losses, there are no rights (conditional or otherwise) (i) to require the issue of any shares or other securities of a Group company (including without limitation, any loan capital) or securities convertible into or exchangeable for, or warrants, rights or options to purchase, or obligations, commitments or intentions to create the same or (ii) other than: (a) in accordance the registration rights agreement entered into between HM Treasury and the Company on 12 January 2009 and as amended and restated on 11 June 2009 and the resale rights agreement entered into between HM Treasury and the Company on 11 June 2009; (b) in accordance with alternative cash settlement mechanisms or principal stock settlement features on capital instruments issued by members of the Group; or (c) other than in respect of the Group’s obligations to the holders of Limited Voting


	Shares, to sell or otherwise dispose of any shares or other securities of a Group company (other than to another Group, company, as the case may be) which are outstanding and in force.

1.13	Except as fairly disclosed in the Prospectus, no member of the Group or any person acting on its behalf has taken, directly or indirectly, any action designed to or which has constituted or which might reasonably be expected to cause or result in stabilisation or manipulation of the price of any security of the Company.

1.14	The Company has not paid or agreed to pay to any person any compensation for soliciting another to purchase any Top up Securities (except as contemplated in this Agreement).

2.	RELEVANT DOCUMENTS

2.1	None of the Relevant Documents contains any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading in any material respect.

2.2	All expressions of opinion, intention, belief or expectation contained in any Relevant Document are truly and honestly held by the Directors, are fairly based and have been made on reasonable grounds after due and careful consideration and enquiry.

2.3	There are no facts or matters known, or which could on reasonable enquiry have been known, to the Company or any of the Directors omitted from any Relevant Document, the omission of which would make any statement of fact or expression of opinion, intention or expectation contained in a Relevant Document misleading in any material respect.

2.4	Having regard to the particular nature of the Company and the Group and the Company’s share capital and the other matters referred to in section 87A of the FSMA, the Prospectus contains all information about the Group which is or would be reasonably likely to be material for disclosure to potential investors and their professional advisers and which they would reasonably require and reasonably expect to find there for the purpose of making an informed assessment of the matters specified in section 87A(2) of the FSMA.

2.5	There is no fact or circumstance which is not disclosed with sufficient prominence in the Prospectus which ought to be taken into account by the UK Listing Authority in considering the application for listing of the Top up Securities.

2.6	All information provided by the Company, its subsidiary undertakings or any of its or their officers or employees to the Joint Bookrunners and/or the Auditors in connection with its organised due diligence enquiries or similar requests for information has been supplied in good faith and such information was when supplied, and remains, true and accurate in all material respects and no further information requested has been withheld, the absence of which would be reasonably likely to be considered to be material to such due diligence enquiries or requests for information.

3.	PREVIOUS ANNOUNCEMENTS

	Except as fairly disclosed in the Prospectus, with respect to all Previous Announcements, all statements of fact contained therein were at the date of the relevant Previous Announcement and, save to the extent corrected or amended in any document or announcement issued or made by or on behalf of the Company or any member of the Group subsequent thereto, remain true and accurate in all material respects and not misleading in any material respect and all estimates, expressions of opinion or intention or expectation of the Directors contained therein were made on reasonable grounds and were honestly held by the Directors and were fairly based and there were no facts known (or which could on reasonable enquiry have been known by the Directors) the omission of


	which would make any statement of fact or estimate or statement or expression of opinion, intention or expectation in any of the Previous Announcements misleading in any material respect and all Previous Announcements complied with the memorandum and articles of association of the Company in all material respects, the Listing Rules, the Disclosure Rules and Transparency Rules, the Prospectus Rules, the Companies Act, the FSMA, all applicable rules and requirements of the London Stock Exchange and the FSA and (in all material respects) all other applicable requirements of statute, statutory regulation or any regulatory body.

4.	DEROGATION

	Each statement, if any, made by or on behalf of the Company (and of which the Company is aware) in connection with any application to the London Stock Exchange or the UK Listing Authority for information to be omitted from the Prospectus is true, complete and accurate and not misleading in any material respect. There is no information which has not been disclosed in writing to the London Stock Exchange or the UK Listing Authority in connection with such an application which by its omission makes such a statement untrue, inaccurate or misleading in any material respect.

5.	ACCOUNTS

5.1	The Accounts incorporated by reference into the Prospectus:

	(a)	have been prepared and audited in accordance and comply with IFRS, the Companies Act and all applicable laws and regulations;

	(b)	give a true and fair view of the financial condition and of the state of affairs of the Company and the Group as at the end of each of the relevant financial periods (including the Accounts Date) and of the profit, loss, cash flow and changes in equity of the Company and the Group; and

	(c)	either make proper provision for, or, where appropriate, in accordance with IFRS, include a note in respect of all material liabilities or commitments, whether actual, deferred, contingent or disputed of the Group.

5.2	The HBOS Accounts incorporated by reference into the Prospectus:

	(a)	have been prepared and audited in accordance and comply with IFRS, the Companies Act and all applicable laws and regulations;

	(b)	give a true and fair view of the financial condition and of the state of affairs of HBOS and the HBOS Group as at the end of each of the relevant financial periods (including the Accounts Date) and of the profit, loss, cash flow and changes in equity of HBOS and the HBOS Group for such periods; and

	(c)	either make proper provision for, or, where appropriate, in accordance with IFRS, include a note in respect of all material liabilities or commitments, whether actual, deferred, contingent or disputed of the HBOS Group.

5.3	The Interim Accounts present fairly the information shown therein and are presented on a basis consistent with the accounting policies of the Group (subject to the qualification that they are unaudited) and the consolidated balance sheet, cash flow statement and income statement for the Group for the six month period for which they have been prepared have been prepared in accordance with the Disclosure and Transparency Rules and with IAS 34, Interim Financial Reporting, as adopted by the European Union and includes a fair review of the information as required by DTR 4.2.7 and DTR 4.2.8, namely an indication of important events that have occurred during the six


	months period to which they have been prepared and their impact on the condensed interim financial statements, and a description of the principal risks and uncertainties for the remaining six months of the financial year, and material related party transactions in the six month period for which they have been prepared and any material changes in the related party transactions described in the Company’s annual report for the financial year prior to the period for which the Interim Accounts have been prepared.

5.4	Any pro forma financial information on the Group set out in the Prospectus has been duly and carefully prepared on the bases set out in (or incorporated by reference in) the Prospectus in accordance with the Prospectus Rules and is presented on a basis consistent with the accounting policies normally applied by the Company at the relevant time.

5.5	Any summary and selected financial information on the Group set out in the Prospectus has been duly and carefully extracted from the Accounts and the Interim Accounts (as applicable) and has been properly compiled on a basis consistent with the accounting policies applied in the Accounts and the Interim Accounts (as applicable).

5.6	Any capitalisation and indebtedness table set out in the Prospectus has been properly compiled on a basis that is consistent with the accounting policies applied in the Accounts.

5.7	No Group company has any off balance sheet financing, investment or liability material for disclosure in the Prospectus that is not so fairly disclosed.

5.8	The Directors have established procedures which provide a reasonable basis for them to make proper judgements on an ongoing basis as to the financial position and prospects of the Company and the Group.

5.9	Except as fairly disclosed in the Prospectus, there are no, and during the past four years have been no (i) material weaknesses in the Company’s internal controls over financial reporting (whether or not remediated) of the Company or the Group, (ii) changes in the Company’s internal controls over financial reporting of the Company or the Group that has materially adversely affected, or would be reasonably likely to materially adversely affect, the Company’s internal controls over financial reporting of the Company or the Group; or (iii) fraud that involves any current member of management of the Company or (so far as the Company is aware) of any member of the Group and no material fraud that involves any employee of the Company or (so far as the Company is aware) of any member of the Group

6.	POSITION SINCE ACCOUNTS DATE

	Except as fairly disclosed in the Prospectus, so far as the Company is aware, since the Accounts Date:

	(a)	each Group company has carried on its respective business in the ordinary course in all material respects, and there has been no Material Adverse Effect;

	(b)	there has been no impairment or charges in respect of any assets of the Company or the Group, and there has been no increase in the provisions in respect of losses in relation to any mortgage, loans or other assets of the Company or of any Group company, except in any such case as would not result in a Material Adverse Effect;

	(c)	save for any utilisation by the Company of the short-term liquidity measures being made available by the Bank of England (in the form notified by HM Government to the European Commission on 13 October 2008 and on 22 December 2008) or of the HM Treasury 2008 Credit Guarantee Scheme, no Group company has, otherwise than in the ordinary course of


		business, entered into or assumed or incurred any contract, commitment (whether in respect of capital expenditure or otherwise), borrowing, indebtedness in the nature of borrowing, guarantee, liability (including contingent liability) or any other agreement or obligation, except in any such case as would not result in a Material Adverse Effect;

	(d)	other than in the ordinary course of business, no debtor has been released by the Company to an extent which (singly or in the aggregate) is material in the context of the Top up Issue, underwriting of the Top up Securities, Admission or post-Admission dealings in the Top up Securities on terms that he pays less than the book value of his debt and no debt of such material amount owing to the Company or any Group company has been deferred, subordinated or written off or has proven irrecoverable to any material extent;

	(e)	no Group company has been involved in any transaction (other than the compensatory open offer agreement entered into by the Company on 20 March 2009), which has resulted or would be reasonably likely to result (singly or in the aggregate) in any material liability for tax on the Company or any Group company other than a transaction in the ordinary course of business or a transaction in respect of which the liability for tax is provided for or taken into account in any provision for tax contained in the Accounts or the Interim Accounts incorporated by reference in the Prospectus; and

	(f)	no Group company has been in default in any material respect under any agreement or arrangement to which any Group company is a party and which is or is reasonably likely to be material and, so far as the Company is aware, there are no circumstances likely to give rise to such default.


7.	GUARANTEES, INDEMNITIES, BORROWINGS AND DEFAULT

7.1	Except as fairly disclosed in the Prospectus, and save for (i) guarantees or indemnities given by any Group company in the ordinary course of business and (ii) any indemnities given by the Company to the Joint Bookrunners, no Group company has given or has agreed to give any guarantee or indemnity or similar obligation in favour of a third party and no Group company has any current or known future liability, howsoever arising except, for any guarantees, indemnities, similar obligations or liabilities that, either singly or in the aggregate, would not result in a Material Adverse Effect.

7.2	Except as fairly disclosed in the Prospectus, no event has occurred nor have any circumstances arisen (and the making and completion of the Top up Issue and the allotment and issue of the Top up Securities will not give rise to any such event or circumstance) so that any person is or would be entitled, or could, with the giving of notice or lapse of time or the fulfilment of any condition or the making of any determination, become entitled, to require repayment before its stated maturity of, or to take any step to enforce any security for, any indebtedness of any member of the Group which is material in the context of the Group’s borrowings or working capital projections and no person to whom any indebtedness, which is material in the context of the Group’s borrowings, is payable on demand has demanded or threatened to demand repayment of, or taken or threatened to take any step to enforce any guarantee, indemnity or other security for, the same.

7.3	Except as fairly disclosed in the Prospectus, there are no companies, undertakings, partnerships or joint ventures in existence in which any Group company has an ownership interest but whose results are not consolidated with the results of the Group, but whose default would affect the indebtedness or increase the contingent liabilities of the Group in any material respect.

7.4	Except as fairly disclosed in the Prospectus, no event or circumstance exists, has occurred or arisen or, so far as the Company is aware, is about to occur which constitutes or results in, or would with the giving of notice and/or lapse of time and/or the making of a relevant determination, constitute, or result in, termination of or a default or the acceleration or breach of any obligation under any


	agreement, instrument or arrangement to which any Group company is a party or by which any such Group company or any of its properties, revenues or assets are bound, which event or circumstance would, either singly or in the aggregate, result in a Material Adverse Effect.

8.	TAXATION

8.1	Except as fairly disclosed in the Prospectus, all material information, returns, computations and notices of the Group for tax purposes have been made for all purposes within the requisite period and on a proper basis and all such information, returns, computations and notices are up-to-date and correct in all material respects and, so far as the Directors of the Company are aware, are not the subject of any dispute between the Group, or claim against the Group, by HMRC or any other taxation authority which is or would reasonably be likely to be considered material in the context of the Top up Issue or the underwriting of the Top up Issue or Admission or post-Admission dealings in the Top up Securities and, so far as the Directors of the Company are aware, no enquiry has been raised by HMRC or any other taxation authority in respect of any member of the Group which is or would reasonably be likely to be material in the context of the Group.

8.2	Except as fairly disclosed in the Prospectus, no stamp duty or stamp duty reserve tax imposed under the law of the United Kingdom is payable in connection with the allotment, issue and delivery of the Top up Securities by the Company in accordance with the terms of this Agreement.

8.3	Except as fairly disclosed in the Prospectus, under United Kingdom law, current as at the date of this Agreement, for so long as the Top up Securities are listed on a qualifying stock exchange, payments of interest on the Top up Securities will be payable without withholding or deduction for or on account of any tax levied or imposed by the United Kingdom or any taxing authority thereof or therein.

9.	LITIGATION

9.1	Except as fairly disclosed in the Prospectus, as far as the Company is aware, no Group company nor any of its officers or agents or employees is involved in relation to the affairs of any Group company, or has during the recent past (being not less than 12 months ending on the date of the Prospectus) been involved in any civil, criminal, arbitration, administrative, governmental or other proceedings or governmental regulatory or similar investigation or enquiry in relation to the affairs of any Group company, whether as plaintiff, defendant or otherwise which, by itself or with other proceedings, would be, or is reasonably likely to be, material in the context of the Top up Issue, the underwriting of the Top up Securities, Admission or post-Admission dealings in the Top up Securities.

9.2	Except as fairly disclosed in the Prospectus, as far as the Company is aware, no litigation or arbitration, administrative, governmental, civil, criminal or other proceedings nor governmental, regulatory or similar investigation or enquiry are pending or have been threatened by or against any Group company or any of their respective officers, agents or employees in relation to the affairs of any Group company and, to the best of the knowledge, information and belief of the Company and the Directors, there are no facts or circumstances likely to give rise to any such litigation or arbitration, administrative, criminal, governmental, civil, or other proceedings or governmental, regulatory or similar investigation or enquiry, in each case, to an extent which, by itself or with other proceedings, which would be, or is reasonably likely to be, material in the context of the Top up Issue, underwriting of the Top up Securities, Admission or post-Admission dealings in the Top up Securities.

9.3	Except as fairly disclosed in the Prospectus, as far as the Company is aware, no Group company nor any of its officers or agents or employees in relation to the affairs of any Group company has been a party to any undertaking or assurance given to any court or governmental agency or the subject of


	any injunction which in any of the foregoing cases is still in force and which, by itself or with other proceedings, which would be, or is reasonably likely to be, material in the context of the Top up Issue, underwriting of the Top up Securities, Admission or post-Admission dealings in the Top up Securities.

9.4	For the purpose of this paragraph 9, proceedings includes any action by any governmental, public or regulatory authority (including any investment exchange or any authority or body which regulates investment business or takeovers or which is concerned with regulatory, licensing, competition, taxation matters or matters concerning Intellectual Property Rights).

10.	INTELLECTUAL PROPERTY

10.1	Except as fairly disclosed in the Prospectus and except to an extent that would not (singly or in the aggregate) be material in the context of the Top up Issue, the underwriting of the Top up Securities, Admission or post-Admission dealings in the Top up Securities, the Group does not infringe the Intellectual Property Rights of any third party nor so far as the Company is aware does any third party infringe the Intellectual Property Rights owned or used by the Group.

10.2	Except as fairly disclosed in the Prospectus, all material Intellectual Property Rights used by the Group are either legally or beneficially owned by the Group in all material respects or are used under a licence and are not subject to any Adverse Interests to an extent that would or might (singly or in the aggregate) be material in the context of the Top up Issue, the underwriting of the Top up Securities, Admission or post-Admission dealings in the Top up Securities.

10.3	Except as fairly disclosed in the Prospectus and save as would not (singly or in the aggregate) be material in the context of the Top up Issue, the underwriting of the Top up Securities, Admission or post-Admission dealings in the Top up Securities, (i) all Intellectual Property Rights registered in the name of a Group company (if any) are beneficially owned by it and subsisting and if granted not subject to revocation and (ii) all requisite registration and renewal fees in respect thereof have been duly and timeously paid.

10.4	Except as fairly disclosed in the Prospectus and save as would not (singly or in the aggregate) be material in the context of the Top up Issue, the underwriting of the Top up Securities, Admission or post-Admission dealings in the Top up Securities, (i) all Intellectual Property Rights owned and used or reasonably likely to be used by the Group and capable of legal protection are subject to appropriate and enforceable protection (including, where reasonably appropriate, by registration), and (ii) so far as the Company is aware there is no restriction of the Group’s rights to use any Intellectual Property Rights owned by or licensed to the Company to engage in any of the activities presently or proposed to be undertaken by it.

11.	ARRANGEMENTS WITH DIRECTORS AND SHAREHOLDERS

11.1	Save as fairly disclosed in the Prospectus:

	(a)	other than the articles of association of the Company and any service agreement with a Director, the deeds of indemnity entered into between the Company and its directors and any contracts entered into in the ordinary course of business, there are no existing contracts or engagements or other arrangements to which any Group company is a party and in which any of the directors of any Group company and/or any associate of any of them is interested; and to the extent that any such contracts, engagements or other arrangements exist they comply with the related party requirements of the Listing Rules of the UK Listing Authority (or other relevant regulator);


	(b)	other than HM Treasury, no shareholder has any rights, in his capacity as such, in relation to the Company other than as set out in the articles of association of the Company;

	(c)	the Company is not aware of any claim, demand or right of action against any Group company (otherwise than for accrued remuneration in accordance with their contracts of employment by any officer or employee (or former officer or employee) of the Group and/or any associate of them in any of the foregoing cases) other than any such claims, demands or rights of action which would not, either singly or in the aggregate, result in a Material Adverse Effect;

	(d)	so far as the Company is aware, no Director nor any person connected with such Director nor any of the employees of the Group nor any person connected with any such employee is in breach of any restrictive covenant, employment agreement or contract for services which would, or would be reasonably likely to, affect the Company or any other Group company and so far as the Company is aware, there are no circumstances which would be reasonably likely to give rise to any claim of such a breach or any other dispute with any employer, former employer or other person for whom any Director or employee of the Group provides or has provided services, except for any such breach or dispute which, either singly or in the aggregate, would not result in a Material Adverse Effect; and

	(e)	(i) no Director nor any director of any Group company has given notice of termination of his contract of employment, and (ii) no Director nor any director of any Group company has indicated an intention to resign except, in respect of (i) and (ii) above, where such notice of termination or notice of intention to resign would not result in a Material Adverse Effect.

11.2	For the purpose of this paragraph 11, associate has the meaning:

	(a)	in the case of an individual, given to “connected person” under section 256 of the Companies Act; and

	(b)	in the case of a body corporate, given to “associated company” in sections 416 et seq of the Income and Corporation Taxes Act 1988.

12.	COMPETITION

12.1	Except as fairly disclosed in the Prospectus, no Group company is a party to (or is concerned in) any agreement, arrangement, concerted practice or course of conduct which infringes, or of which particulars have or should have been delivered to any relevant governmental or other authority in any jurisdiction under any relevant legislation in any territory regarding anti-competitive or restrictive trade or business practices or which falls within Articles 81 and/or 82 of the EC Treaty, or otherwise, in any of the foregoing cases to an extent that (singly or in the aggregate) would, or would be reasonably likely to, be material in the context of the Top up Issue, the underwriting of the Top up Securities, Admission or post-Admission dealings in the Top up Securities.

12.2	Except as fairly disclosed in the Prospectus, no Group company is, or has been, in connection with its business or that of any other Group company, engaged in any practice which contravenes any such legislation as is referred to in the preceding paragraph or which is under investigation by any authority referred to in the preceding paragraph or which is the subject of undertakings to any such authority and, so far as the Company is aware, none of the practices carried on by any Group company contravenes or may contravene any such legislation or is reasonably likely to be subject to such investigation, in any of the foregoing cases to an extent that would, or would be reasonably likely to, be (singly or in the aggregate) material in the context of the Top up Issue, the underwriting of the Top up Securities, Admission or post-Admission dealings in the Top up Securities.


13.	INSURANCE

	Except as fairly disclosed in the Prospectus, the Group is insured to adequate levels against all risks which the Company reasonably believes to be commonly insured against by persons carrying on the same or similar businesses as those carried on by the Group and against all risks against which the Group could reasonably be expected to insure in the particular circumstances of the businesses carried on by each Group company, all such insurances are in full force and effect and to the best knowledge, information and belief of the Company, there are no circumstances which could render any such insurances void or voidable and there is no material insurance claim, pending, threatened or outstanding against any Group company and all premiums due in respect of such insurances have been duly paid.

14.	INFORMATION TECHNOLOGY

	Except as fairly disclosed in the Prospectus and save as otherwise would not (singly or in the aggregate) be material in the context of the Top up Issue, the underwriting of the Top up Securities, Admission or post-Admission dealings in the Top up Securities:

	(a)	systems used or planned to be used in connection with the businesses of the Group are all the systems required for the present needs of the business of the Group, including, without limitation, as to system capacity and ability to process current peak volumes and anticipated volumes in a timely manner;

	(b)	in the 12 months prior to the date of the Prospectus, the Group not suffered any failures or bugs in or breakdowns of any systems used in connection with the businesses of the Group which have caused any substantial disruption or interruption in or to its use and the Company is not aware of any fact or matter which may so disrupt or interrupt or affect the use of such equipment following the date of the Prospectus on the same basis as it is presently used;

	(c)	all hardware comprised in any systems, excluding any software and any external communications lines, used in the businesses of the Group are owned (except those items which are subject to finance leases) and operated by and are under the control of a Group company and are not wholly or partly dependent on any facilities which are not under the ownership, operation or control of the Group or (where governed by outsourcing or other similar arrangements) are otherwise openly accessible to the Group; and

	(d)	each Group company is validly licensed to use the software used in its business.

15.	RATING

	Except as fairly disclosed in the Prospectus, so far as the Company is aware, it has not received notice of any intended or potential downgrading of the rating assigned to any of the Company’s (or any other member of its Group’s) credit or debt by a ratings agency and (other than awareness of publicly known general market conditions and speculation) is not aware of a specific fact, circumstance or condition in respect of itself or any Group company from which or a combination of any of which, when considered in the context of current market conditions and speculation in the financial services sector, it could reasonably expect such a downgrade to be threatened or to occur. Except as fairly disclosed in the Prospectus, so far as the Company is aware, no ratings agency has placed the Company or any Group company or any of the Company’s or any Group company’s debt on credit watch.


16.	SHARE SCHEMES

16.1	Any particulars of the employee schemes contained in the Prospectus and, in particular, the information as to the dates on which options or other rights may be exercised and the number of options or other rights granted (conditionally or otherwise) on or before the date of the Prospectus are accurate in all material respects and not misleading in any material respect.

16.2	Except as fairly disclosed in the Prospectus and save as otherwise would not (singly or in the aggregate) be material in the context of the Top up Issue, the underwriting of the Top up Securities, Admission or post-Admission dealings in the Top up Securities, except for options or other rights granted under the Company’s approved share option schemes in accordance with normal practice, there are no arrangements which (contingently or otherwise) may give rise to an obligation on the Company or any Group company to allot, issue or grant any relevant securities as contemplated by section 549 of the Companies Act.

17.	PENSION SCHEMES

	Except as fairly disclosed in the Prospectus, and save as otherwise would not (singly or in the aggregate) be material in the context of the Top up Issue, the underwriting of the Top up Securities, Admission or post-Admission dealings in the Top up Securities, the Group is not paying, and is not under any liability (actual or contingent) to pay or secure (other than by payment of employers’ contributions under national insurance or social security legislation), any pension or other benefit on retirement, death or disability or on the attainment of a specified age or on the completion of a specified number of years of service.

18.	AGREEMENTS

	Except as fairly disclosed in the Prospectus and otherwise than arising as a result of ordinary course financing arrangements entered into by the Group and save otherwise as would not (singly or in the aggregate) be material in the context of the Top up Issue, the underwriting of the Top up Securities, Admission or post-Admission dealings in the Top up Securities, other than: (i) in accordance the registration rights agreement entered into between HM Treasury and the Company on 12 January 2009 and as amended and restated on 11 June 2009 and the resale rights agreement entered into between HM Treasury and the Company on 11 June 2009; (ii) in accordance with alternative cash settlement mechanisms or principal stock settlement features on capital instruments issued by members of the Group; or (iii) other than in respect of the Group’s obligations to the holders of Limited Voting Shares, there is no agreement, undertaking, instrument or arrangement requiring the creation, allotment, issue, redemption or repayment, or the grant to any person of the right (whether conditional or not) to require the allotment, issue, redemption or repayment, of any shares in the capital of a Group company (including, without limitation, an option or right of pre-emption or conversion).

19.	INSOLVENCY

19.1	Except as fairly disclosed in the Prospectus, no Group company is unable to pay its debts within the meaning of section 123 of the Insolvency Act 1986 or is otherwise insolvent except where the inability to pay any such debt, or such insolvency, would not result in a Material Adverse Effect.

19.2	Except as fairly disclosed in the Prospectus, no order has been made, petition presented or resolutions passed for the winding up of any Group company and no meeting has been convened for the purpose of winding up any such Group company that, in any such case would, either singly or in the aggregate, result in a Material Adverse Effect. No such Group company has been a party to any transaction which could be avoided in a winding up where such avoidance would result in a Material Adverse Effect.


19.3	Except as fairly disclosed in the Prospectus, no steps have been taken for the appointment of an administrator or receiver (including an administrative receiver) of all or any part of the assets of any Group company that, either singly or in the aggregate, would result in a Material Adverse Effect

19.4	Except as fairly disclosed in the Prospectus, by reason of actual or anticipated financial difficulties, no Group company has commenced discussions with the FSA, the Bank of England, the European Central Bank or any other regulatory authority to obtain stand-by or emergency funding (whether by way of repo transactions or otherwise) or has commenced negotiations with its creditors or any class of its creditors with a view to rescheduling any of its indebtedness or has made or proposed any arrangement or composition with its creditors or any class of its creditors.

20.	REGULATORY

20.1	Except as fairly disclosed in the Prospectus, each Group company required to be licensed (as a bank or otherwise) is duly licensed in its jurisdiction of incorporation and domicile and, except as would not reasonably be expected to be material, is duly licensed or authorised in each other jurisdiction where it is required to be licensed or authorised to conduct its business as described in the Prospectus.

20.2	Save as fairly disclosed in the Prospectus, no Group company nor any of its officers, in relation to a Group company, has failed to comply with any statutory provision or any rules, regulations, directions, requirements, notices and provisions of the FSA or any other regulatory body applying to such Group company in relation to its business including (without limitation) in respect of the maintenance of its Capital Resources Requirement and satisfaction of the Overall Financial Adequacy Rule and any equivalent capital requirements in any other jurisdiction that are applicable to any Group company; no obligation has arisen, in relation to a Group company, in respect of the general notification requirements under Chapter 15.3 of SUP, save in any of the foregoing cases to an extent which would not (singly or in the aggregate) be material in the context of the Top up Issue, the underwriting of the Top up Securities, Admission or post-Admission dealings in the Top up Securities.

20.3	There are no facts or circumstances, which have not been included in the Prospectus or any other information provided to the UK Listing Authority, which would cause the UK Listing Authority not to be satisfied that the Company’s capital adequacy is regulated by the FSA or suitably regulated by another regulatory body.

20.4	Save as fairly disclosed in the Prospectus or otherwise as would not (singly or in the aggregate) be material in the context of the Top up Issue, the underwriting of the Top up Securities, Admission or post-Admission dealings in the Top up Securities, no Group company is the subject of any investigation, enforcement action (including, without limitation to vary the terms of any permission of licence) or disciplinary proceeding by the FSA or any other regulatory body having jurisdiction over such Group company, and no such investigation, enforcement action or disciplinary proceeding is threatened or pending.

20.5	Save as fairly disclosed in the Prospectus or otherwise as would not (singly or in the aggregate) be material in the context of the Top up Issue, the underwriting of the Top up Securities, Admission or post-Admission dealings in the Top up Securities, the Company is not subject to any special or additional surveillance by the FSA or to any special or additional reporting requirements in relation to its assets, liquidity position, funding position or otherwise and the Company is not subject to any visits, beyond customary visits, by the FSA.

20.6	Save as fairly disclosed in the Prospectus, no Group company is, or has been, in receipt of aid within the meaning of Article 87(1) of the EC Treaty which has not been notified or which, having been notified, has been put into effect prior to clearance or which has been found not to be compatible


	with the common market. Save as fairly disclosed in the Prospectus, no Group company is aware of any procedure initiated by the European Commission which is reasonably likely to lead to a decision addressed to any EU member state that could result in a decision ordering the recovery of aid from any Group company.

20.7	Save as fairly disclosed in the Prospectus, no Group company is aware of any investigation, formal or informal, having been initiated by the Office of Fair Trading, the European Commission or any agency responsible for the enforcement of competition law in any territory or jurisdiction concerning a violation of Section 2 or Section 18 of the Competition Act 1998, as amended, or Article 81 or Article 82 of the EC Treaty or any similar or related provision in English or EU law or the law of any other territory or jurisdiction, except where any such investigation, either singly or in the aggregate, would not result in a Material Adverse Effect.

20.8	All information supplied by the Company to the European Commission in relation to the matters addressed by the Heads of Terms was when supplied and remains true and accurate in all material respects and not misleading in any material respect, and no information has been withheld the absence of which could be reasonably likely to have affected the contents of such Heads of Terms.

20.9	The operations of each Group company are and have been conducted at all times in compliance with the money laundering statutes of all jurisdictions, the rules and regulations thereunder and any related or similar rules, regulations or guidelines, issued, administered or enforced by any governmental agency (collectively, the Money Laundering Laws ) and no action, suit or proceeding by or before any court or governmental agency, authority or body or any arbitrator involving any Group company with respect to the Money Laundering Laws is pending or, to the best knowledge of the Company, threatened except in any such case for any action, suit or proceeding which would not, either singly or in the aggregate, result in a Material Adverse Effect.

20.10	None of the Company, any other member of the Group or, to the knowledge of the Company, any director, officer, agent, employee or affiliate of the Company is currently subject to any sanctions administered by the U.S. Department of the Treasury or any similar sanctions imposed by the European Union, the United Nations or any other body, governmental or other, to which the Company or any of its affiliates is subject; and the Top up Securities are not being issued for the purpose of funding any operations in, financing any investment or activities in or making any payments to any country or to any person targeted by any U.S. sanctions administered by the Office of Foreign Assets Control of the U.S. Department of the Treasury.

20.11	None of the Company, any other member of the Group or, to the knowledge of the Company, any director, officer, agent, employee or affiliate of the Company, is aware of or has taken any action, directly or indirectly, that could result in a violation by such persons of the U.S. Foreign Corrupt Practices Act of 1977, as amended, or the rules and regulations thereunder (the FCPA ) (including, without limitation, making use of the mail or any means or instrument of interstate commerce corruptly in furtherance of an offer, payment, promise to pay or authorisation of the payment of any money, or other property, gift, promise to give, or authorisation of the giving of anything of value to any “foreign official” (as such term is defined in the FCPA) or any foreign political office, in contravention of the FCPA), the OECD Convention on Bribery of Foreign Public Officials in International Business Transactions (the OECD Convention ) or any similar law or regulation, to which the Company, any other member of the Group, any director, officer, agent, employee of any member of the Group or, to the knowledge of the Company, any affiliate is subject; and the Company, each member of the Group and, to the knowledge of the Company, its affiliates have conducted their businesses in compliance with the FCPA, the OECD Convention and any applicable similar law or regulation and have instituted and maintain policies and procedures designed to ensure, and which are reasonably expected to continue to ensure, continued compliance therewith.


20.12	There are no facts or circumstances, which are not included in the Prospectus, or any other information provided to the UK Listing Authority, which would cause the UK Listing Authority not to be satisfied that the Company’s capital adequacy is regulated by the FSA or suitably regulated by another regulatory body.

21.	UNITED STATES SECURITIES REGULATIONS

21.1	None of the Company, its affiliates (as defined in Rule 405 under the Securities Act), or any person acting on its or their behalf (provided that the Company does not make any representation or warranty with respect to the Joint Bookrunners) has engaged or will engage in any “directed selling efforts” (within the meaning of Rule 902(c) of Regulation S under the Securities Act) with respect to the Top up Securities or any shares into which the Top up Securities are or will be exchangeable ( Exchange Shares ).

21.2	The Company is a “foreign issuer” (as defined in Regulation S under the Securities Act).

21.3	The Company reasonably believes that there is no “substantial US market interest” (as defined in Rule 902(j) of Regulation S under the Securities Act) in any of the Top up Securities or Exchange Shares or any security of the same class or series as the Top up Securities or Exchange Shares.

21.4	None of the Company, its affiliates (as defined under Rule 501(b) under Regulation D under the Securities Act) or any person acting on its or their behalf (provided that the Company does not make any representation or warranty with respect to the Joint Bookrunners) has engaged or will engage in any form of general solicitation or general advertising (within the meaning of Rule 502(c) of Regulation D under the Securities Act) in the United States in connection with any offer or sale of the Top up Securities or Exchange Shares, or has offered or will offer to sell or solicited or will solicit offers to by any Top up Securities or Exchange Shares in any manner involving a public offering in the United States within the meaning of Section 4(2) of the Securities Act.

21.5	None of the Company, its affiliates or any person acting on behalf (provided that the Company does not make any representation or warranty with respect to the Joint Bookrunners) of any of them has, directly or indirectly, (a) made or will make offers or sales of any security, (b) solicited or will solicit offers or sales by any security, (c) otherwise negotiated or will negotiate in respect of any security, in any of the foregoing cases under circumstances that would require the registration of the Top up Securities or Exchange Shares under the Securities Act or (d) taken or will take any other action that would require the registration of the Top up Securities or Exchange Shares under the Securities Act.

21.6	The Company does not believe that it is and does not expect to become (whether as a result of the receipt and application of the proceeds of the sale of the Top up Securities or otherwise) a “passive foreign investment company” within the meaning of section 1297 of the US Internal Revenue Code of 1986.

21.7	The Company is not, and, immediately after giving effect to the offering and sale of the Top up Securities and the application of the proceeds thereof as set forth in the Prospectus will not be, an “investment company” as such term is defined in the US Investment Company Act of 1940 (the Investment Company Act ).

21.8	For so long as any Top up Securities or Exchange Shares are “restricted securities” within the meaning of Rule 144(a)(3) under the Securities Act, the Company will not become an “open-end company”, “unit investment trust” or “face-amount certificate company”, as such terms are defined in, and that is or is required to be registered under Section 8 of, the Investment Company Act.

21.9	Other than HM Treasury, there are no persons with registration rights or other similar rights to have any shares or other securities registered by the Company under the Securities Act except to the


	extent that HM Treasury has transferred any of its registration rights to any persons in accordance with any provisions of the registration rights agreement entered into between HM Treasury and the Company in effect from 12 January 2009 and as amended and restated on 11 June 2009 and the resale rights agreement entered into between HM Treasury and the Company on 11 June 2009.

21.10	During the period of six months after the Settlement Date, the Company will not, and will not permit any of its affiliates to, resell any Top up Securities or Exchange Shares which constitute “restricted securities” under Rule 144 that have been reacquired by any of them other than in transactions that meet the applicable requirements of Regulation S under the Securities Act.

SCHEDULE 5

REPRESENTATIONS, WARRANTIES AND UNDERTAKINGS OF THE ISSUER AND THE
GUARANTOR


1.	Prospectus in the case of Top up Securities offered and sold in the United States to a QIB, the Prospectus does not contain an untrue statement of material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading.

2.	Listing : all information relating to such matters required by Section 87A(2) of the FSMA and the Listing Rules to be included in the Prospectus in relation to the Top up Securities and the giving of the guarantee in relation to the Top up Securities and the Issuer and the Guarantor (save insofar as a derogation therefore has been obtained) is included in the Prospectus and the Prospectus has been published in accordance with the Prospectus Rules

3.	Relevant Documents: the information in the Relevant Documents is in accordance with the facts and does not omit anything likely to affect the import of such information;

4.	Due Incorporation: each of the Issuer and the Guarantor is a company duly incorporated under the laws of England with power and authority to conduct its business as presently conducted and is lawfully qualified to do business as a foreign corporation in all other jurisdictions in which business is conducted by it.

5.	Authorisation : the creation and issue of the Top up Securities and the execution and delivery of the this Agreement, the Trust Deed (if applicable) and the Agency Agreement (if applicable), the consummation of the transactions contemplated therein and herein and the compliance with the terms thereof and hereof and the subscription and sale of the Top up Securities on the terms and conditions of this Agreement have been duly authorised by all necessary corporate action of the Issuer and the Guarantor and do not conflict with, or result in a breach of, any of the terms or provisions of, or constitute a default under, the Memorandum and Articles of Association of the Issuer or the Guarantor or any deed, mortgage or other agreement or instrument to which the Issuer or the Guarantor is party or by which it is (or its properties are) bound or any existing English or (to the best of the knowledge and belief of the Issuer and the Guarantor) other applicable law, rule, regulation, judgment, order or decree of any government, instrumentality, authority or court, domestic or foreign, having jurisdiction over the Issuer, the Guarantor or their respective properties.

6.	Consents: all necessary authorisations, consents and approvals for and in connection with the issue of the Top up Securities by the Issuer have been obtained and are in force and this Agreement, the Trust Deed (if applicable) and the Agency Agreement (if applicable) constitute valid and binding obligations of the Issuer and the Guarantor and the Top up Securities, when executed, authenticated, issued and delivered in accordance with this Agreement, the Trust Deed (if applicable) and the Agency Agreement (if applicable), will constitute valid and binding obligations of the Issuer and the due performance by the Issuer of the terms and conditions of such Top up Securities will not infringe the terms of any such authorisation, consent or approval or the provisions of any existing laws of England.

7.	Litigation: save as fairly disclosed in the Prospectus, none of the Issuer, the Guarantor nor any of their respective subsidiaries is involved in any governmental, legal or arbitration proceedings, nor has the Issuer or the Guarantor knowledge of any threatened governmental, legal or arbitration proceedings or claim against the Issuer or the Guarantor or any of their respective subsidiaries, which is material in the context of the issue of the Top up Securities.


8.	Directed Selling Efforts: none of the Issuer, the Guarantor or any of their respective affiliates (including any person acting on behalf of the Issuer, the Guarantor or any of their respective affiliates, provided that the Company is not making a representation or warranty with respect to the Joint Bookrunners) has engaged or will engage in any directed selling efforts (as defined in Rule 902(b) of Regulation S under the Securities Act) with respect to the Top up Securities, and the Issuer, the Guarantor and their respective affiliates have complied and will comply with the offering restrictions requirement of Regulation S under the Securities Act.

9.	General Solicitation: none of the Issuer, the Guarantor or any of their respective affiliates (as defined in Rule 501(b) of Regulation D under the Securities Act), or any person acting on behalf of any of them (provided that the Company does not make any representation or warranty with respect to the Joint Bookrunners), (i) has made or will make offers or sales of any security, or solicited or will solicit offers to buy, or otherwise negotiated in respect of, any security, under circumstances that would require the registration of the Top up Securities under the Securities Act; or (ii) has engaged or will engage in any form of general solicitation or general advertising (within the meaning of Regulation D under the Securities Act) in connection with any offer or sale of the Top up Securities in the United States.

10.	Investment Company: neither the Issuer nor the Guarantor is, and as a result of the offer and sale of the Top up Securities contemplated herein will be, an “investment company” under, and as such term is defined in, the Investment Company Act.

11.	Registration : none of the Issuer, the Guarantor or their respective affiliates, nor any persons acting on any of their behalf has made or will make offers or sales of any securities under circumstances that would require the registration of any of the Top up Securities under the Securities Act.

12.	Sanctions : none of the Issuer or the Guarantor or, to the knowledge of the Issuer or the Guarantor, any director, officer, agent, employee or affiliate of the Issuer or the Guarantor is currently subject to any sanctions administered by the U.S. Department of the Treasury or any similar sanctions imposed by the European Union, the United Nations or any other body, governmental or other, to which the Issuer, the Guarantor or any of their respective affiliates is subject; and Top up Securities are not being issued for the purpose of funding any operations in, financing any investment or activities in or making any payments to any country or to any person targeted by any U.S. sanctions administered by the Office of Foreign Assets Control of the U.S. Department of the Treasury.

SCHEDULE 6

LETTER OF CONFIRMATION

[On the letterhead of the Issuer/Guarantor/Company]


To:	Merrill Lynch International
	Merrill Lynch Financial Centre
	2 King Edward Street
	London EC1A 1HQ

	UBS Limited
	1 Finsbury Avenue
	London EC2M 2PP

	(on behalf of themselves and the other Joint Bookrunners)

		[ ] 2009

Dear Sirs

We refer to the underwriting agreement relating to the issue of Top up Securities between us dated 3 November 2009 (the Underwriting Agreement ) and to the conditions set out in Clause 2.5 of the Underwriting Agreement (the Conditions ). References in this letter to Clauses are to Clauses of the Underwriting Agreement and words and expressions defined in the Underwriting Agreement have the same meaning herein.

We hereby confirm that:


(a)	each of the Conditions is satisfied as at the delivery of this letter;

(b)	we are not aware of any reason why the Conditions will not continue to be satisfied until Admission;

(c)	it has not come to the knowledge of the [Issuer/Guarantor/Company or any Director] that the [Issuer/Guarantor/Company] is in breach of any of its obligations under the Underwriting Agreement which fall to be performed following the date of publication of the Press Announcement (such confirmation excluding any breach of the [Issuer’s/Guarantor’s/Company’s] obligations which fall to be performed to date that has arisen, directly or indirectly, as a result of (a) a MAC Event or a Material Adverse Effect that has occurred subsequent to the publication of the Press Announcement, or (b) a Commission Decision that has been publicly announced or publicly communicated subsequent to the publication of the Press Announcement, other than where the MAC Event or Material Adverse Effect occurred as a direct or indirect consequence of a Specified Circumstance); and

(d)	with reference to our obligation in Clause 10.7 of the Underwriting Agreement, it has not come to the knowledge of the [Issuer/Guarantor/Company or any Director] that (i) any of the Warranties made by the [Issuer/Guarantor/Company] was breached or untrue, inaccurate or misleading in any respect when given on the date of the Underwriting Agreement or (b) any of the Warranties referred to in [Clause 10.3/Clause 10.4] of the Underwriting Agreement made by the [Issuer/Guarantor/Company] has ceased to be true and accurate or has become misleading in any respect; or that there is any circumstance which would or is reasonably likely to cause any of the Warranties referred to in [Clause 10.3/Clause 10.4] to be breached or become untrue, inaccurate or misleading in any respect if repeated by reference to the facts and circumstances existing at the date

hereof (such confirmation (other than in the case of a breach of Warranties made by the [Issuer/the Guarantor/the Company] on the date of publication of any Prospectus, Disclosure Package, Supplementary Prospectus or supplement to any Disclosure Package provided that any such breach of Warranty specifically relates to the content of such document not being true and accurate in all respects or being misleading in any respect as at the date of publication of such document) excluding any breach of the Warranties that has arisen, directly or indirectly, as a result of (A) a MAC Event or a Material Adverse Effect having occurred subsequent to the publication of the Press Announcement, or (B) a Commission Decision having been publicly announced or publicly communicated subsequent to the publication of the Press Announcement, other than where the MAC Event or Material Adverse Effect occurred as a direct or indirect consequence of a Specified Circumstance).

We undertake to notify you immediately if the confirmations contained in this letter could not continue to be given by us at any time prior to Admission (in each case by reference to the facts and circumstances then existing).


Yours faithfully


Director/Secretary

SCHEDULE 7

SELLING RESTRICTIONS


1.	General

	Other than in the United Kingdom, none of the Issuer, the Guarantor, the Company or any Joint Bookrunner makes any representation that any action has been or will be taken in any jurisdiction that would permit a public offering of any of the Top up Securities, or possession or distribution of the Prospectus, Disclosure Package or any other offering material, in any country or jurisdiction where action for that purpose is required.

	None of the Issuer, the Guarantor, the Company or the Joint Bookrunners represent that Top up Securities may at any time lawfully be sold in compliance with any appropriate registration or other requirements in any jurisdiction, or pursuant to any exemption available thereunder, or assumes any responsibility for facilitating such sale.

	Each Joint Bookrunner agrees that it will to the best of its knowledge and belief, comply with all relevant laws, regulations and directives in each jurisdiction in which it purchases, offers, sells or delivers Top up Securities or has in its possession or distributes the Prospectus, Disclosure Package or any other offering material and, that it will, obtain any consent, approval or permission required by it for the purchase, offer, sale or delivery by it of Top up Securities under the laws, regulations and directives in force in any jurisdiction to which it is subject or in which it makes such purchases, offers, sale or deliveries, in all cases at its own expense, and none of the Issuer, the Guarantor, the Company or any other Joint Bookrunner shall have responsibility therefor. No Joint Bookrunner is authorised to make any representation or use any information in connection with the issue, offering and sale of the Top up Securities other than as contained in, or which is consistent with, the Relevant Documents.

2.	United States of America

1.1	The Top up Securities and any Exchange Shares have not been and will not be registered under the Securities Act and may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons except in accordance with Regulation S or pursuant to an exemption from the registration requirements of the Securities Act. Each Joint Bookrunner represents and agrees that it has offered and sold the Top up Securities and Exchange Shares of any identifiable tranche, and shall offer and sell the Top up Securities and Exchange Shares of any identifiable tranche (1) as part of their distribution at any time and (2) otherwise until 40 days after completion of the distribution of such tranche as determined, and certified to the Issuer and each Joint Bookrunner, by the Joint Global Co-ordinators, only to persons that are not U.S. persons in accordance with Rule 903 of Regulation S under the Securities Act or to QIBs in a transaction that does not require registration under the Securities Act. Accordingly, neither it, its affiliates nor any persons acting on its or their behalf have engaged or will engage in any directed selling efforts with respect to the Top up Securities, and it and they have complied and shall comply with the offering restrictions requirements of Regulation S. Each Joint Bookrunner agrees to notify the Joint Global Co-ordinators when it has completed the distribution of its portion of the Top up Securities of any identifiable tranche so that the Joint Global


	Co-ordinators may determine the completion of the distribution of all Top up Securities of that tranche and notify the other Joint Bookrunners of the end of the distribution compliance period. Each Joint Bookrunner agrees that, at or prior to confirmation of sale of Top up Securities (other than a sale of Top up Securities to a QIB), it will have sent to each distributor, dealer or person receiving a selling concession, fee or other remuneration that purchases Top up Securities from it during the distribution compliance period a confirmation or notice to substantially the following effect:

		“The Securities covered hereby have not been registered under the U.S. Securities Act of 1933 (the “Securities Act”) and may not be offered and sold within the United States or to, or for the account or benefit of, U.S. persons (i) as part of their distribution at any time or (ii) otherwise until 40 days after completion of the distribution of such tranche as determined, and certified to the Issuer and Joint Bookrunners, by the Joint Global Co-ordinators, except in either case in accordance with Regulation S under the Securities Act or pursuant to another applicable exemption. Terms used above have the meanings given to them by Regulation S under the Securities Act.”

	Terms used in this paragraph have the meanings given to them by Regulation S.

	Each Joint Bookrunner represents and agrees that neither it nor any of its affiliates (as defined in Rule 501(b) of Regulation D under the Securities Act ( Regulation D ), nor any person acting on its or their behalf has engaged or will engage in any form of general solicitation or general advertising (within the meaning of Regulation D) in connection with any offer and sale of the Top Securities and Exchange Shares in the United States.

	The Joint Bookrunners may arrange for the offer and sale of the Top up Securities or Exchange Shares in the United States only to persons reasonably believed to be qualified institutional buyers who have provided representations, warranties and undertakings substantially in the form attached hereto as Schedule 8.

	Each Top up Issue in registered form issued by the Issuer to be sold to qualified institutional buyers in the United States shall contain a legend stating substantially to the effect that such Top up Issue in registered form has not been and will not be registered under the Securities Act or with any securities regulatory authority of any state or other jurisdiction of the United States and may not be offered, resold, pledged or otherwise transferred except (1) another qualified institutional buyer purchasing for its own account or a person acting for the account of a qualified institutional buyer in a transaction that does not require registration under the Securities Act, (2) in an offshore transaction in accordance with Rule 903 or Rule 904 under Regulation S or (3) pursuant to an exemption from registration under the Securities Act provided by Rule 144 thereunder (if available), in each case in accordance with any applicable securities laws of any state of the United States, and that no representation can be made as to the availability of the exemption provided by Rule 144 under the Securities Act for resales of the Top up Securities in registered form.


1.2	In addition, unless the Prospectus or Disclosure Package specifies that the applicable TEFRA exemption is either “C Rules” or “not applicable”, each Joint Bookrunner represents, warrants and agrees in relation to the relevant Top up Securities (if such Top up Securities are in bearer form) that:

	1.2.1	except to the extent permitted under U.S. Treas. Reg. §1.163-5(c)(2)(i)(D) (the “D Rules”),

		(i)	it has not offered or sold, and during the restricted period shall not offer or sell, Top up Securities in bearer form to a person who is within the United States or its possessions or to a United States person; and

		(ii)	it has not delivered and shall not deliver within the United States or its possessions definitive Top up Securities in bearer form that are sold during the restricted period;

	1.2.2	it has and throughout the restricted period shall have in effect procedures reasonably designed to ensure that its employees or agents who are directly engaged in selling Top up Securities in bearer form are aware that such Top up Securities may not be offered or sold during the restricted period to a person who is within the United States or its possessions or to a United States person, except as permitted by the D Rules;

	1.2.3	if it is a United States person, it is acquiring the Top up Securities in bearer form for purposes of resale in connection with their original issuance and if it retains Top up Securities in bearer form for its own account, it shall only do so in accordance with the requirements of U.S. Treas. Reg. §1.163-5(c)(2)(i)(D)(6);

	1.2.4	with respect to each affiliate that acquires from it Top up Securities in bearer form for the purpose of offering or selling such Top up Securities during the restricted period, it either (a) repeats and confirms the representations contained in Paragraphs 2.2.1, 2.2.2 and 2.2.3 on behalf of such affiliate or (b) agrees that it shall obtain from such affiliate for the benefit of the Issuer the representations contained in Paragraphs 2.2.1, 2.2.2 and 2.2.3; and

	1.2.5	it will not enter into a written contract (apart from a confirmation or other notice of the transaction) for the offer or sale during the restricted period of Top up Securities in bearer form with any person other than its affiliate(s) unless it obtains the representations and agreements contained in this paragraph 2.2 from the person with whom it enters into such written contract.

	Terms used in this paragraph have the meanings given to them by the U.S. Internal Revenue Code of 1986 and regulations thereunder, including the D Rules.

1.3	In addition, to the extent that the Prospectus or Disclosure Package relating to the relevant Top up Securities (if such Top up Securities are in bearer form) specifies that the applicable TEFRA exemption is “C Rules”, under U.S. Treas. Reg. §1.163-5(c)(2)(i)(C) (the “C Rules”), Top up Securities in bearer form must be issued and delivered outside the United States and its possessions in connection with their original issuance. In relation to each such Top up Issue, each Joint Bookrunner represents, warrants and agrees that it has not offered, sold or delivered, and shall not offer, sell or deliver, directly or indirectly, Top up Securities in bearer form within the United States or its possessions in connection with their original issuance. Further, in connection with their original issuance of Top up Securities in bearer form, it has not communicated, and shall not communicate, directly or indirectly, with a prospective purchaser if either such purchaser or it is within the United States or its possessions or otherwise involve its U.S. office in the offer or sale of Top up Securities


	in bearer form. Terms used in this paragraph have the meanings given to them by the U.S. Internal Revenue Code of 1986, as amended, and regulations thereunder, including the C Rules.

1.4	Each Joint Bookrunner represents and agrees that neither it nor any of its affiliates (as defined in Rule 501(b) of Regulation D), nor any person acting on its or their behalf has engaged or will engage in any form of general solicitation or general advertising (within the meaning of Regulation D) in connection with any offer and sale of the Top up Securities in the United States.

	The Joint Bookrunners may directly or through their respective U.S. broker-dealer affiliates arrange for the offer and resale of Top up Securities issued by the Issuer in the United States only to qualified institutional buyers. For the avoidance of doubt, any Top up Issues that are proposed to be offered or sold to QIBs in the United States shall be subject to the agreement of the Company, such agreement not to be unreasonably withheld or delayed, taking into account the requirements of the Securities Act and the documentary requirements of this Agreement in respect of any such Top up Securities.

3.	Public Offer Selling Restriction Under the Prospectus Directive

1.5	In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive (each, a “Relevant Member State”), each Joint Bookrunner represents and agrees that with effect from and including the date on which the Prospectus Directive is implemented in that Relevant Member State (the “Relevant Implementation Date”) it has not made and will not make an offer of Top up Securities which are the subject of the offering contemplated by the Prospectus or the Disclosure Package to the public in that Relevant Member State except that it may, with effect from and including the Relevant Implementation Date, make an offer of such Top up Securities to the public in that Relevant Member State:

	1.5.1	if the Prospectus in relation to the Top up Securities specify that an offer of those Top up Securities may be made other than pursuant to Article 3(2) of the Prospectus Directive in that Relevant Member State (a “Non-exempt Offer”), following the date of publication of a prospectus in relation to such Top up Securities which has been approved by the competent authority in that Relevant Member State or, where appropriate, approved in another Relevant Member State and notified to the competent authority in that Relevant Member State, in accordance with the Prospectus Directive, in the period beginning and ending on the dates specified in such prospectus;

	1.5.2	at any time to legal entities which are authorised or regulated to operate in the financial markets or, if not so authorised or regulated, whose corporate purpose is solely to invest in securities;

	1.5.3	at any time to any legal entity which has two or more of (1) an average of at least 250 employees during the last financial year; (2) a total balance sheet of more than €43,000,000 and (3) an annual net turnover of more than €50,000,000, as shown in its last annual or consolidated accounts;

	1.5.4	at any time to fewer than 100 natural or legal persons (other than qualified investors as defined in the Prospectus Directive) subject to obtaining the prior consent of the relevant Joint Bookrunners nominated by the Issuer for any such offer; or


	1.5.5	at any time in any other circumstances falling within Article 3(2) of the Prospectus Directive,

	provided that no such offer of Top up Securities referred to in paragraph 3.1.2 to 3.1.5 above shall require the Issuer or any Joint Bookrunner to publish a prospectus pursuant to Article 3 of the Prospectus Directive or supplement a prospectus pursuant to Article 16 of the Prospectus Directive.

	For the purposes of this provision, the expression an “offer of Top up Securities to the public” in relation to any Top up Securities in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and the Top up Securities to be offered so as to enable an investor to decide to purchase or subscribe the Top up Securities, as the same may be varied in that Member State by any measure implementing the Prospectus Directive in that Member State and the expression “Prospectus Directive” means Directive 2003/71/EC and includes any relevant implementing measure in each Relevant Member State.

4.	United Kingdom

	Each Joint Bookrunner represents and agrees that:

1.6	it has only communicated or caused to be communicated and will only communicate or cause to be communicated an invitation or inducement to engage in investment activity (within the meaning of Section 21 of FSMA) received by it in connection with the issue or sale of any Top up Securities in circumstances in which Section 21(1) of the FSMA does not or, in the case of the Guarantor, would not, if it was not an authorised person, apply to the Issuer, the Guarantor and the Company; and

1.7	it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to any Top up Securities in, from or otherwise involving the United Kingdom.

SCHEDULE 8

FORM OF INVESTOR CERTIFICATION FOR TOP UP ISSUES


1.	We are (a) a “qualified institutional buyer” (“QIB”) as defined in Rule 144A under the U.S. Securities Act of 1933, as amended (the “Securities Act”) or (b) a non-U.S. person outside the United States.

2.	We are an institution that (a) has such knowledge and experience in financial and business matters that we are capable of evaluating the merits and risks of our investments in the ECNs, and (b) are, and any accounts for which we are acting are, able to bear the economic risk, and sustain complete loss, of such investment in the ECNs.

3.	We will base our investment decision on a copy of the Issuer’s prospectus dated [ ] (the “Prospectus”), including the documents incorporated by reference therein. We acknowledge that the Joint Bookrunners have not made any representations, express or implied, to us with respect to the Issuer or the Guarantors, the offer, the ECNs or the accuracy, completeness or adequacy of any financial or other information contained in or incorporated by reference in the Prospectus. We have had access to all information necessary to allow us to make an informed investment decision.

4.	We are acquiring the ECNs for our own account (or for accounts as to which we exercise sole investment discretion and have authority to make, and do make, the statements contained in this letter) and not with a view to any distribution of the ECNs, subject, nevertheless, to the understanding that the disposition of our property will at all times be and remain within our control.

5.	We understand that the ECNs have not been, and are not expected to be, registered with the US Securities and Exchange Commission and will be “restricted securities” within the meaning of Rule 144(a)(3) under the Securities Act and we agree that for so long as such securities are “restricted securities” (as so defined), we will not reoffer, resell, pledge or otherwise transfer the ECNs, except (a) to another QIB in a transaction that does not require registration under the Securities Act (we recognize that the ECN’s are not eligible for resale under Rule 144A) or (b) in an offshore transaction in accordance with Rule 903 or Rule 904 of Regulation S under the Securities Act (which, for the avoidance of doubt, includes a sale over the London Stock Exchange), in each case in accordance with any applicable securities laws of any state of the United States or any other jurisdiction. We understand and acknowledge that the Issuer shall have the right to force the sale or transfer of any ECNs other than in compliance with the foregoing restrictions on transfer.

6.	As long as the underlying ordinary shares of the Company are “restricted securities” within the meaning of Rule 144(a)(3) under the Securities Act, we agree that they may not be deposited into any unrestricted depositary facility established or maintained by any depositary bank, including the current American Depositary Receipt (“ADR”) facility maintained by The Bank of New York Mellon, as depositary for the LBG’s ADR facility.

7.	We understand that the ECNs will be in global registered form only and will settle through the facilities of Euroclear/Clearstream but not through the facilities of The Depository Trust Company and that no definitive certificates are expected to be made available. In the limited circumstances in which definitive certificates will be made available, any certificates delivered to us in respect of the ECNs will bear a legend substantially to the following effect:

	“THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN AND WILL NOT BE REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND THE SECURITIES MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH RULE 903 OR RULE 904 OF REGULATION S UNDER THE


	SECURITIES ACT OR TO ANOTHER QUALIFIED INSTITUTIONAL BUYER IN A TRANSACTION THAT DOES NOT REQUIRE REGISTRATION UNDER THE SECURITIES ACT, IN EACH CASE IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER JURISDICTION.”

8.	We irrevocably authorize the Issuer, its affiliates, the Joint Bookrunners and their respective affiliates and any person acting on their behalf to produce this certification or a copy hereof to any interested party in any administrative or legal proceedings, dispute or official inquiry with respect to matters covered hereby.

9.	All holders of ECNs are required to notify transferees of the restrictions on transfer and other limitations and requirements of holding an interest in the ECNs. We hereby agree to notify any transferee to whom we subsequently reoffer, resell, pledge or otherwise transfer the ECNs of the restrictions on transfer and other limitations and requirements of holding an interest in the ECNs, including those set forth in paragraphs 5 and 6 above and this paragraph 9, and the transferee will be bound by such restrictions and requirements and will notify any subsequent transferees of such restrictions.

10.	We understand and acknowledge that the foregoing representations, warranties, agreements and acknowledgements are requirements in connection with United States and other securities laws and that the Issuer, its affiliates, the Joint Bookrunners and their affiliates, and others are entitled to rely on the truth and accuracy of the representations, warranties, agreements and acknowledgements contained herein. We agree that if any of the representations, warranties, agreements and acknowledgements made herein are no longer accurate, we shall promptly notify the Issuer and the Joint Bookrunners.

SCHEDULE 9

THE JOINT BOOKRUNNERS


(1)	(2)	(3)

Name	Address and fax number	Proportionate Share

Merrill Lynch International	Merrill Lynch Financial Centre	25%
	2 King Edward Street
	London EC1A 1HQ

	Fax number: +44 (0) 20 7995 2968
	For the attention of: Fixed Income Syndicate

UBS Limited	1 Finsbury Avenue	25%
UBS Limited	London EC2M 2PP	25%

	Fax number: +44 (0) 20 7567 4146
	For the attention of: Fixed Income Syndicate
	With a copy to: Transactions Legal
	Fax number: +44 (0) 20 7567 2364

Citigroup Global Markets Limited	Citigroup Centre	12.5 %
	Canada Square
	Canary Wharf
	London E14 5LB

	Fax number: +44 (0) 20 7986 7627
	For the attention of: Fixed Income Syndicate

Goldman Sachs International	Peterborough Court	12.5%
	133 Fleet Street
	London EC4A 2BB

	Fax number: +44 207 774 4477
	For the attention of: Fixed Income Syndicate

HSBC Bank plc	8 Canada Square	12.5%
HSBC Bank plc	London E14 5HQ

	Fax number: + +44 20 7992 4853
	For the attention of: Andrew Montgomery
	/Adam Bothamley


(1)	(2)	(3)

Name	Address and fax number	Proportionate Share

J.P. Morgan Securities Ltd.	125 London Wall	12.5%
J.P. Morgan Securities Ltd.	London EC2Y 5AJ

	Fax number: +44 20 7 325 8240
	For the attention of: Head of Debt Capital Markets
	Syndicate Desk and Head of EMEA Debt Capital
	Markets Group Legal

SIGNATORIES


SIGNED by		ANDREI MAGASINER

for and on behalf of

LBG CAPITAL NO. 2 PLC

SIGNED by		ARCHIE KANE

for and on behalf of

LLOYDS TSB BANK PLC

SIGNED by		ARCHIE KANE

for and on behalf of

LLOYDS BANKING GROUP PLC

SIGNED by		ALVARO CAMARA

for and on behalf of

MERRILL LYNCH INTERNATIONAL

SIGNED by		ROBERT CLARK

and

SIGNED by		KARIN MELSON

for and on behalf of

UBS LIMITED


SIGNED by		TOM PAUK

for an on behalf of

CITIGROUP GLOBAL MARKETS LIMITED

SIGNED by		RICHARD BUCKINGHAM

for an on behalf of

GOLDMAN SACHS INTERNATIONAL

SIGNED by		DANIEL SHORE

for an on behalf of

HSBC BANK PLC

SIGNED by		MICHAEL RIDLEY

for an on behalf of

J.P. MORGAN SECURITIES LTD.

Exhibit 4(b)(xi)

27 July 2009

Sir Winfried Bischoff
[                    ]
[                    ]
[                    ]

Dear Sir Win

LLOYDS BANKING GROUP (“the Company”)

I am delighted that the directors have confirmed your appointment to the board of the Company as Chairman. The appointment will be effective from 15 September 2009 on the terms set out below.

All directors of the Company also serve on the Board of Lloyds TSB Bank plc, HBOS plc and Bank of Scotland plc (together “the principal subsidiaries”). You will therefore also be appointed to the board of each of the principal subsidiaries in the capacity of Chairman. The boards generally meet simultaneously.

Appointment

Your appointment is subject to the articles of association of the Company from time to time in force and the provisions of the Companies Act 2006.

Continuation of your appointment is contingent upon satisfactory performance, election by shareholders at the Company’s Annual General Meeting in 2010 and re-election as a director at subsequent Annual General Meetings as required by the Company’s articles of association and codes to which the Company subscribes, in particular, the Combined Code on Corporate Governance issued by the Financial Reporting Council. If you are not elected or re-elected by the shareholders your appointment shall terminate automatically with immediate effect and without compensation.

The Company may terminate your appointment and this agreement at any time without compensation, subject to six month’s written notice. If you wish to terminate your appointment and this agreement, you must give the Company six months’ written notice. If, following termination of your appointment, you do not resign from the board of the Company, and the boards of the principal subsidiaries, having been requested to do so, the Company will be appointed s your attorney to effect your resignation. By countersigning this letter, you irrevocably appoint the Company as your attorney to act on your behalf to execute any document or to do anything in your name necessary to effect your resignation in accordance with this letter. If there is any doubt as to whether such a document (or other thing) has been carried out within the authority conferred by this paragraph, a certificate in writing (signed by any director or the Secretary of the Company) will be sufficient to prove that the act (or thing) falls within that authority.

Board Committees

As Chairman you will chair the Company’s Chairman’s Committee and Nominations Committee. You will also be a member of the Remuneration Committee. You will not be a member of any other committees of the board unless the board resolves otherwise.

Time Commitment

It is a condition of your appointment that the role of Chairman of the Company is your primary role. The agreement of the board should be sought before accepting additional commitments that might materially affect the time you are able to devote to your role.

On appointment you will be required to relinquish any other roles that compete or conflict with the Company’s business, e.g. Prudential, or which will affect your ability to meet the time commitment indicated below. You should discuss and agree with the Deputy Chairman your proposals in this regard prior to taking up the appointment.

As Chairman you will be required to devote such time as is necessary to ensure the effective execution of your role and responsibilities. This is expected to be 3-4 days a week but may be full time on occasion. By accepting this appointment, you confirm that you are able to allocate sufficient time to meet the expectations of your role to the satisfaction of the board.

Role and duties

Your duties will be those normally required of a non-executive director. Non-executive directors have the same legal responsibilities as any other director. The board as a whole is collectively responsible for promoting the success of the Company by directing and supervising the Company’s affairs. The key responsibilities of the Chairman are set out in schedule 1 to this letter.

As you are aware, the Financial Services Authority (FSA) has cleared you application for approved person/directorship status. Directors must inform the FSA of any significant changes in their personal circumstances which may have an impact on their status as approved persons/directors.

Status of Appointment

Upon appointment as Chairman you will become an employee of the Company. This letter sets out the only consideration you will receive for performing your duties. Accordingly, no other remuneration or benefits will be provided and, in particular, you will not participate in any of the Company’s senior executive incentive plans or pension schemes. For the avoidance of doubt if there is any conflict between this letter and the terms of any staff handbook or staff manual issued to you, the terms of this letter will prevail.

Fees and Expenses

In consideration of your appointment as Chairman the Company will pay you a fee at the rate of £700,000 per annum (“annual fees”) and provide the following benefits:

Life cover providing for a payment equal to four times your annual fees in the event of your death during the term of this agreement provided you comply with any eligibility requirements or other conditions from time to time set by the Company.

A cash allowance of £1,000 payable each month (£12,000) per annum) in lieu of a company car.

Membership of the Company’s medical plan subject to the rules of the plan from time to time, including eligibility rules. You will also be entitled to receive an executive confidential annual medical screening.

Secretarial services and the services of a Company driver.

You will be responsible for the payment of any tax in relation to the provisions of these benefits.

Your fees are inclusive of all services performed by you for any member of the Lloyds Banking Group. In this letter “Lloyds Banking Group” means the Company and its subsidiaries (as defined by section 1159 Companies Act 2006).

You will also be expected to maintain a bank account with a subsidiary of Lloyds Banking Group into which your fees shall be paid.

These fees will accrue on a daily basis and be payable monthly in arrears less any tax and national insurance contributions the Company is obliged to pay. These fees will be subject to an annual review by the Remuneration Committee of the Company.

If for any reason related to illness, disability or injury, you are unable to carry out your duties, payment of any fees during the period of incapacity will be at the discretion of the Remuneration Committee, after the first 3 months of incapacity.

Outside Interests

It is accepted and acknowledged that you have business interests other than those of the Company. As a condition of your appointment commencing you are required to declare any such directorships, appointments and interests to the board in writing. If you take on any additional business interests or become aware of any potential conflicts of interest, these must be disclosed to the board as soon as they arise or become known to you. If at any time you are considering acquiring any new interest which might give rise to a conflict of interest with the Company you must first discuss the matter with the Deputy Chairman and obtain a resolution of the board authorising such acquisition. Regardless of any approval given in relation to outside interests, it is your responsibility to ensure that you can meet the time commitment required by the role.

Confidentiality

You will not use or disclose to any person, firm or organisation (except as required by law or to carry out your duties under this letter) any trade secrets, know-how, business information or other private or confidential information relating to the business, finances or affairs of the Company, or any customer of the Company or any information provided on the basis that it is confidential. You will use your best endeavours to prevent the unauthorised use or disclosure of any such information. This restriction will continue to apply after your appointment ends without limit in time but will not apply to information which becomes public, unless through

unauthorised disclosure by you. After your appointment ends you will return all documents and information (whether written, visual or electronic) under your control which belong to the Company or any member of the Lloyds Banking Group. Your attention is also drawn to the requirements under both legislation and regulation as to the disclosure of price sensitive information. Consequently you should avoid making any statements that might risk a breach of these requirements. The Company Secretary can provide or obtain advice in relation to these matters.

Induction

Following appointment, the Company will provide a tailored induction programme.

Review Process

The performance of individual directors and the whole board and its committees is evaluated annually. If, at any time, there are any matters which cause you concern about your role you should discuss them with the Deputy Chairman as soon as is appropriate.

Directors’ Liability Indemnity and Insurance

You will have the benefit of any indemnity for directors contained in the articles of association of the Company and of any directors’ and officers’ insurance cover maintained from time to time by the Company (but this shall not oblige the Company to maintain any such cover either at all, or on current terms.

Independent Professional Advice

Occasions may arise when you consider that you need professional advice in the furtherance of your duties as a director and it will be appropriate for you to consult independent advisers at the Company’s expense. A copy of the board’s procedure under which directors may obtain such independent advice is set out in schedule 2 to this letter. The Company will reimburse the full cost of the expenditure incurred in accordance with the Company’s policy.

Disclosure and Dealings in Shares

The Company may be required by a rule of law or regulation of a competent authority or provisions of a code to include in its annual accounts a note of any material interest that a director may have in a transaction or arrangement that the Company has entered into. You must disclose such interest no later than when the transaction or arrangement comes up at a board meeting so that the minutes may record your interest appropriately and our records are updated. A general notice that you are interested in any contracts with a particular person, firm or Company is acceptable.

During the continuation of your appointment you will be expected to comply (and to procure that your spouse and connected persons comply) where relevant with any rule of law or regulation of any competent authority or of the Company from time to time in force in relation to dealings in shares, debentures and other securities of the Company and the unpublished price sensitive information affecting the shares, debentures and other securities of the Company.

Details of the procedure for dealing in shares, together with explanatory notes on the code of market conduct/model code, will be sent to you by our Group Compliance Director.

Shareholdings

Directors are encouraged to hold shares in the Company. Unless you already have a shareholding, you may wish to buy some, so that the shareholding appears in the report and accounts at the end of the year, confirming that you have a stake in the Company. You may elect to receive all or part of your monthly fees in shares. in the event that you wish to do so, you should advise the Head of Executive Remuneration who will make the necessary arrangements. Any shares purchased for you in this way will be subject to a share purchase agreement providing for purchase on a set date each month at the prevailing market price at the time.

Any tax arsing from the increase in value of these shares will be for your own account.

I hope that you will not hesitate to contact me if I can be of assistance with respect to any matters that arise during the term of your appointment.

Please acknowledge receipt and acceptance of the above terms by signing and returning the enclosed copy of this letter.

Harry Baines
Company Secretary and General Counsel
Lloyds Banking Group plc

I refer to the letter dated 27 July 2009, of which is a copy and agree its terms

Countersigned

Date

Schedule 1: Responsibilities of Chairman

As Chairman, you will be responsible for leadership of the board, and ensuring the board’s effectiveness in all aspects of the role. This will include:

Running the board and setting its agenda. The agenda should take full account of the issues and the concerns of all the board members. The agenda should be forward looking and concentrate on strategic matters rather than formulaic approvals of proposals which can be the subject of appropriate delegated powers to management;

Ensuring that members of the board receive accurate, timely and clear information, in particular about the Company’s performance, to enable the board to take sound decisions, monitor effectively and provide advice to promote the success of the Company;

Ensuring effective communication with, and chairing meetings of shareholders and ensuring that the members of the board develop an understanding of the views of the major investors;

Managing the board to ensure that sufficient time is allowed for discussion of complex or contentious issues, where appropriate, arranging for informal meetings beforehand to enable thorough preparation for the board discussion. It is particularly important that directors have sufficient time to consider critical issues and are not faced with unrealistic deadlines for decision-making;

Taking the lead in providing properly constructed recruitment and orientation for new directors that is comprehensive, formal and tailored, facilitated by the Company Secretary and Group HR Director; and ensuring that arrangements are put in place thereafter to enable directors thereafter to update the skills and knowledge they require in order to fulfil their role;

Taking the lead in identifying and meeting the development needs of individual directors, with support provided by the Company Secretary. It is the responsibility of the Chairman to address the development needs of the board as a whole with a view to enhancing its overall effectiveness;

Arranging for, and acting on the result of, the performance evaluation of the board, its committees and individual directors;

Evaluating and appraising the performance of the Chief Executive regularly and conduct a formal review at least annually.

Encouraging active engagement by all the members of the board.

Schedule 2: Obtaining professional advice

Subject to obtaining the prior agreement of:

(1)	either the Chairman or the Group Chief Executive; failing which

(2)	any two independent non-executive directors,

the directors of the Company may at any time, individually or collectively, consult the Company’s or other independent professional advisers at the Company’s expense in the furtherance of their duties as directors of the Company.

A record is kept of such agreement, including the names of the directors concerned, the names of the independent professional advisers whose advice was proposed to be sought, a brief summary of the subject matter and an estimate of the cost of obtaining such advice.

If the Group Chief Executive or two independent non-executive directors agree to the taking of such advice, they should forthwith notify the Chairman, unless it appeared to them that the particular circumstances made it inappropriate to do so.

INVESTOR IN PEOPLE

Exhibit 4(b)(xii)

12 February 2010

Mr David Roberts,
[                    ]
[                    ]
[                    ]

Non executive director appointment - Lloyds Banking Group plc (“the company”)

Following our recent discussions, I am pleased to confirm on behalf of our Nomination and Governance Committee my invitation to you to join the board of Lloyds Banking Group plc as a non executive director.

All directors of the company also serve on the principal subsidiary boards of Lloyds TSB Bank plc, HBOS Plc and BOS plc. This letter therefore also covers your appointment as non executive director of those companies. The boards generally meet simultaneously.

Your appointment is subject to the terms and conditions set out in this letter.


1. Appointment

Your appointment will commence on 1 March 2010 and is for an initial term of three years expiring at the AGM 2013. At the end of the three year term, your appointment will be reviewed. Subject to satisfactory performance and Board approval, you may be invited to serve for a further period.

Continuation of your appointment is subject to:


•	confirmation of the Financial Services Authority (FSA) that your application for Approved Person status has been approved and to this status being maintained throughout your tenure Directors must inform the FSA and the company of any significant changes in their personal circumstances which may have an impact on their status as approved persons/directors;

•	satisfactory performance and contribution to the Board and any committees of which you are a member;


•	election and re-election as a director by the company’s shareholders in general meeting as required by the company’s Articles of Association and codes to which the company subscribes in particular, the Financial Reporting Council’s UK Corporate Governance Code (formerly the Combined Code).

2. Termination

You will cease to hold the office of director if:


	(i)	you resign from your appointment or choose not to stand for re-election;

	(ii)	the company terminates your appointment or chooses not to propose you for re-election;

	(iii)	shareholders fail to elect or re-elect you;

	(iv)	the Articles of Association or any law or regulation prevent you from continuing in office.

In the case of (i) and (ii) above, there is no entitlement to notice or to compensation for loss office. However, where possible, you are requested to make the Chairman aware of any intention to resign or not to seek re-election so that the board can plan for orderly succession.

In the case of termination under (iii) or (iv) above, your appointment will terminate automatically with immediate effect and without compensation.

3. Board Committees

In addition to your appointment as a non executive director, you may be required to serve on standing or ad hoc Board Committees. Initially, you will be invited to serve on the following committees:


•	Member of the Audit Committee

•	Member of the Remuneration Committee.

4. Role

Your duties will be those required of a non executive director. Non executive directors have the same legal responsibilities as any other director. The Board as a whole is collectively responsible for promoting the success of the company by directing the company’s affairs. As members of the unitary board, all directors are required to:


•	provide sound leadership of the company within a framework of prudent and effective controls which enable risk to be assessed and managed;

•	set the company’s strategy having regard to its risk appetite, ensuring that the necessary financial and human resources are in place for the company to meet its objectives, and review management performance; and


•	set the company’s values and standards and ensure that its obligations to its shareholders and others are met and understood.

5. Key accountabilities

Non executive directors are expected to focus on the following key areas


•	Strategy. Non executive directors should constructively challenge and help to develop proposals on strategy by bringing a different and external perspective to board discussions.

•	Performance. Non executive directors should satisfy themselves that Board discussion and decision making on risk matters is based on accurate and appropriately comprehensive information and draws, as far as they believe it to be relevant or necessary, on external analysis and input. In particular, non executive directors should satisfy themselves on the integrity of financial information and that financial controls and systems of risk management are robust, adequate and effective.

•	Risk. Non executive directors should satisfy themselves that Board discussion and decision making on risk matters is based on accurate and appropriately comprehensive information and draws, as far as they believe it to be relevant or necessary, on external analysis and input. In particular, non executive directors should satisfy themselves on the integrity of financial information and that financial controls and systems of risk management are robust, adequate and effective.

•	People. Through membership of Board Committees, non executive directors are responsible for determining appropriate policies, structure and levels of remuneration for executive directors and senior executive management and ensuring appropriate arrangements are in place for board appointments and executive and non executive succession planning.

6. Time Commitment

As a non executive director, you are required to devote such time as is necessary for the effective discharge of your duties. The estimated time commitment per annum for your role is around 3 days per month which is made up as follows:


-	Base time commitment as LBG non executive director:	20 days
-	Additional time for membership of Audit Committee:	8 days
-	Additional time for membership of Remuneration Committee:	6 days

		34 days	per annum

The estimated time commitment includes all scheduled Board and Committee meetings relevant to your role, plus strategy sessions, attendance at shareholders meetings and preparation for meetings. A schedule of Board and committee meetings for 2010 and 2011 is attached.

The above time commitment is based on planned events. From time to time, however, you may be required to attend meetings at short notice. You will be expected to use your best efforts to relinquish other appointments to ensure that you can meet the time commitments and make yourself available as appropriate.

By accepting this appointment, you confirm that you are able to allocate sufficient time to meet the expectations of your role to the satisfaction of the board.

The agreement of the Chairman should be sought before accepting additional commitments that might affect your ability to meet the time commitments necessary to discharge your duties.

7. Fees and Expenses

The following fees per annum are payable in respect of your appointment:


•	Non executive base fee - this will be looked at in the course of 2010	£ 65,000
•	Additional fee for membership of Audit Committee	£ 25,000
•	Additional fee for membership of Remuneration Committee	£ 20,000

Total		£110,000

Fees are payable monthly and will be paid to a Lloyds TSB bank account held in your name. If you do not hold a Lloyds TSB account, you will be required to open one for this purpose. Please contact the Company Secretary who will be happy to make the necessary arrangements.

The company will reimburse you for all reasonable and properly documented expenses incurred by you in the performance of your duties.

8. Outside Interests

It is accepted and acknowledged that you have business interests other than those of the company. As a condition of your appointment you are required to declare any such directorships, appointments and interests to the board in writing. If you take on any additional business interests or become aware of any potential conflicts of interest, these must be disclosed to the board as soon as they arise or become known to you. If at any time you are considering acquiring any new interest which might give rise to a conflict of interest with the company you must first discuss the matter with the senior independent director and obtain a resolution of the board authorising such acquisition. Regardless of any approval given in relation to outside interests, it is your responsibility to ensure that you can meet the time commitment required by the role.

9. Confidentiality

You will not use or disclose to any person, firm or organisation (except as required by law or to carry out your duties under this letter) any trade secrets, know-how, business information or other private or confidential information relating to the business, finances or affairs of the company, or any customer of the company or any other information provided on the basis that it is confidential. You will use your best endeavours to prevent the unauthorised use or disclosure of any such information. This restriction will continue to apply after your appointment ends without limit in time but will not apply to information which becomes public, unless through unauthorised disclosure by you. After your appointment ends you will return all documents and information (whether written, visual or electronic) under your control which belong to the company or any member of the Lloyds Banking Group.

Your attention is also drawn to the requirements under both legislation and regulation relating to the disclosure of price sensitive information. You should avoid making any statements or engaging in any dealings that might contravene these requirements. The Company Secretary can provide further information and advice on these matters if required.

10. Induction

Following appointment, the company will provide a tailored induction programme. You are entitled to request any additional information or briefings to assist you in the execution of your duties.

11. Evaluation and review of performance

The performance of individual directors and the board and its committees is evaluated annually. In the interim, if there are any matters which you wish to discuss in relation to your role, please feel free to contact me.

12. Directors’ Liability Indemnity and Insurance

To the extent permitted by law, directors are entitled to be indemnified by the company against all costs and liabilities incurred by them in execution of their duties. A deed of indemnity is included in your appointment pack for signature and return.

You will also have the benefit of any directors’ and officers’ insurance cover maintained from time to time by the company (but this shall not oblige the company to maintain any such cover either at all, or on current terms).

13. Independent Professional Advice

Occasions may arise when you consider that you need professional advice in the furtherance of your duties as a director and it will be appropriate for you to consult independent advisers at the company’s expense. The company will reimburse the full cost of expenditure incurred in accordance with the company’s policy, details of which are set out in the appointment pack.

14. Disclosure and Dealings in Shares

The company may be required to include in its annual accounts a note of any material interest that a director may have in any transaction or arrangement that the company has entered into. You must disclose any such interest as soon as possible but no later than the board meeting at which the transaction or arrangement is first discussed so that the Board can note your interest and, if appropriate, approve any conflicts. A general notice that you are interested in any contracts with a particular person, firm or company is acceptable.

During the continuation of your appointment you will be expected to comply (and to procure that your spouse and any connected persons comply) where relevant with any rule of law or regulation of any competent authority or of the company from time to time in force in relation to dealings in shares, debentures and other securities of the company and the unpublished price sensitive information affecting the shares, debentures and other securities of the company.

Details of the procedure for dealing in shares, together with explanatory notes on the code of market conduct/model code, will be included in your appointment pack.

15. Shareholdings

All directors are encouraged to hold shares in the company. If you would like to receive whole or part of your monthly fee in shares, we would be happy to make the necessary arrangements for you.

Please acknowledge receipt and acceptance of the above terms by signing and returning the enclosed copy of this letter.

Please do not hesitate to contact me for any assistance in any matters during the term of your appointment. I look forward to working with you on the Board.

Sir Winfried Bischoff

I acknowledge receipt of the letter dated 12 February 2010 of which this is a copy and accept the terms of appointment.


Signed


Date

Exhibit 4(b)(xiii)

19 February 2010

Mr Glen Moreno,
[                    ]
[                    ]
[                    ]

Non executive director appointment - Lloyds Banking Group plc
(“the company”)

Following our recent discussions, I am pleased to confirm on behalf of our Nomination and Governance Committee my invitation to you to join the Board of Lloyds Banking Group plc as a non executive director.

Your appointment as a non executive will include the role of Senior Independent Director (“SID”) and is subject to the terms and conditions set out in this letter.

1. Appointment

Continuation of your appointment is subject to:


•	Confirmation by the Financial Services Authority (FSA) that your application for Approved Person status has been approved and to this status being maintained throughout your tenure. Directors must inform the FSA and the company of any significant changes in their personal circumstances which may have an impact on their status as approved persons/directors;

•	Satisfactory performance and contribution to the Board and Committees of which you are a member;


•	Election and re-election as a director by the company’s shareholders in general meeting as required by the company’s Articles of Association and codes to which the company subscribes, in particular the Financial Reporting Council’s UK Corporate Governance Code (formerly the Combined Code).

2. Termination

You will cease to hold the office of director if:


	(i)	you resign from your appointment or choose not to stand for re-election;

	(ii)	the company terminates your appointment or chooses not to propose you for re-election;

	(iii)	shareholders fail to elect or re-elect you;

	(iv)	the Articles of Association or any law or regulation prevent you from continuing in office.

In the case of (i) and (ii) above, there is no entitlement to notice or to compensation for loss office. However, where possible, you agree to make the Chairman aware of any intention to resign or not to seek re-election so that the board can plan for orderly succession.

In the case of termination under (iii) or (iv) above, your appointment will terminate automatically with immediate effect and without compensation.

3. Board Committees

In addition to your appointment as a non executive director and SID, you may be required to serve on standing or ad hoc Board Committees. Initially, you will be invited to serve as Chair of the Risk Oversight Committee and as a member of the Remuneration Committee.

As part of your duties as SID you will also be invited to become a member of the Nomination and Governance Committee.

4. Role

Your duties will be those required of a non executive director and SID. Non executive directors have the same legal responsibilities as any other director. The Board as a whole is collectively responsible for promoting the success of the company by directing the company’s affairs. As members of the unitary board, all directors are required to:


•	Provide sound leadership of the company within a framework of prudent and effective controls which enable risk to be assessed and managed;


Set the Group’s strategic aims having regard to the risk appetite appropriate for the company, ensure that the necessary financial and human resources are in place for the company to meet its objectives, and review management performance; and

•	Set the Group’s values and standards and ensure that its obligations to its shareholders and others are understood and met.

In addition, in your capacity as SID, you will:

•	be available to shareholders if they have concerns which contact through the normal channels of Chairman, Chief Executive or Finance Director has failed to resolve or for which such contact is inappropriate;

•	attend sufficient meetings with major shareholders and financial analysts to obtain a balanced understanding of the issues and concerns of such shareholders;

•	act, together with the Deputy Chairman, as a sounding board for the Chairman and CEO on board and shareholder matters.

•	be a conduit, as required, for views by other non-executive directors on the performance of the Chairman, and chair a formal annual session of the Nomination and Governance Committee members (excluding the Chairman) to agree the Chairman’s objectives and review his performance.

•	be the focal point for board members for any concerns regarding the Chairman, or the relationship between the Chairman and the CEO.

5. Key accountabilities

Key accountabilities for non- executive directors will consist of: -

§	Strategy . Non executive directors should constructively challenge and help to develop proposals on strategy by bringing a different and external perspective to Board discussions.

§	Performance . Non executive directors should support and scrutinise the performance of management in meeting agreed goals and objectives and monitor the reporting of performance.

§	Risk . Non executive directors should satisfy themselves that Board discussion and decision making on risk matters is based on accurate and appropriately comprehensive information and draws, as far as they believe it to be relevant or necessary, on external analysis and input. In particular, non executive directors should satisfy themselves on the integrity of financial information and that financial controls and systems of risk management are robust, adequate and effective.


§	People . Through membership of Board Committees, non executive directors are responsible for determining appropriate policies, structure and levels of remuneration for executive directors and senior executive management and ensuring appropriate arrangements are in place for Board appointments and executive and non executive succession planning.

6. Time Commitment

As a non executive director, you are required to devote such time as is necessary for the effective discharge of your duties. The estimated time commitment for your role is approximately 4 days per month which is made up as follows:


- Base time commitment as non executive director:	20 days
- Additional time for SID responsibilities:	10 days
- Additional time for chair of Risk Oversight Committee:	16 days
- Additional time for member of Remuneration Committee:	6 days

Total per annum	52 days

The estimated time commitment includes all scheduled Board and Committee meetings relevant to your role, plus strategy sessions, attendance at shareholder meetings and preparation for meetings. A schedule of Board and committee meetings for 2010 and 2011 is attached.

By accepting this appointment, you confirm that you are able to allocate sufficient time to meet the expectations of your role to the satisfaction of the board.

The agreement of the Chairman should be sought before accepting additional commitments that might affect your ability to meet the time commitments necessary to discharge your duties.

7. Fees and Expenses

The following fees per annum are payable in respect of your appointment:


	§	Non executive director base fee:
		£65,000 - this will be looked at in the course of 2010

	§	Additional fee for acting as SID
		£60,000

	§	Additional fee for acting as chair of the Risk Oversight Committee
		£40,000

	§	Additional fee for acting as a member of the Remuneration Committee
		£20,000

Total £185,000

The company will reimburse you for all reasonable and properly documented expenses incurred by you in the performance of your duties.

8. Outside Interests

9. Confidentiality

You will use your best endeavours to prevent the unauthorised use or disclosure of any such information. This restriction will continue to apply after your appointment ends without limit in time but will not apply to information which becomes public, unless through unauthorised disclosure by you. After your appointment ends you will return all documents and information (whether written, visual or electronic) under your control which belong to the company or any member of the Lloyds Banking Group.

10. Induction

Following appointment, the company will provide a tailored induction programme. You are entitled to request any additional information or briefings to assist you in the execution of your duties.

11. Evaluation and review of performance

12. Directors’ Liability Indemnity and Insurance

13. Independent Professional Advice

Occasions may arise when you consider that you need professional advice in the furtherance of your duties as a director and it will be appropriate for you to consult independent advisers at the company’s expense. The company will reimburse the full cost of expenditure incurred in accordance with the company’s policy, details of which are set out in the appointment pack.

14. Disclosure and Dealings in Shares

Details of the procedure for dealing in shares, together with explanatory notes on the code of market conduct/model code, will be included in your appointment pack.

15. Shareholdings

All directors are encouraged to hold shares in the company. If you would like to receive whole or part of your monthly fee in shares, we would be happy to make the necessary arrangements for you.

Please acknowledge receipt and acceptance of the above terms by signing and returning the enclosed copy of this letter.

Please do not hesitate to contact me for any assistance in any matters during the term of your appointment.

I look forward to working with you on the Board.

Sir Winfried Bischoff

I acknowledge receipt of the letter dated 12 February 2010 of which this is a copy and accept the terms of appointment.


Signed


Date

Exhibit 8.1

LLOYDS BANKING GROUP STRUCTURE

The following is a list of the principal subsidiaries of Lloyds Banking Group plc at 31 December 2009. The audited consolidated accounts of Lloyds Banking Group plc for the year ended 31 December 2009 include the audited accounts of each of these companies.


Name of subsidiary undertaking	Country of registration/ incorporation	Percentage of equity share capital and voting rights held	Nature of business	Registered office

Lloyds TSB Bank plc	England	100%	Banking and financial services	25 Gresham Street London EC2V 7HN

Scottish Widows plc	Scotland	100%*	Life assurance	69 Morrison Street Edinburgh EH3 8YF

HBOS plc	Scotland	100%	Holding company	The Mound Edinburgh EH1 1YZ

Bank of Scotland plc	Scotland	100%*	Banking and financial services	The Mound Edinburgh EH1 1YZ

Clerical Medical Investment Group Limited	England	100%*	Life assurance	33 Old Broad Street London EC2N 1HZ

* Indirect interest

EXHIBIT 12.1

Certifications required under Section 302 of the Sarbanes-Oxley Act

I, Eric Daniels, certify that:

1.	I have reviewed this annual report on Form 20-F of Lloyds Banking Group plc (the “Company”) ;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;

4.	The Company's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and we have:

	a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

	c)	Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	d)	Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and

5.	The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company's auditors and the audit committee of the Company's board of directors (or persons performing the equivalent functions):

	a)	All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarise and report financial information; and

	b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal control over financial reporting.

/s/ J Eric Daniels
J E Daniels, Group Chief Executive
Date: 13 May 2010

EXHIBIT 12.2

Certifications required under Section 302 of the Sarbanes-Oxley Act

I, Tim Tookey, certify that:

1.	I have reviewed this annual report on Form 20-F of Lloyds Banking Group plc (the “Company”);

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;

4.	The Company's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and we have:

	a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

	c)	Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	d)	Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and

5.	The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company's auditors and the audit committee of the Company's board of directors (or persons performing the equivalent functions):

	a)	All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarise and report financial information; and

	b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal control over financial reporting.

/s/ T Tookey
T J W Tookey, Group Finance Director
Date: 13 May 2010

EXHIBIT 13.1

CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(SUBSECTIONS (a) AND (b) OF SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES CODE)

This certification set forth below is being submitted in connection with the Annual Report on Form 20-F for the year ended 31 December 2009 (the “Report”) for the purpose of complying with Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Section 1350 of Chapter 63 of Title 18 of the United States Code.

J. Eric Daniels, the Group Chief Executive, and Tim J W Tookey, the Group Finance Director, of Lloyds Banking Group plc, each certifies that, to the best of his knowledge:

	1.	the Report fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act; and

	2.	the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Lloyds Banking Group plc.

13 May 2010

/s/ J Eric Daniels
____________________

J Eric Daniels
Group Chief Executive

/s/ T Tookey
____________________
T J W Tookey
Group Finance Director

Exhibit 15.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration Statement on Form F-3 (No. 333-143778) of Lloyds Banking Group plc of our report dated 25 February 2010, except with respect to our opinion on the consolidated financial statements insofar as it relates to the segmental analysis described in Note 4 which is as of 13 May 2010 relating to the financial statements and the effectiveness of internal control over financial reporting, which appears in the Annual Report on Form 20-F. We also consent to the reference to us under the heading “Selected Consolidated Financial Data” in this Annual Report on Form 20-F.

PricewaterhouseCoopers LLP
Edinburgh, United Kingdom
13 May 2010