Tesco is to pay out £235m to settle investigations by the Serious Fraud Office and Financial Conduct Authority into the 2014 accounting scandal that rocked Britain’s biggest retailer.

It will pay a fine of £129m as part of a deferred prosecution agreement (DPA) with the SFO, although this deal requires court approval. The DPA relates to Tesco subsidiary Tesco Stores Ltd.

The supermarket group has separately agreed with the FCA to pay about £85m in compensation to investors affected by a trading statement on 29 August 2014 that overstated profits. Tesco will also pay legal costs associated with the agreements and said the total exceptional charge was expected to be £235m.

Dave Lewis, the chief executive of Tesco, said the settlement allowed the company to move on. “I want to apologise to all those affected. What happened is a huge source of regret to us all at Tesco, but we are a different business now,” he said.

He admitted the Tesco brand had been damaged by the disclosure of the accounting scandal, but said the company was “committed to doing everything we can to continue to restore trust in our business and brand”.

Lewis said it had been a very difficult period for Tesco, but he was “proud that we faced into it. We have undertaken a comprehensive programme of change.”

A small team at Tesco has been dedicated to working on resolving the accounting issue and cooperating with the investigations.

Lewis took charge of Tesco in September 2014. The proposed DPA relates to false accounting at Tesco Stores Limited, a subsidiary of the retailer, between February and September 2014.

The settlements relate to Tesco admitting in 2014 that it had overstated profits by £326m. This overstatement was linked to how it booked payments from suppliers.

The agreements between Tesco, the SFO and FCA are not an admittance by the company that it or any of its employees committed a criminal offence. The FCA has stated in a ruling that it is not suggesting the Tesco board of directors knew, or could reasonably be expected to have known, that the information in the company’s trading statement in August 2014 was false or misleading.

The compensation agreement with the FCA involves paying out to investors who bought shares or bonds between 29 August and 19 September 2014. Each purchaser of shares during this period will receive 24.5p a share plus interest at 1.25% a year for institutional investors, or 4% a year for retail investors.



Auditor KPMG has been appointed to administer the compensation scheme with oversight from the FCA, which has not imposed a penalty on Tesco.



The company said it had fully cooperated with the SFO and FCA investigations and undertaken an “extensive programme of change” that involved overhauling leadership, structures, financial controls, partnerships with suppliers, and the way the business buys and sells.

DPAs, which were introduced in the UK in February 2014, allow a company to suspend a prosecution in return for meeting specified conditions, such as paying a fine and demonstrating that its culture has changed. The agreements, which have been used in the US for years, require judicial approval. Tesco’s case is scheduled to be heard on 10 April.

The DPA with Tesco follows a settlement with Rolls-Royce in January that saw the aerospace and defence company agree to pay £671m over allegations that it bribed middlemen around the world between 1989 and 2013.

In a statement, the SFO confirmed the agreement with Tesco, but said it would make no further comment until the court hearing.

Bruno Monteyne, an analyst at Bernstein, said: “Tesco has now settled three out of the four challenges [relating to the scandal] – US investors, the SFO and the FCA.



“That leaves one more issue from the past to be dealt with: possible lawsuits by European-based investors. There is no progress on that. There are occasional reports about groups of investors filing a claim, but clearly not enough in their cases to make any real progress.

“The short period of time covered by both the SFO ruling and the FCA ruling seems to imply very limited opportunity for these cases to extract large compensation.”

Laith Khalaf, a senior analyst at Hargreaves Lansdown, said: “This kind of accounting error is exceptionally rare in the UK stock market. Nonetheless, shareholders in all companies will be heartened to learn that in instances where false information is provided to the market, the regulator will see to it that investors are duly compensated.”

Tesco’s £85m payout to investors

About 10,000 investors in Tesco will share £85m in compensation agreed with the financial markets watchdog. It is the first time the FCA has used its powers to require a listed company to pay compensation for market abuse after the supermarket admitted issuing a misleading statement of its affairs in 2014.

The majority of those being offered compensation are individual retail investors, some of whom hold just a handful of shares.

To qualify, investors must have bought Tesco shares or bonds between 29 August 2014 and 19 September 2014.

In order to receive compensation shareholders must also be a “net investor” having bought more shares than they sold during that period. They must have also suffered a financial loss. Any loss automatically offset by a hedging agreement, for example, would not qualify.

Each qualifying shareholder will receive 24.5p per share while compensation for bondholders varies depending on the investment they made.

Interest on compensation will also be paid at a rate of 4% from 19 September until 120 days after the scheme commences later this year for individual investors. Institutional investors will get a rate of 1.25%.

The scheme will be operated by accountancy firm KPMG which expects to complete preparations to begin operation by the end of August.