The Association of British Insurers (ABI) will launch a complaint against Spain's Santander
The ABI has formed a committee comprising several of Britain's largest insurance companies to challenge the terms of the offer to investors to exchange subordinated debt into new senior notes, the paper said, without citing a source.
Santander, Spain's biggest bank, declined to comment.
The bond swap affects a third of its total outstanding Lower Tier 2 stock with call dates ranging from March 2012 until September 2014 but final maturities five years thereafter.
Bondholders will receive new senior debt maturing in December 2015 at a spread of mid-swaps plus 150 basis points.
Bondholders are questioning why Santander should want to exchange subordinated bonds for debt that would rank higher in the bank's capital structure in the event it got into trouble, given it has said it is among the strongest banks in Europe, The Telegraph said.
The European Banking Authority (EBA) has identified a capital shortfall of 15 billion euros at Santander, or 6.5 billion euros (5 billion pounds) if a convertible bond is taken into account.
Bondholders have until November 23 to tender their securities via dealer managers Morgan Stanley and Santander.
(Reporting By Judy MacInnes; Editing by Will Waterman)