How Councils Blow Your Millions: Channel 4 Dispatches
Parliamentary committee chairman calls for inquiry into £15bn of risky bank loans taken out by councils across the country
Clive Betts, the Chairman of the parliamentary committee which scrutinises local government has called for an inquiry into £15bn of risky bank loans taken out by more than 200 councils across the country.
These risky and complex loans are known as LOBOs. Some councils like Newham and Cornwall are being charged interest rates of more than 7% on tens of millions of pounds of these LOBO loans at a time when base rates are at a historic low.
Expensive exit fees imposed on councils by banks like RBS and Barclays mean that councils can’t get out of these loans which can run for up to 70 years.
Dispatches estimate that banks made more than £1bn in upfront profits on these local authority loans.
A former trader at Barclays Capital told Dispatches he had “deep moral qualms” about LOBOs and didn’t feel they were “fair” on councils.
For the past three months, Channel 4 Dispatches has been investigating the books of town halls across the country. How Councils Blow Your Millions: Channel 4 Dispatches, airs tonight (Monday 6th July).
Dispatches presented its evidence to Clive Betts, who said: ‘I think the committee will want to look at this very seriously indeed’. He said he would question ‘whether should these loans be continued, is there any way they can be unravelled and councils given loans at a fair interest rate. ‘
Calculations suggest that if councils could refinance at today’s rates they could save taxpayers £145m this year alone – or almost three quarters of a billion pounds across this parliament.
Betts has also called for the Financial Conduct Authority to investigate the City firms that give specialist financial advice to town halls on their borrowing.
Dispatches uncovered evidence that some council advisers were not only paid by the local authority, but earned commission from City brokers if town halls took out these risky loans. Betts described this potential conflict of interest as “outrageous”.
What are LOBO loans?
Few outside a council's finance department or the City of London know about the existence of these LOBO loans. While these loans might look a bit like a fixed-rate mortgage they are long-term loans tied to complex interest rate derivatives set up by the banks.
LOBO stands for Lender Option Borrower Option and unlike a fixed-rate mortgage they have three key twists:
· The loan contract runs for between 40 and 70 years
· Councils have to pay huge exit fees if they want to move to a better deal
· Banks have the option of raising the rates at regular intervals
Most LOBO loans were taken out between 2003-2011 when council officials believed interest rates would stay high. As base rates have hit rock bottom and stayed low, many local authorities have been left counting the cost.
Research suggests about 240 local authorities across the UK have taken out about £15 billion of LOBO loans.
In some cases local authorities have taken up to half a billion pounds of these loans, borrowing from private banks including Barclays and RBS.
MP calls for investigation into LOBO loans
Labour MP Clive Betts told Channel 4 Dispatches that he wants his committee to investigate these loans and would like to explore whether there are grounds to unravel these deals.
He has also called for the Financial Conduct Authority to investigate the behaviour of City firms that offer local authorities specialist financial advice. Dispatches has obtained evidence that as well as being paid by councils some of these firms earned commission from City brokers if a council took out a LOBO.
Betts told the programme: “That's outrageous. In the end a council appoints and pays for an independent outside advisor to come in they expect that advice to be independent and not to be paid for by somebody else who is gaining a profit from these loans being set up. I mean that really is scandalous if that's happened.”
He added: "I think the FCA now ought to investigate this, and if it hasn't got the powers then the government ought to consider giving it the powers to regulate this in the future.”
Expensive ‘inverse floater’ LOBO loans
There are a number of different types of LOBO loans but currently the most expensive for councils is known as the "inverse floater". These are LOBO loans taken out by councils that have tied interest payments to a complex formula designed to reduce a council's interest payments if rates go up.
However, as base rates have fallen and stayed low some councils have ended up paying high rates of interest.
Channel 4 Dispatches has established that at least 12 councils which have the most expensive LOBO loans include Cornwall and Newham. Most of these have "inverse floaters" taken out with RBS.
The council with the biggest portfolio of LOBO loans is the London Borough of Newham which has £563m of these risky loans. Channel 4 Dispatches has obtained a council document which shows that this year the local authority has been paying rates of up to 7.6% on these loans.
Banking whistleblower speaks out
A former banker with Barclays Capital, Rob Carver, has spoken out about his "deep moral qualms" with LOBO loans.
Carver used to work on Barclays Capital's Exotic Interest Rate Derivative Desk . He didn’t deal with councils directly, but millions of pounds of Lobo contracts passed across his desk.
He says: “I didn't feel that the trading we were doing was fair. I didn't feel that they [councils] understood the business that they were getting in to, and I didn't think ultimately it would be a very good deal for the - the local taxpayers of that authority."
‘Conflict of interest’?
Channel 4 Dispatches also hears evidence that some City consultants giving councils specialist financial advice on their borrowing earned commission on LOBO loans that a council took out.
We’ve learned that as well as being paid by councils, some advisors earned commission from city brokers if the council took out a lobo.
Mark Pickering previously worked for Sector, a firm of council advisers which earned these commissions.
He felt this was a potential conflict of interest.
Asked whether Sector earned commission on LOBO deals, Mark Pickering says: “Yes, it did go on during my time at Sector…. I felt pretty uncomfortable and that’s why I sought to do something about it by setting up an independent alternative."
Mark Pickering left Sector and set up a rival firm, which doesn’t take commission. His firm , Arlinglcose, does not advise councils to take out LOBO loans.
He said: "it's rare to find a situation which the balance of the benefits have seen to fall favourably on the local authority."
Capita, which owns Sector, told the programme:
they ‘strongly refute any allegations of inappropriate business activities’
We provided ‘generic, factual, comparative information to local authorities regarding their funding options’
‘We did not and do not direct local authorities to seek funding from any specific organisation”
Right to Replies
A Barclays spokesperson told Channel 4 Dispatches that these loans have helped councils:
‘ build new schools, roads and parks. They are straightforward, fair and easily explained’
‘The average interest rate was about 4.5 %, typically cheaper than the public sector loans available’
‘It is untrue lobo loans work against the best interest of the local authority’
At RBS recent AGM, Channel 4 Dispatches asked the banks chairman, Sir Philip Hampton, if he could justify charging councils, high interest rates for LOBO loans.
Sir Philip Hampton says:
‘It's very difficult to talk about specific interest rates attached to specific asset classes… the rates go up and down, sometimes we do quite well with interest rates spreads and sometimes we do really badly - that's the nature of banking. So I don't think, we don't have any mechanisms for separating out councils for any particular treatment, I don't think we've got the market power to do that.’
Councils say the LOBOs they took out had lower interest rates than government loans and that on average that’s still the case.
Newham council told us it’s made ‘£65 m of savings’ on its borrowing since 2002 and that it’s ensured its ‘ borrowing protects the council’s finances from ...different interest rates’. It added that after refinancing its debts between 2002 and 2009 its interest payments were halved. They also say they comply with accounts and audit regulations.’
Cornwall Council told us they take expert financial advice and: ‘We are happy our portfolio provides value for money and protects against the risk of fluctuating interest rates ..two LOBO rates are higher... due to the extended period of extremely low interest rates that could not have been foreseen.’
The Local Government Association say that LOBOs are legitimate for councils to use but should be assessed as part of their overall portfolio and not judged in hindsight.
How Councils Blow Your Millions: Channel 4 Dispatches, Monday 6th July at 8pm
Notes to Editors
Press contact: Peter Heneghan, Channel 4 Press Office