Barclays removes its “lenders option” to increase interest rates on some LOBO loans. This is not “cancellation” and should not be viewed a victory for councils and housing associations.
Debt Resistance UK would like to correct misleading reports in the media and the local government press regarding Barclays “cancelling” its LOBO loans, and this being interpreted as an unequivocally good thing for public sector borrowers. It is not.
Commenting for Debt Resistance UK, Joel Benjamin said:
“The idea Barclays has removed its “lenders option” to increase interest rates on LOBO loans as some form of free giveaway to Councils & Housing Associations is absurd. Despite its Quaker roots, Barclays is not in the business of indulging in charity.”
Barclays has removed the options on its standard (aka “vanilla”) LOBO loans only because it is in its own economic and political interests to do so and the bank expects interests rates to remain low – meaning there is next to zero chance of the LOBO loan options being called. The more toxic “range LOBOs” sold to Newham Council remain unaffected by the move.
The real reasons for Barclays scrapping the “lenders option” on vanilla LOBO loans are twofold:
1. Basel regulatory changes mean Barclays will need to hold more capital against variable rate loans. By removing the “lenders option” on LOBOs and converting the loans to a fixed rate, Barclays can reduce their capital reserve ratio.
2. Public relations & litigation risk – lets face it, “mis-selling” LOBO loans to charitable organisations like Housing Associations or councils is not a good look. Barclays is trying to get on the front foot, extending a fig leaf and appearing to help struggling public authorities, achieving a media relations win at no cost to itself – whilst hoping to avoid costly litigation in the process.
Barclays latest move should not be seen as a victory for the public sector. Councils despite the removal of lenders options are still locked into fixed rate loans with high interest rates for the next 40-60 years.
Being loans of 60-70 year duration, the breakage costs on LOBO loans are at least 3x the cost of equivalent PWLB loans, and crucially, we are yet to see any of the new loan terms & conditions imposed by Barclays on the councils.
According to Financial Journalist Nick Dunbar who has analysed LOBO loan contracts obtained by Debt Resistance UK:
“Barclays is doing this because UK interest rates are forecast to remain low for the indefinite future, especially given emergency action by the Bank of England over Brexit.
“The real problem with LOBOs is that they are extremely long maturity, typically 40-60 years, much longer than than PWLB loans which have an average maturity of about 20 years according my analysis. The long maturity makes breakage costs proportionately higher. Remember that councils entered into LOBOs in the belief that rates would be much higher than they are today, and that the LOBOs [call options] would be exercised long before maturity.
Also, Barclays is not extending this deal to councils that entered into so-called exotic LOBOs such as Newham council, which are currently paying the highest LOBO interest rates in the country.”
Rather than keeping quiet in the hope the LOBO loan scandal will blow over without anyone noticing, Councils should be speaking up for local residents and taking the banks and advisors to court for mis-selling. Instead, the silence from the local government sector on LOBO loans has been deafening.
Only removal of the crippling LOBO loan “breakage penalties” by the banks will allow councils to refinance at affordable rates of interest.
Recent Background And Ongoing Legal Objections to LOBO Borrowing at 24 Councils
Residents of more than twenty local authorities around the UK have mounted legal objections to risky council borrowing from banks, calling for public interest reports by council auditors, and requesting High Court declarations that controversial Lender Option, Borrower Option (LOBO) loans are “irrational” expenditure, and therefore unlawful.
In an unprecedented, nationwide action, the 24 objections lodged by residents throughout July and August under the 2014 Local Audit and Accountability Act force council auditors (PwC, KPMG, Deloitte, EY, BDO, Grant Thornton) to investigate why councils chose to take out risky, derivatives laced loans from banks at high interest rates, when they could have borrowed directly from Government, with significantly less risk?
(go here for live links)
A local objector who has requested remain anonymous said: “The use of Lender Option Borrower Option instruments without appropriate justification compromises the work of s151 officers. They should exercise more prudence to the risks that they are exposing local authorities to. The only people who lose out so far in these arrangements are current and future taxpayers. They only way out without incurring more municipal debt is higher taxes or reducing services”
External auditors will effectively mark their own homework at these Councils, after Eric Pickles closed the Audit Commission in March 2015, as part of his package of ill-considered austerity cuts.
Commenting for Debt Resistance UK (DRUK), researcher Joel Benjamin said:
“UK local government finance is completely unregulated, so it’s great to see local residents around the country taking action, demanding accountability over how billions of pounds of public money is spent. For the past 6 years, councils have been passing down savage cuts to the poorest in society, using bailiffs to violently recover debts from the working poor, claiming they have “no other option.”
Debt Resistance UK research shows councils do have options, but councils are instead making the political choice that citizens wear the costs of the banking crisis, not the banks that caused it.”
Debt Resistance UK are calling for full transparency over how public money is being spent and an end to CAPITA lining their pockets through fraudulent financial advice at the taxpayers expense.
A significant proportion of the £15 billion in LOBO Loans taken out by councils amounts to “irrational expenditure” and should be cancelled, freeing up councils to refinance at lower rates of interest, making funds available for social housing and maintaining public services.”
Legal objections raise the prospect of High Court legal battles, rekindling memories of when Hammersmith and Fulham and 137 other UK councils in the 1980’s took out speculative interest rate swaps from US and UK banks.
Hammersmith residents complained to the Audit Commission and a series of legal cases ending in the House of Lords, ruled the swaps contracts to be ‘ultra vires’ or illegal, because councils should not be speculating with public money. The deals were torn up, and the debts cancelled.
Ludovica Rogers from Debt Resistance UK added:
“When central and local government fail in their duties to act in the public interest, citizens are forced to use all democratic tools at their disposal to hold those in power to account. Local residents are now exercising their democratic rights granted by the Local Audit and Accountability Act to expose serial failings in the management of public finances, and we demand these concerns are taken seriously and acted upon.”
Of particular concern are the legally suspect “range LOBO” product offered by Barclays and “inverse floater” LOBO loans sold by RBS. These loans were effectively crystal ball induced bets on interest rates by banks and council finance officers, loans now costing councils 7-8% in annual interest, when base rates are near zero, and loans from the Public Works Loan Board are available for less that 2%.
Debt Resistance UK spokespeople are available for comment.
For press inquiries
Email: email@example.com Phone: 07429637423
Links to further information:
UK Local Authority Debt Audit website: http://lada.debtresistance.uk/
Debt Resistance UK website: http://debtresistance.uk/
Interactive map of local authority debt: bit.ly/LADAmap
What is a LOBO loan? http://bit.ly/LOBOLoan
LOBO Loans are potentially illegal http://bit.ly/DebtTrap
Conflicts of interest http://bit.ly/LADA3
As covered in the Media
Financial Times: Local Councils suffer after taking out exotic loans
Evening Standard: Council faces probe into “time-bomb” Lobo loans from City amid cuts in children’s services
Sent loco by Lobos? The great council loan controversy
RBS and Barclays made more than £300m selling questionable loans to UK councils
MPs call on City regulators and Parliament to look at ‘lobo’ loans