Local Authorities are borrowing from private banks instead of the Government Public Works Loan Board (PWLB) even if it is more expensive to do so. Central Government is encouraging this, as it pushes public debt off the government balance sheet. As a result, tax payer money is being unnecessarily wasted, and profits from lending are going to the banks rather then recirculating into the public sector. At Newham Council, LOBO loans are costing ratepayers an extra £13million each year in interest payments.
Banks are providing “teaser rate” loan contracts to public authorities called LOBO loans that contain derivatives. These loans are potentially illegal as Local Authorities were prohibited from taking out swap contracts (a form of derivative) following a 1989 ruling known as Hammersmith and Fulham vs Goldman Sachs case.
Local Authorities rely on private institutions like CAPITA and ICAP to help manage, advise on, structure and broker their financial affairs. These firms, known as Treasury Management Advisers not only charge high fees, but operate with significant conflicts of interest, whilst enabling Council Treasurers to behave like short term, profit driven, investment bankers. Given the high commissions being paid on LOBO loan trades by banks and brokers to some advisors, it is hard to believe that LOBO loans are recommended with the interests of taxpayers in mind!
No one! Local Authority finance is unregulated by the Financial Conduct Authority (FCA) and the Prudential Regulatory Authority (PRA). Documents regarding borrowing from private banks are not available to the public and auditing is outsourced to the auditors of the banks, the big four accounting firms – following the closure of the Local Government Audit Commission in April 2015.
Debt Resistance UK calls on Local Authorities to:
- Challenge George Osborne to lower the excessively high interest rates he set for the PWLB
- Prioritise borrowing from the PWLB instead of private banks and ensure that the PWLB keeps on serving the interest of Local Authorities by keeping interest rate profit margins low
- Contest the legality of LOBO Loans
- Challenge the conflict of interest of private institution (banks, brokers, advisors) involved in mis-selling LOBO Loans (possibly involves fraudulent mis-representation)
- Request appropriate regulation of Local Authority finance, improve transparency and accountability and demand truly independent scrutiny
- Work towards new forms of Local Authority Finance including publicly owned banks that anchor wealth locally in communities
When Central and Local Government are not acting in the interest of citizens, we must call them to account and demand change. Debt Resistance UK is building a campaign to facilitate citizen-led Local Authority Debt Audits, to provide information and tools for those who want to challenge Local Government financial decisions. We want to assist other campaigns and grassroots groups to further their own struggles (anti-cuts, divestment, etc) by ensuring public borrowing and spending decisions are always transparent, and made in the public interest.