Tower Hamlets resident and green party activist Daniel Lee has raised a formal objection to Lender Option, Borrower Option (LOBO) Loans from Barclays and RBS contained in the councils 2014/15 annual accounts.
Debt Resistance UK is providing information and support to local residents wanting to take action against LOBO loan mis-selling and austerity cuts in their Borough, exercising rights under the Audit Commission Act to challenge items of irrational or illegal spending in the Councils annual accounts.
By law, Tower Hamlets external auditor – KPMG must consider the “public interest test” for proceeding with the matter, and preparing a report in the public interest.
A Copy of Daniel Lee’s Objection Letter to the London Borough of Tower Hamlets Is Posted Below
To whom it may concern,
As an elector of the London Borough of Tower Hamlets, I wish to lodge an objection to the accounts prepared for public inspection by Council for the year 2014-2015. I request that KPMG issue a report on these accounts in the public interest and transmit it to the Council.
I wish you to issue this report on the grounds that taking out Lender Option Borrower Option (LOBO) loans was potentially unlawful.
The term ‘unlawful’ applies in this context, I believe, because the decision to sign up to LOBO loans from the Royal Bank of Scotland and Barclays was irrational.
I am concerned that the terms of the LOBO contracts and their implications were not sufficiently understood by council financial officers; were insufficiently scrutinised by councillors, and that the volume and type of borrowing carried such a high risk as to be prejudicial to the interests of Tower Hamlets taxpayers.
The legal status of LOBO loan use is the subject of significant legal ambiguity and debate. Following the 1989 Hazell vs Hammersmith and Fulham [Goldman Sachs] case, derivatives use was declared “ultra vires” or illegal, for UK local government.
By inserting derivatives into a LOBO loan in a deliberately opaque manner, it is clear banks subverted the intent of such protections, to “engineer” around the law.
The London Borough of Tower Hamlets borrowed £77.5m in the form of LOBO loans between August 2007 and September 2009, to which I refer to Section 15, pg 38- 41 [Financial Instruments] of the 2014/15 annual accounts.
The Council, in its decision to borrow via LOBOs, were advised by Treasury Management firm Capita. All three of councils LOBOs were brokered by Tullet Prebon, from whom it has been established Capita were receiving undeclared kickback payments.
The loans are with Barclays (£17.5m) and RBS (£60m) which means that the Borough, which is home to some of London’s most deprived areas, and where the Council has just signed off on £30m spending cuts alongside a 4% hike in council tax rates, is paying over £3.5m in interest per annum to the owners of One Churchill Place, Canary Wharf and the former owners of 5 Canada Square, Canary Wharf.
The accounts make note of the fact that: “In the more than 10 years [i.e. long term borrowing] category, there are £77.5 million of Lender’s Option, Borrower’s Option (LOBO) market loans, of which £17.5 million have call dates in the less than one year category. The Council uses money market funds to provide liquidity.”
Tower Hamlets are forced to keep treasury reserve cash on hand, to meet annual call options on LOBOs to repay without penalty, should the bank exercise its option to raise interest rates.
It is my view that taking out loans of this type and magnitude constituted a gamble: namely that the Council would gain a short-term benefit if interest rates continued to rise.
Abhischek Sachdev, CEO of Vedanta Hedging described LOBO loans to the Communities and Local Government Committee inquiry hearing on local government bank loans as a “lose-lose bet for councils.”
Legal opinion regarding LOBOs from City law firm Collyer Bristow states: “if market rates for equivalent lending remain low (and lower than the rate to be paid under the LOBO) the borrower is effectively locked in for the full term – it has no option to exit the arrangement and seek cheaper borrowing elsewhere – it must live with the rate agreed at the time the LOBO was entered into. So from the borrower’s perspective, these loans are a very long term commitment to pay the rate agreed at the outset for a term, or higher. So, on the face of it, the borrower is in a “lose/lose” position.
I believe that making such a borrowing commitment under the conditions which the banks imposed, without benchmarking and recording the decisions against comparable PWLB loans or seeking external financial advice, amounted to ‘irrational’ conduct.
Treasury Management Advisor, CAPITA who recommended LOBO loan products received kickbacks (undeclared to council), when loans were brokered by Tullet Prebon and ICAP.
Treasury Management Advisors, operating under the Chartered Institute of Public Finance and Accountancy (CIPFA) framework, recommend councils borrow no more than 30% of long term debt in ‘inherently risky’ (refer April 2015 CIPFA bulletin), variable rate, LOBO loans.
Tower Hamlets, by comparison, has 87% of its long-term debt in variable rate LOBOs.
This compares very unfavourably with other London Boroughs. Figures obtained by FOI requests on LOBO loan borrowing show that the mean portion of overall long term borrowing in the form of LOBO loans is 16% for London boroughs. The median is just 3.3%.
I would therefore be grateful if you considered this request to issue a public interest report on Tower Hamlets LOBO loan borrowing for the year 2014-2015.