13:34, October 30 80 0 theguardian.com

2018-10-30 13:34:05
Crippling bank loans to local councils judged illegitimate by critics

Repayments on a crippling set of council loans worth £15bn – which left one local authority spending more on servicing its debt than it earned in council tax – should be suspended immediately, according to a report published on Tuesday.

The cooperative Research For Action, which investigates public finances and corporate power, has analysed bank loans, with an estimated total value of £15bn, that were taken out by 240 local authorities, and concluded that these loans were illegitimate. It has called for the suspension of repayments on the loans until their legality can be determined.

Many councils took out a loan known as a lobo, or lender option borrower option, in the early 2000s. At the time the councils thought that these loans would be cheaper than government loans from the public works loan board. However in the long-term the loans proved cripplingly expensive at a time of austerity, with cuts in central government funding having forced closure of many essential services.

These loans gave banks the power to impose new rates at certain points. Borrowers could reject the new terms, but they would then be forced to repay the entire loan straight away.

Today’s report looks at the national picture, while focusing on Newham council, in east London, which has the largest amount of LOBO loans in the UK. In 2017/18 Newham spent £75m on debt repayments, more than the £68m it received in council tax. Newham is one of the poorest boroughs in the UK.

Fanny Malinen, one of the authors of the new report, said: “Every year millions of pounds are flowing into the financial sector to service loans that were mis-sold to councils. It’s time councils like Newham put people before the interests of banks and stopped repaying their lobo loans.”

Barclays bank is facing a court battle with 15 local authorities over lobos. Fourteen local councils filed a mass legal action against the bank over lobo loans. Newham has embarked on a separate legal action against the bank.

The 14 local authorities involved in the group action – Bristol, Bradford, Greater Manchester, Kirklees, Leeds, Liverpool, Newcastle, North East Lincolnshire, Nottingham, Oldham, Sheffield, South Gloucestershire, Walsal, and West Yorkshire –say the loans entered into between 2004 and 2010 should be rescinded with fees returned. They also want compensation for damages.

Barclays is accused of rigging interest rates and thereby potentially manipulating charges to borrowers. In June 2012, the Financial Services Authority, now the Financial Conduct Authority, fined Barclays £59.5m over manipulation of Libor, the London interbank offered rate. Some lobo loans were directly linked to Libor rates, and many others were influenced by it.

Lobo loans are controversial partly because the interest rate paid by councils changed at the bank’s discretion and often depended on Libor, which both Barclays and RBS were fined for rigging. A parliamentary inquiry into these loans to councils took place in 2015.

Lianne Craig, a solicitor at Hausfeld Solicitors, said: “Hausfeld is currently acting for a number of local authorities in claims against Barclays bank plc in respect of their lobo borrowing. These claims hinge upon Barclays’ involvement in the manipulation of the Libor benchmark rate. Barclays have been served with the claim and the proceedings are now active.”

A spokesman for Newham council said: “Decisions taken at the time to enter into these loans were legal and not illegitimate as the report suggests, but this administration has serious concerns regarding the mis-selling of lobo loans and manipulation of the Libor rate by Barclays and potentially other banks. Newham council is unable to comment on the legal action against Barclays as this is now a live legal matter.”

Barclays has been approached for comment.

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