3 Scottish councils could save over £1 billion by refinancing ‘Lobo’ loans, research finds

Ben Wray

RBS has indicated it is “open to discussions” about loan re-financing after agreeing to new terms with Kent and Northamptonshire councils

SCOTLAND’S three largest councils could collectively save over £1 billion by re-financing controversial high interest ‘Lobo’ loans, researchers have found.

Research for Action, a workers’ co-operative producing research to support social, economic and environmental justice, found that all in all £16 billion could be saved from councils across the UK, and £4 billion from the top 10 Lobo loan councils, if they followed the example of Kent and Northamptonshire councils and re-financed Lobo loans.

Lobo’s (Lender Option Borrower Option) are local authority loans with commercial banks which usually start at a ‘teaser’ rate with low interest in the short-term, but the loans contain ‘break clauses’ which allow banks to ramp up the rates to sometimes as high as 7 or 8 per cent, significantly higher than the cost of borrowing from the UK Government’s Public Works Loan Board (PWLB).

READ MORE: RBS accused of committing a “fraud on the people” over LOBO loans at AGM

Research for Action have shown Glasgow City Council has the third highest number of Lobo loans of any council in the UK, bringing in £449 million in total. But the average interest rate on the loans is 4.2 per cent, and with each loan taking on average 42 years to mature, the aggregate interest costs are sky-high. The potential saving to be made from switching to a PWLB loan with 2.21 per cent interest is £450 million, more than the total value of the original loan to the council.

Fife Council, eighth biggest user of Lobos of all UK councils, could save £382 million by refinancing, on a loan worth £357 million to the council.

Edinburgh City Council, 11th on the list, could save £298 million, on an original loan of £281 million.

RBS, a major issuer of Lobo loans, indicated last month that it was open to refinancing deals with local councils, after signing an agreement with Kent County Council which took out £60 million worth of Lobo loans between 2008-2011. The deal agreed meant the Council paid off the loan on 1 October by replacing the 4 per cent Lobo loan interest rate with a 2.5 per cent government one and paying a £13.4 million premium charge to escape the contract early.

READ MORE: RBS shareholder claims bank using high-interest loans to rip off Edinburgh City Council to tune of £110m

RBS, which is one of the main providers of Lobo loans to Scottish councils, would not comment on the specifics of the Kent Council deal but said it was “open to discussions” with other councils.

Northamptonshire Council also repaid a £20 million Lobo loan in October after striking a deal with RBS.

Commenting on the findings, researcher and debt campaigner Joel Benjamin said: “HM Treasury has been aware of the billions of pounds of savings available on mis-sold bank LOBO loans since at least March 2016, when they were asked to investigate toxic LOBO loans in an open letter signed by MPs, academics and councillors, yet two years on, the Treasury continues to ignore the problem, as billions of pounds of unnecessary further cuts decimate local services.”

Research for Action’s findings come as the Accounts Commission has today [29 November] published its annual financial overview on local authorities, which found that councils used savings and drained reserves to deal with funding shortfalls of 4 per cent in 2017/18.

READ MORE – Threats, debt collectors and nervous terror: the reality of Council Tax in Scotland

The Accounts Commission anticipated further funding reductions over the “medium term”, increasing the pressure on councils as service demand rises.

Graham Sharp, chair of the Accounts Commission, said of the report: “Councils did a good job last year in managing resources as budgets are tightened and demands on them rise.

“The position varies from council to council but there is clearly need for continuing change in the way services are provided. It’s not been easy but the pressure on them – and the key services we all rely on – shows no signs of easing.”

The report comes just weeks before the Scottish Finance Minister Derek Mackay will announce the Scottish Budget for 2019/20.

READ MORE – Analysis: Will the threat of a teachers’ strike force Derek Mackay to rethink his budget plans?

Mackay has in recent years looked to the Scottish Greens to get the minority SNP Government’s Budget through the Scottish Parliament, but the Greens have said they won’t support it this year without a commitment from the Scottish Government to serious local tax reform.

Commenting on the Accounts Commission report, Scottish Greens local government spokesperson Andy Wightman MSP said: “This report confirms what we’ve been telling Derek Mackay for years now – local government funding needs a complete overhaul if councils are going to meet rising demand for vital public services and pay the staff who deliver them fairly.

“We’ve done our best in recent years to reverse planned cuts but it’s clear now that services are at breaking point and it’s no longer acceptable for national government to keep tying the hands of local government. 

“Councils are united behind the Scottish Greens on this issue – Derek Mackay needs to show he’s listening and set out plans to give them more funding powers and a timescale for getting rid of the Council Tax.”

Picture courtesy of Neil F

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