Campaigners call on local authorities, including Edinburgh City Council, to take action against the loans and ensure hundreds of millions are saved for local taxpayers
RBS has been accused of committing a “fraud over the people” and seeking to extract the “maximum interest possible” from local authorities struggling with austerity cuts due to the role the bank places in LOBO loans.
LOBO – or ‘Lender Option, Borrower Option’ – loans are expensive with a high level of risk that local authorities are often locked into after borrowing from private banks. These loans contain derivatives provided by banks to public authorities, and often lead to the bank drawing enormous profits at the expense of local taxpayers, instead of the money going to the public sector.
LOBO loans grew in prominence following then-Chancellor of the Exchequer George Osborne’s 2010 decision to raise the interest rate offered to councils by the Public Works Loan Board (PWLB), which had traditionally been most local authorities’ first choice for credit.
At least 240 councils across the UK, including Edinburgh, have taken out LOBO leans, totalling approximately £15bn, despite the fact that auditors are potentially illegal, due to the fact that local authorities are prohibited under law from taking out swap contracts, which count as a form of derivative. Consequently, residents in 18 councils have brought forth legal objections, which auditors are currently considering, and could lead to some of the LOBO loans taken out by local authorities being ruled unlawful.
There is some difficulty in this however, as local authority finance is unregulated by the Financial Conduct Authority and the Prudential Regulatory Authority. Relevant financial documents pertaining to local authority funding are not available to the public, and auditing is now outsourced to the ‘big four’ accounting firms, which chiefly work for the banks, following the closure of the Local Government Audit Commission in 2015. This has led to accusations of conflicts of interest.
Speaking at an RBS AGM in Edinburgh this week, in response to RBS chairman Sir Howard Davies’ criticism of PFI on Question Time in January after the Carillion scand – where he said “it is always cheaper for Government to borrow that anyone else” – Newham Councillor John Whitworth questioned Davies’ on the nature of RBS LOBO loans.
Whitworth described how, as an example of the practice, Newham was paying an interest rate of 7.6 per cent on LOBO loans first taken out in 2010. By contrast, RBS is accessing credit from the Bank of England at a mere 0.5 per cent.
Newham Council also currently pays around 70 per cent of all its council tax income on servicing interest on debts including £563million of LOBOs borrowed from RBS and Barclays.
Whitworth went on to argue that local authorities are still suffering as a result of austerity cuts imposed in the aftermath of the 2008 financial crash, during which time RBS – at that point, the largest bank in the world – approached collapse. Despite its role in the recession, Whitworth criticised RBS for seeking to extract the “maximum interest possible” from afflicted councils.
Following Whitworth’s remarks, Debt Resistance UK campaigner Joel Benjamin commented: “Sir Howard Davies admits that it is always cheaper for Government to borrow than banks, and that PFI and by extension LOBO loans are therefore a fraud.
“What Mr Davies fails to recognise in an act of cognitive dissonance all too commonplace in the banking profession is the role of his own bank in facilitating those frauds, as one of the largest PFI and LOBO loan lenders to UK public authorities.
“Frankly, I would have expected more from the man who once ran the Audit Commission and chaired the Financial Services Authority.”
Responding the punitive effect that LOBO debt has had upon Scottish councils – such as the Western Isles Council, which as of 2016 paid 103 per cent of its income from taxes to service long-term debt – the Scottish Green Party has previously proposed the loans should be written off as they were agreed upon under unethical terms. The Scottish Conservatives have opposed this however, describing it as “irresponsible and unfair.”
LOBO loans grew in prominence following then-Chancellor of the Exchequer George Osborne’s 2010 decision to raise the interest rate offered to councils by the Public Works Loan Board (PWLB), which had traditionally been most local authorities’ first choice for credit.
The RBS AGM was met with protests from Unite the union over its branch closures, which executives have said will go ahead despite widespread political opposition and the UK Government being the majority stakeholder in the bank
Picture courtesy of morebyless
Enjoy reading CommonSpace? Click here to get our daily newsletter so you never miss a story.