Tuesday, 7 July 2015

Borders almost mentioned in Dispatches

This week's worrying revelations by Channel 4's Dispatches programme about £15 billion's worth of risky bank loans taken out by 240 UK local authorities may have been viewed with concern by finance officers and portfolio holders at Scottish Borders Council which has a clutch of eleven of the so-called LOBO loans worth £43 million.

As soon as the Dispatches investigation How Councils Blow Your Millions was screened on Monday evening Clive Betts MP, the chairman of the Westminster parliamentary committee which scrutinises local government, called for an inquiry after it emerged that some councils are paying more than seven per cent interest per annum on their LOBOs (Lender Option Borrower Option) deals at a time when rates are at an all time low.

Dispatches claimed expensive exit fees imposed on the councils by lenders like RBS and Barclays meant local authorities could not get out of contracts which were set to last for between 40 and 70 years.

Most LOBO loans were arranged between 2003 and 2011 when council officials believed interest rates would stay high.The eleven Borders loans - the money was used to fund capital investment projects -were taken out between 2002 and 2007, and included a £6 million advance from Barclays in 2005.

Under the terms of that deal SBC was to pay 2.87% interest until 2009, then 4.4% to 2065. Banks have the option of raising the rates at regular intervals. Borders council officials also borrowed £24 million in six separate LOBOs from Dexia Public Finance Bank based on the Continent with a further £8 million provided by German bank Dresdner. The highest interest rate quoted in any of these deals was 4.99% by Dresdner Bank.

Dispatches researchers estimate that banks made more than £1 billion upfront profits from the LOBOs. It is suggested that if the councils could refinance at today's interest rates they could save taxpayers £145 million this year alone or almost £750 million across the parliamentary term.

The programme also uncovered evidence that some council advisers were not only paid by the local authority, but also earned commission from City brokers if town halls took out these risky loans. Mr Betts described this potential conflict of interest as "outrageous".

Apparently few people outside a council's finance department or the City of London know about the existence of LOBO loans. But if Mr Betts has his way that is about to change.

He wants the Financial Conduct Authority to investigate the City firms which give specialist financial advice to local authorities on their borrowing.

SBC was asked about its LOBO collection earlier this year by a Freedom of Information requester. He asked the council for a review after they denied him copies of the loan documents, and these have now been made available.

The FOI request asked for the name of the adviser who recommended SBC to opt for LOBO loans. According to SBC: "There is no recorded information specifically stating who advised the Council to enter each LOBO agreement. But the Finance Section explained that in each instance there would have been an external adviser. One of the Council's external advisers at the time of LOBO agreements was Butler Capital LLP".

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