Borders council's lender sued for "alleged fraud and interest rigging"

by EWAN LAMB

A bank used by Scottish Borders Council to secure a controversial £6 million LOBO loan more than a decade ago is being sued by 14 other local authorities who claim the 'rip-off' loans were fraudulent as interest rates may have been rigged to manipulate charges to the borrowers.

Councils throughout Scotland and England arranged long term LOBO loans (Lender Option Borrower Option) between 2001 and 2010 from a selection of lenders including Barclays and the Belgian bank Dexia.

Now a High Court action has been raised by a group of authorities including the councils at Leeds, Bristol, Nottingham, Sheffield and Greater Manchester. The claimants are alleging that the loans they took out between 2004 and 2010 should be rescinded with fees returned. They also want compensation for damages.

Court papers seen by a Sunday newspaper accuse Barclays of “deceit and/or fraudulent misrepresentation” as its bankers were secretly rigging Libor, which was “integral” to the rate at which LOBO loans had to be paid back.

Libor is the interest rate at which banks offer to lend funds to one another in the international market. In 2016, three former Barclays traders were convicted of conspiring to fraudulently manipulate the global benchmark rate.

It was in May 2005 that officials at Scottish Borders Council (SBC) acting on advice from Butlers' Treasury Consultancy. agreed a £6 million LOBO loan from Barclays with repayment of the principal sum due by June 2065. The original interest rate of 2.87% went up to 4.4% in 2009. In 2016 the fair value of the loan was estimated to be £10.644 million.

LOBO loans were attractive to councils as they often offered interest rates below that of central government’s Public Works Loan Board although they allowed lenders to change rates at set times in the future. Refusing to pay updated interest rates would mean councils are forced to pay back the loan in full.

This form of credit certainly proved popular with SBC, the council setting up a total of eleven LOBOs with a total value of £43 million. The true value of all eleven is now in excess of £70 million, according to figures supplied to a Freedom of Information requester two years ago.

A spokesman for the campaign group Debt Resistance UK, said: 'Having campaigned for councils to file fraud cases against the banks since 2014, we are thrilled these local authorities have finally stepped in to protect local taxpayers by filing fraud claims against banks which brought our economy to the brink. Ten years after the crash it is councils which are now facing bankruptcy to pay for the bankers bailouts.

'We are aware that 240 councils have rip-off LOBO loans. We're now calling on the other 226 councils with LOBO loans to file legal action against Barclays, RBS, Dexia, ICAP, Tullet Prebon and CAPITA."

No fewer than six of SBC's loans are with Dexia Bank. In 2004 and 2005 the authority borrowed £24 million in total from the Brussels-based bank.

In 2011 Dexia was the subject of a massive £3.4 billion bail-out by the Belgian Government after it encountered serious liquidity problems. It then became known as Belfius Bank. More recently there have been stories in the press and media linking the financial institution with revelations in the so-called Paradise Papers with allegations of money laundering and tax evasion.

Research by Unite the Union in 2016 on the state of debt in Scottish local government concluded that the equivalent of 26% of SBC's council tax income was used to service outstanding debts. The total collected from council taxpayers was £46.1 million with £11.806 million being swallowed up by interest and capital repayments on loans.

Barclays has so far declined to comment on the High Court action by 14 of its local government clients.