Was SBC mis-sold a £6 million loan?

EXCLUSIVE by EWAN LAMB

The decision by seven English local authorities to raise a joint court action against Barclays Bank in a bid to wipe out 49 'toxic' loans worth a combined £573 million will no doubt be closely monitored by other councils throughout the UK who have similar arrangements with the bank.

Barclays sold the so-called LOBO (Lender Option Borrower Option) loans to the claimants between 2005 and 2008. Interest rates on the loans were pegged to LIBOR, a benchmark rate set by a group of London banks, including Barclays. In 2012 it was revealed the banks had been manipulating the rate, and Barclays was fined £290 million.

The local authorities – Leeds, Greater Manchester, Newcastle, North East Lincolnshire, Nottingham, Oldham and Sheffield – allege that due to Barclays’ role in the rate rigging, the banks knew customers would rely on LIBOR rates when deciding whether to enter into contracts.

The councils are asking the High Court to cancel the loans without exit penalties, and also restitution for sums in interest they have already paid the bank.

Campaigning group Research for Action which claims high interest payments linked to LOBO loans are at least partially responsible for cuts in public services has welcomed the decision by councils to sue Barclays.

The organisation said it was hopeful the case would bring justice to local authorities that had fallen prey to "the toxic combination of conflicted advisers, LOBO loan mis-selling and benchmark rate rigging".

Legal actions taken by councils in relation to LOBO loans should not be restricted to LIBOR rigging alone, Research for Action claimed.

"We hope to see further legal actions taken by local authorities in relation to ISDAfix manipulation and the role of council financial adviseors (Butlers/ICAP and Capita) and the various banks involved in the mis-selling of LOBO loans which were never designed or promoted in either the council or taxpayers best interests."

In May 2005 Scottish Borders Council signed up for a £6 million LOBO loan from Barclays. The interest rate was to be 2.87% until 2009, then 4.4%. The 60-year loan is not due for repayment until June 2065, and in 2017 it was revealed via a Freedom of Information request that the fair value of the SBC loan was £10,644,275. 

The council's Treasury advisers when the loan was arranged was Butlers.In all SBC took out eleven LOBO loans with various banks. The interest rates payable are all higher than the rate currently being charged by the UK Government's Public Works Loans Board.

Councils with LOBO loans are being urged by Research for Action to re-finance these debts with the prospect of saving many millions of pounds in interest.

A few local authorities have re-financed. The campaign group said: "Following the announcement of loan refinancing savings, we conducted an analysis into savings that could be obtained by other councils that have taken out LOBO loans. Taking the average interest rates and years to maturity from each council’s loan portfolio and using 2.21% as the PWLB rate, we calculated potential savings by multiplying the annual difference between LOBO loan & PWLB loan rates, and multiplying savings by the years to loan maturity.

"We found that for just the top 10 borrowers of these risky and expensive bank loans, they could save £4 billion over 40 years by refinancing via the PWLB. For the 240 councils that have taken out LOBO loans, savings could reach £16 bn over the lifetime of the loans. These substantial savings could relieve pressure on strained budgets, free up cash for local services and prevent further unnecessary cuts."