Lender Option, Borrower Option (LOBO) loan lending to UK local authorities and conflicts of interest between brokers and advisors

This letter below was sent to the Chair of the Treasury Select Committee and signed by a number of different people including Shadow Chancellor, John McDonnell MP, former Council Chief Executive, Academics, trade unionists, Campaigners and Councillors (including me). 

The Banks and financial advisers have ripped off local authorities up and down the country. It is a national scandal and due to legal time limits - urgent action is needed.

"The Rt Hon Andrew Tyrie MP

Treasury Select Committee

House of Commons

London

SW1A 0AA

HM Treasury, 1 Horse Guards Road, London, SW1A 2HQ

Dear Mr Tyrie

Re: Lender Option, Borrower Option (LOBO) loan lending to UK local authorities and conflicts of interest between brokers and advisors

We are writing in response to coverage of Lender Option, Borrower option (LOBO) loans sold to local authorities and housing associations - exposed by Channel 4 Dispatches and recently covered by the Evening Standard, The Independent and Financial Times 9-12 March, where banks are reported to have made up-front trading profits of £1.5 billion.

We believe it is important to understand how 250 local authorities came to take out at least £15 billion in LOBO loans, containing embedded derivatives. Since the 1989 Hammersmith and Fulham swaps case, the use of derivatives by UK local government has been potentially unlawful.

LOBO loans are described by the Chartered Institute of Public Finance and Accountancy (CIPFA) [April 2015] Bulletin as “inherently risky” products.

We note that this is the third time in eight years there have been calls for a Financial Conduct Authority (FCA) inquiry into Brokers and Treasury Management Advisors to local government, the last occasions being during the 2008/09 Icelandic banking collapse when councils lost £1bn on deposit, and in July 2015 following the Channel 4 Dispatches expose of LOBO loans in “How Councils Blow Your Millions.”

On each occasion, calls for the FSA/ FCA to investigate the conduct of regulated Treasury Advisory firms it supervises, including Capita and ICAP were ignored, with DCLG accusing The FSA in 2009 of: “deliberate obfuscation [119].”

As councillors, MPs, citizens and civil society organisations, we wish to lend our voice to calls from MPs John Mann and Clive Betts for an inquiry into LOBO loans, and the conflicts of interest between Banks, Brokers, and Advisors who promoted them, by the Treasury Select Committee (TSC) and The FCA, and demand a financial system that operates in the interests of society.

At the heart of this matter is the assertion by regulators, acting under FSMA 2000 that local authorities are “sophisticated” investors, able to transact safely with global investment banks and brokers selling derivatives products, including LOBOs.

A string of municipal swaps and derivatives mis-selling legal cases across Italy, France, Germany, Portugal and Belgium are testament to the fact that local authorities were not in a position to safely use complex products like derivatives, and could not be accurately described as “sophisticated” investors with full understanding of derivatives risks.

Banks pitched highly complex, opaque and risky products such as ‘inverse floaters’ and ‘range LOBOs’ which were inappropriate for the needs of local authorities. In the case of Newham council, this has had a significant adverse financial impact on its position.

The Communities and Local Government Committee inquiry into local government bank loans heard testimony from Abhishek Sachdev (CEO Vedanta Hedging) and Rob Carver (a former LOBO loan trader with Barclays) that even FTSE 200 Treasurers would be unable to accurately price LOBO loans.

Unlike professional investors such as Hedge Funds, local authorities did not understand the inherent risks with LOBO loans, being reliant upon external Treasury Management Advisers - who received undeclared income streams in the form of commissions from brokers when councils borrowed from banks.

Brokers held themselves out as offering best execution services for local authorities and prior to 2009, failed to disclose relationships with treasury advisers and banks.

It should be remembered that local authority finance is entirely unregulated, and that ultimately, it is local taxpayers picking up the tab when councils are mis-sold risky financial products.

With the closure of the Local Government Audit Commission in 2015, severe cuts to Town Hall budgets since 2010, and plans outlined in the Devolution for Cities agenda granting additional financial powers to local authorities, it has never been more important to stamp out market abuse along the financial advisory chain to town halls.

CIPFA and the Department for Communities and Local Government (DCLG) both assert that it should be The FCA, not councils, which investigate and regulate the conduct of financial consultants and advisors to councils.

We call upon the Treasury Select Committee to conduct an inquiry, and to ensure The FCA is given appropriate powers/ forced to investigate and regulate the conduct of Treasury Management Advisors and financial consultants to local government.

Signatories:

1.    Cllr Ruthi Brandt - Deputy Leader (Green Group), Oxford City Council

2.    Cllr Matthew Brown - Preston City Council (Labour)

3.    Cllr Stephen Clarke - Bristol City Council (Green)

4.    Cllr Sam Coates - Oxford County Council (Green)

5.    Cllr Rokhsana Fiaz - London Borough of Newham (Labour)

6.    Cllr John Gray - London Borough of Newham (Labour)

7.    Cllr Nick Hands - Oxfordshire County Council (Labour)

8.    Cllr Richard Kemp - Leader Liverpool Council (Lib Dem Group)

9.    Cllr Daniel Lee - London Borough of Tower Hamlets (Greens)

10. Murad Qureshi - London Assembly Member (Labour)

11. Cllr Martyn Rawlinson - Preston City Council (Labour)

12. Cllr Abhishek Sachdev - Hertsmere Council (Conservative)

13. Cllr Sam Tarry - London Borough of Barking & Dagenham (Labour)

14. Cllr John Whitworth - London Borough of Newham (Labour)

15. Jeremy Smith - former Chief Executive Officer London Borough of Camden

16. John McDonnell MP - Shadow Chancellor of the Exchequer (Labour)

17. Caroline Lucas MP - Brighton and Hove (Green Party)

18. Ann Pettifor - Economist and Director, Advocacy International

19. John Christensen - Director Tax Justice Network

20. Prem Sikka - Professor of Accounting - Essex Business School

21. Professor Johnna Montgomerie - Goldsmiths University PERC

22. Richard Murphy - Professor of International Political Economy, City University, London

23. Natalie Bennett - Leader of Green Party of England and Wales

24. Nick Dunbar - Financial Analyst and Journalist

25. Antony Barnett - Journalist and Presenter Channel 4 Dispatches

26. Sarah-Jayne Clifton - Director, Jubilee Debt Campaign

27. Professor Steve Keen - Kingston University

28. Marc Stears - CEO, New Economics Foundation

29. Fran Boait - Director, Positive Money

30. Frances Coppola - Financial Journalist, Forbes Magazine

31. Fionn Travers-Smith - Campaign Manager, Move Your Money

32. Ludovica Rogers - Debt Resistance UK

33. SME Alliance

34. Rob Carver - Former Barclays LOBO loan trader

35. Dr Gary Kendall - Director CDO2

36. Rachel Collinson - LB Newham resident and GLA London candidate

37. Hannah Caller - Focus E15

38. Angus McNelly - London Borough of Tower Hamlets resident

39. Sian Berry - Candidate, Mayor of London

40. Carl Packman - Author and researcher on payday loans

41. Damon Gibbons - Centre for Responsible Credit

42. Professor Mark Burton - Steady State Manchester/ Manchester Metropolitan University

43. Emma Aviles - Citizens Debt Audit Platform (PACD) Spain

44. Chris Hewett - The Finance Lab

45. Ben Wray - Common Space

46. Peter Crowley - Windsor Acturial

47. Nicholas Wilson - Financial Whistleblower

48. Romayne Phoenix, London Borough of Lewisham resident

49. Ross Ashcroft - Renegade Inc

50. Cat Hobbs - Director, We Own It

51. Andrew Caldwell - Unite, City of Edinburgh Branch

52. Brian Robertson - Unite, City of Edinburgh Branch

53. Peter Lawson - Unite, City of Edinburgh Branch

54. Peter McColl - Former Rector - University of Edinburgh

55. Centre for Local Economic Strategies (CLES)

56. Bryan Rylands - Kent County Council resident

57. Adrian Beard MBE - resident Argyll and Bute Council

58. Simon Jose - Leeds City Council resident

59. Kerry-Anne Mendoza - Editor in Chief - The Canary

60. Mark McGowan - London Borough of Bromley resident

61. Joel Benjamin - Community Reinvest