"Local Residents Lodge Legal Objections to LOBO Loans at 24 Local Authorities Demanding Public Interest Reports and High Court Strike Out
Residents of more than twenty local authorities around the UK have mounted legal objections to risky council borrowing from banks, calling for public interest reports by council auditors, and requesting High Court declarations that controversial Lender Option, Borrower Option (LOBO) loans are “irrational” expenditure, and therefore unlawful.
In an unprecedented, nationwide action, the 24 objections lodged by residents throughout July and August under the 2014 Local Audit and Accountability Act force council auditors (PwC, KPMG, Deloitte, EY, BDO, Grant Thornton) to investigate why councils chose to take out risky, derivatives laced loans from banks at high interest rates, when they could have borrowed directly from Government, with significantly less risk?
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A local objector who has requested remain anonymous said: “The use of Lender Option Borrower Option instruments without appropriate justification compromises the work of s151 officers. They should exercise more prudence to the risks that they are exposing local authorities to. The only people who lose out so far in these arrangements are current and future taxpayers. They only way out without incurring more municipal debt is higher taxes or reducing services”
External auditors will effectively mark their own homework at these Councils, after Eric Pickles closed the Audit Commission in March 2015, as part of his package of ill-considered austerity cuts.
Commenting for Debt Resistance UK (DRUK), researcher Joel Benjamin said:
“UK local government finance is completely unregulated, so it’s great to see local residents around the country taking action, demanding accountability over how billions of pounds of public money is spent. For the past 6 years, councils have been passing down savage cuts to the poorest in society, using bailiffs to violently recover debts from the working poor, claiming they have “no other option.”
Debt Resistance UK research shows councils do have options, but councils are instead making the political choice that citizens wear the costs of the banking crisis, not the banks that caused it.”
Debt Resistance UK are calling for full transparency over how public money is being spent and an end to CAPITA lining their pockets through fraudulent financial advice at the taxpayers expense.
A significant proportion of the £15 billion in LOBO Loans taken out by councils amounts to “irrational expenditure” and should be cancelled, freeing up councils to refinance at lower rates of interest, making funds available for social housing and maintaining public services.”
Legal objections raise the prospect of High Court legal battles, rekindling memories of when Hammersmith and Fulham and 137 other UK councils in the 1980’s took out speculative interest rate swaps from US and UK banks.
Hammersmith residents complained to the Audit Commission and a series of legal cases ending in the House of Lords, ruled the swaps contracts to be ‘ultra vires’ or illegal, because councils should not be speculating with public money. The deals were torn up, and the debts cancelled.
Ludovica Rogers from Debt Resistance UK added:
"When central and local government fail in their duties to act in the public interest, citizens are forced to use all democratic tools at their disposal to hold those in power to account. Local residents are now exercising their democratic rights granted by the Local Audit and Accountability Act to expose serial failings in the management of public finances, and we demand these concerns are taken seriously and acted upon."
Of particular concern are the legally suspect “range LOBO” product offered by Barclaysand “inverse floater” LOBO loans sold by RBS. These loans were effectively crystal ball induced bets on interest rates by banks and council finance officers, loans now costing councils 7-8% in annual interest, when base rates are near zero, and loans from the Public Works Loan Board are available for less that 2%.
In practice, this means councils like Newham London with £573m in LOBO loan bank debt now find that the equivalent of 80% of their council tax revenue is eaten up by debt interest repayments.
Repayments on debt interest at Newham Council (refer to chart below) now make up a greater component of expenditure than housing. 240 Councils around the UK now find themselves trapped into LOBO loans, with breakage costs greater than 90% of the loan face value and increasing further as base interest rates drop. Comparatively, the breakage cost on PWLB loans is just 30% of the loan face value.
Debt Resistance UK spokespeople are available for comment.
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