Controversial loans sold to councils by banks, known as LOBOs (Lender Option Borrower Option), are under investigation by the group Debt Resistance UK (DRUK).

These loans have unfavourable terms, according to a landmark legal case may be untenable, and are resulting in absurd levels of debt repayment: DRUK have found, for example, that in the borough of Newham, the equivalent of 77% of council tax income goes directly into interest payments alone.

DRUK’s campaign, #NoLOBOs, aims to both expose the truth and make the case that such loans are illegitimate — and we were interested to see that they’ve made use of our Freedom of Information site, WhatDoTheyKnow, to do so.

We’re always interested to hear how people and organisations are using our services, so we caught up with DRUK’s Vica Rogers, who gave us the whole history.

What are LOBOs? Can you explain a bit about them for the completely uninitiated?

Vica: LOBO stands for “Lender Option Borrower Option” and the name indicates the terms of the loan: on predefined dates, the lender (the bank) has the option to raise the interest rate; if the bank decides to do so, the borrower (the council) can either accept the new interest rate or repay the loan in full; if the bank doesn’t decide to use the option, then the council is locked into the loan and can only exit it by paying an exorbitant exit fee — sometimes 90% of the loan’s principal. With this mechanism some councils are locked into paying up to 11%, which is very expensive in the current climate where interest rates are low.

LOBO loans have been described as a “lose-lose bet for councils” because no matter what happens to interest rates, the one-sided terms of the loans ensure the banks always win. In this way banks are making huge profits and are extracting resources from local government that should instead be going to cover the cost of services for its residents.

How are you using Freedom of Information requests in the campaign?

Vica: FOI was crucial for the development of the #NoLOBOs campaign. We started from the “borrowing and investment tables” for local government published by the then Department for Communities and Local Government. We sent FOI requests to more than 240 councils who from the tables appeared to be borrowing from banks.

We asked each council to provide, for each LOBO loan they had, the original contract and a spreadsheet containing the principal, maturity date, interest rate, etc.

The spreadsheet was easier to obtain, while the contracts were often withheld.

We link any data and documents back to WhatdoTheyKnow so that anyone can see the source and the process that we went through to obtain it. This is very useful when dealing with journalists.

We therefore had to go all the way to the Information Commissioner’s Office for them to rule that the public interest in providing the loan contracts overwrote the commercial confidentiality exemption that councils were relying on.

Once we managed to obtain the contracts from some of the councils it was much easier to argue for the others to release them. This is one of the values of using batch requests.

In a second batch of requests we asked the council to identify the financial intermediaries — the brokers and the Treasury Management Advisors (TMAs) — involved in recommending and arranging the loans so that we could expose their conflict of interests. We also asked for the fees paid to the brokers and any invoices and contracts.

We obtained most of the information related to the companies involved and the fees paid, but most of the original documents requested were missing. This was due to the age of the documents, as councils are not required to keep them for more than a decade.

We have now published on our website most of the information we gathered. On our website we link any data and documents back to the WhatDoTheyKnow site so that anyone can see the source and the process that we went through to obtain it.

This is very useful when dealing with journalists, but it also provides local citizens the opportunity to challenge their council on LOBO loans without having to relate specifically to our campaign.

Our approach to the campaign has been from the start to encourage local residents to take action autonomously, both because we are supporters of decentralised forms of organising, but also because being such a small organisation we did not have the resources to develop a national campaign.

What gave you the idea to use FOI requests, and why did you decide to use WhatDoTheyKnow to make them?

By using WhatDoTheyKnow the information was provided with open access by default, could be linked and referenced in articles, and would have a longevity that does not always exist with small websites and organisations.

Vica: Through previous work by one of our members on council reserves it became obvious that some of the most financialised councils were also some of the most secretive — and a protracted FOI campaign would be necessary to unearth relevant practices.

We used WhatDoTheyKnow partially due to the experience of working in small, poorly funded NGOs, where once an organisation closed down, the information was lost unless it was published somewhere on a third party website.

By using WhatDoTheyKnow the information was provided with open access by default, could be linked and referenced in articles, and would have a longevity that does not always exist with small websites and organisations.

DRUK believes LOBOs to be illegal: what’s the basis of that?

Vica: There was a ruling in the 80s called the Hammersmith and Fulham vs Goldman Sachs case. At that time, councils had entered into hundreds of swap contracts presenting significant risk to local government finances across the country. The judge then ruled that it was ultra-vires (‘beyond their powers’) for councils to be gambling with taxpayers’ money and all the contracts were cancelled.

Debt Resistance UK is also making the case that such debt is illegitimate. In the current years where local authorities are facing huge cuts with a 40% reduction in grants from central government, interest payments to banks are ring-fenced while funds to essential services are being cut. Debt Resistance UK questions if it is legitimate that human rights of local residents are being put second to the interests of the banks.

There are also other basis on which such loans could be considered illegal:

  • In many cases LOBO loans were taken out on advice from Treasury Management Advisors, who should be independent, but in the case of LOBO loans were receiving undeclared commissions from the brokers who were providing the deals. This is a clear conflict of interest that council’s can use to challenge the loans.
  • LOBO loans are instruments that were created to engineer around the Hammersmith & Fulham vs Goldman Sachs case by embedding the derivatives in the loan. The banks should be held to account for deliberately creating a loophole to extract public resources.
  • The value of LOBO loans is pegged to LIBOR. Since some of the banks and brokers who sold LOBO loans to councils were also involved in rigging LIBOR, there is a case for councils to challenge the banks on the base of this manipulation and the information asymmetry it created.

What’s next for the campaign?

Vica: We designed the #NoLOBOs website so people could understand the overall campaign and then search for the details of their own council. The website also offers suggestions on how people can take action.

We have been collaborating with  the cooperative Research for Action to develop two strands of the NoLOBOs campaign:

Objections to LOBO loans across the UK

We are using the 2014 Audit and Accountability Act which provides local citizens with the right to inspect, ask a question about and object to items in their council’s financial accounts.

This right can be exercised once a year during the summer once the draft accounts have been published. Debt Resistance UK, in collaboration with the cooperative Research for Action, has supported more than 50 residents in the use of the Act to either gather more information on the loans, or to challenge their lawfulness through the objection process. All objections link back to WhatDoTheyKnow as evidence of LOBO loan borrowing. We are now starting to receive the responses to these actions.

A citizen debt audit in Newham

Newham, best known for hosting the 2012 Olympics, is one of the poorest local authorities in the country. It is also the largest borrower of LOBO loans and is paying the equivalent of 77% of council tax income only on interest payments. We have therefore decided to focus on the borough and develop an in-depth citizen debt audit. The aim of the audit is to evaluate the social and economic sustainability of the council’s debt, the legality of it’s LOBO loans portfolio and who should be held to account for it. Through the process we hope to improve the accountability of the council in managing funds in the public interest.

How can people get involved?

Vica: We welcome all contributions to the NoLOBOs project, and are open for people contributing in different ways without feeling they have to become a member of Debt Resistance UK.

If you are a local resident the best way to take action is to submit an objection to the council’s accounts. For most councils, the period to object to the accounts this year runs from the start of June to mid July. If you would like to object to your council’s accounts, do get in touch with Debt Resistance UK and we can support you through the process. You can find a guide on how the process works here.

The #NoLOBOs campaign has been made possible thanks to a network of people with various expertise who have kindly offered their time to unravelling different aspects of the LOBO story. If you would like to contribute based on your expertise, please get in touch. Some of the expertise that we would find useful are: financial analysts, accountants, lawyers, local government finance officers, journalists, developers, data analysts, data visualisers and graphic designers.

To gain further insight, we are also very interested in talking to people who have been aware of LOBO loans while working within organisations involved in the mis-selling, be it a council, a bank, a brokerage company or a Treasury Management Advisory company. We’d also like to collaborate with officers and councillors who want to take action in their own council.

NOTE: Debt Resistance UK is unaffiliated with mySociety, so if you would like to get involved in the NoLOBOS campaign, please contact them directly.

Thanks very much to Vica for taking the time to explain the campaign, and its use of WhatDoTheyKnow. We’re glad to have been one part of this many-pronged approach.

Image: Raw Pixel

Original source – mySociety

Comments closed

Bitnami