Monday 11 April 2016

Brent Council has £95.5m in LOBO loans and does not intend to withdraw at present

Michael Pavey, deputy leader of Brent Council and lead member for finance has confirmed that Brent Council has £95.5m in LOBO (Lender Option, Borrower Option) loans which have been the subject of much criticism. LINK

Cllr Pavey says that the loans were taken out prior to 2010 and none since. He states:
The council has no plans to take out further LOBO loans.
If opportunities arise to withdraw from these loans in a financially advantageous way, the council will look at this very seriously. But our current estimate is that the lowest-cost option to Brent residents is to allow the loans to mature in the usual way.

Please be assured that I'm keeping an eye on this. Cllr Filson also took a close interest in this matter when he was chair of scrutiny. Obviously sadly he is no longer here to give his opinions, but I think it's fair to say that he was supportive of our current position - though critical of our predecessors for investing in the first place.
MPs, Council leaders and others have come together to request that the Treasury Select Committee look into the matter LINK:

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 (TMAs) 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 (TMAs) – 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 (TMAs) and financial consultants to local government.


Philip Grant said...

It would be interesting to know when the £95.5m of LOBO loans were taken out by Brent Council, and who were the Council Finance Officer(s) and Lead Member(s) for Finance who approved them.

I have not personal experience of LOBO loans, but I did have to try to sort out the proper tax treatment of several "derivatives" transactions during my time as an H.M. Inspector of Taxes in the 1990's and early 2000's.

One of the key characteristics of "derivatives" is that they are generally quite complex transactions, which have been drawn up by highly skilled (and therefore highly paid) professionals, such as lawyers and accountants. So, from the start, anyone entering into them is incurring higher costs than by taking out a straightforward loan.

Why would anyone want to do this? Well, some of the ones I had to deal with involved tax avoidance (for example, dressing up a straight forward bank loan of £25m to a UK Group of Companies so that it appeared that both the interest and the capital repayments were deductible in arriving at trading profits, which would have saved the Group around £8m in UK Corporation Tax if it had succeeded, less the large fee to the Investment Banking arm of a UK High Street Bank for setting up the scam).

But why would a local authority, like Brent, want to get involved in something as complex as a "derivatives" based loan? It has no tax to avoid, and the additional costs involved would appear to make it a less attractive loan arrangement (although it might be that the lender had designed it in such a way that some or all of their "profit" on the loan ended up in an offshore tax haven, which would allow them to make the LOBO loan appear to be a more advantageous arrangement for the borrower).

As the sources quoted in Martin's blog above show, whatever the actual terms of these LOBO loans, there will always be a greater risk to the borrower (banks and other lenders, who devise, or pay someone else to devise, these complex transactions will always ensure that their own profit is guaranteed!).

So Brent 'will allow the[se] loans to mature in the usual way'. Let us hope that the final bill to Brent's Council Tax payers from these dodgy financial decisions of the past will not prove to be too excessive; or better still, that the Financial Authorities declare these LOBO loans to have been mis-sold, so that the Council receives some compensation if Brent loses out on these "derivatives" transactions.


Philip Grant said...

Further to my comment above, a source at Brent Council has advised me that the LOBO loans were taken out between 2006 and 2010, when the Council was controlled by a Lib Dem / Conservative coalition. However, I do not have independent confirmation of that claim.


Unknown said...
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Unknown said...

Why not ask Paul LOBO Lorber who was the leader of BrENT council?