Rip-off RBS “LOBO” loans impoverishing local councils

July 6, 2015

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Our response to the Dispatches LOBO loan revelations

  • British banks advanced more than £2 billion in high-cost, potentially illegal LOBO loans to Local Authorities
  • Taxpayer-owned RBS the “worst offender”, with £545.5 million in LOBO loans costing taxpayers up to twice as much as standard infrastructure loans
  • More than £1.5 billion owed in total by the top 5 borrowing councils alone
  • LOBO loans procured on the basis of financial advice suffering from serious conflicts of interest
  • Councils including Edinburgh & Newham cutting services to pay LOBO debt
RBS was embroiled in fresh scandal today, acting against the public interest by impoverishing local authorities with extortionate loans for its own profit.

In a special investigation by Channel 4’s Dispatches based on FOI research from Debt Resistance UK, the taxpayer-owned bank was found to have lent more than £545.5 million in high cost Lender Option Borrow Option (LOBO) loans.

These loans lock councils in to high-interest rates for periods of up to 70 years after an initial teaser rate ends, sometimes costing twice as much as traditional infrastructure loans from the Public Works Loans Board (PWLB).

Brent LOBO Loan_v1
LOBO loans waste millions of pounds of taxpayer funds not only through excessive interest rates, but also from the fees given for the advice of brokers suffering from serious conflicts of interest.Commenting on the revelations, Fionn Travers-Smith, Spokesman for ethical banking campaign Move Your Money, said:“Despite only surviving thanks to the £45 billion bail out from taxpayers, today’s revelations show publicly-owned Royal Bank of Scotland again acting against the public interest, by flogging rip-off loans to cash-strapped councils.

“We own RBS so it should work for us, not cripple cash-strapped councils already impoverished as a result of the financial crisis.”

Whilst Barclays provided more LOBO loans than any other bank, RBS was branded as the “worst offender” by Debt Resistance UK for their use of “inverse floater” LOBO loans.

These “inverse floaters” are a particularly complicated form of LOBO loan, which carry more than twice the interest councils would otherwise be charged. These loans also include punitive break clauses, which would cost more than the sum of the loan if the council were to exit these expensive arrangements, and were advanced after the bank was bailed out by the taxpayer.

They are also potentially illegal as the packaged loans are backed with derivatives, which was ruled as illegal for council borrowing in the landmark Hammersmith and Fulham vs Goldman Sachs case of 1989.

 “It is both financially and morally wrong for the bank that owes so much to the taxpayer to be undermining the jobs, services and investment that the bank was saved to support,” Fionn Travers-Smith continued.

More than simply biting the hand that feeds, this scandal merely goes to show that returning RBS to private ownership will do nothing for the public interest, and instead will worsen predatory bank activities preying on the public purse.”

Details revealed in the research show that Edinburgh council, the authority in which RBS is headquartered, will repay £110 million on loans totalling £44 million. Edinburgh Council recently announced a further £107 million of cuts, a total very similar to the total repayable to RBS in LOBO loans.

In a similar case, Newham Council, which has been beset by social unrest as a result of its cuts, is paying more than £13 million a year in interest payments that it would not otherwise have to pay were more conventional loans taken out with central government.

 “We need a bank that supports the public interest and provides finance, jobs and branches to the public that saved the banking sector, not more private profits and socialised losses,” Fionn Travers-Smith said.

“Instead of flogging RBS at knock-down rates to those that caused the crisis, the government must reform RBS into a network of local banks that serve the interests of society.

“Otherwise it will be business as usual in the banking sector – enrichment of the very few at the expense of the great many, with councils and the public footing the bill for a crisis they did nothing to cause.”

The revelations come at a difficult time for RBS, which recently faced a barrage of criticism during its AGM two weeks ago.

The bank is currently facing class-action litigation from small businesses that claim the bank acted fraudulently in closing them down for its own profit; for closing bank branches that communities and the public rely on; and for its role in selling dodgy mortgage-backed securities, which could cost the bank $13 billion in fines – which would be the largest fine ever received by a bank.

To read more about Debt Resistance UK’s research, click here. 

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