Labour leaders face a backlash from their own MPs after admitting they received loans from millionaire supporters who were then recommended for peerages.
The party insisted it had broken no rules by accepting loans, that enable it to avoid declaring the financial help, and strenuously denied the backers were being rewarded for the loans.
But MPs protested last night that the practice was bringing Labour into disrepute and called for reform both of the funding of political parties and the composition of the House of Lords.
The controversy arose after it emerged that three businessmen at the centre of a row between Downing Street and the watchdog on Lords appointments had all made loans to the Labour party. The Independent on Sunday reported that their loans were worth more than £3.5m.
One of them, Chai Patel, who is chief executive of the Priory Clinics, lent the party £1.5m at commercial rates last August, as well making donations worth £100,000. He said yesterday: "I did this because I was asked to, and because I was able to.
"If I had ever imagined that providing financial support in this way would have brought so much criticism, I would not have done so. I never expected anything in return for either the donation or the loan."
His elevation to a peerage is one of three being blocked by the House of Lords Appointments Commission. The others are that of Sir David Garrard, a property developer who is believed to have loaned Labour more than £1m, and stockbroker Barry Townsley, who lent the party £1m.
A Labour spokesman said: "There is nothing wrong with donating or lending money to a political party as long as the rules are strictly adhered to.
"The issue here, regarding the loans that these people have made, is whether the strict rules set by the Electoral Commission regarding the declaration of loans that have been made at a commercial rate, have been fully observed.
"They have. It has been suggested that these loans were made at a preferential rate. That is absolutely not the case."
But Peter Kilfoyle, the former armed forces minister, said: "I have always been very concerned about the increasing reliance on wealthy donors. Traditionally, the party was funded by the trade unions that was far more transparent and accountable."
Mr Kilfoyle called for a cap on the donations, or loans, that a political party can receive. He added: "I don't want to see political parties fighting over which business will fund them. That would put us in the same situation as the Americans."
Ian Gibson, the MP for Norwich North, called for a review of how the party receives its income and he made the call for a fully-elected House of Lords to be put in place.
Mr Gibson said: "Whether the income is through loans or straight cash donations, it isn't liked either by party members or by the public generally."
Three lenders in question
* BARRY TOWNSLEY, STOCKBROKER
Caught up in the 'Galloping Major' share-dealing City scandal and banned from the trading floor for six months. He has given sponsorship worth £1.5m to Stockley Academy, Hillingdon, west London, a flagship Labour academy. Has withdrawn his name, telling friends the recent publicity has not made elevation to the Lords worthwhile.
* CHAI PATEL, ENTREPRENEUR
His family moved to a south London council estate after it fled Idi Amin's regime in Uganda. Trained as a doctor, he became a healthcare entrepreneur. Reported to have made £25m from the Priory clinics. Cleared last year of misconduct over allegations of mistreatment in a home run by Westminster Health Care, where he was chief executive.
* SIR DAVID GARRARD, PROPERTY DEVELOPER
Knighted in 2002, the multimillionaire property developer is a friend of Labour's chief fundraiser Lord Levy. He previously donated to the Tories when they were led by William Hague. He has contributed £2.4m to the Bexley Business Academy in south-east London, a flagship for the Government's city academy scheme.Reuse content