MPs call on City regulators and Parliament to look at ‘lobo’ loans

Controversial bank lending to councils under scrutiny as FCA concerns emerge

Birmingham New Street, 2013 (Getty)

MPs are calling for a new investigation into controversial loans sold by banks to local authorities after it emerged that, in 2014, City regulators had highlighted “unfair” penalties attached to some of the deals agreed by councils.

According to an internal review unearthed by a Freedom of Information request, the Financial Conduct Authority (FCA) looked into complex lobo loans, which were taken out by hundreds of councils across the UK, and concluded that a proportion of them may have been “unfair” due to their large exit fees.

The Labour MP John Mann yesterday said that both the FCA and the big-hitting Treasury Select Committee – of which he is a member – should now investigate the issue.

“Councils are unsophisticated investors – they are easy targets. This is a matter for the FCA,” Mr Mann said.

“When [the new FCA chief executive] Andrew Bailey arrives, he should be robust in dealing with this.

Fellow Labour MP Clive Betts said Parliament should examine the relationships between the banks, brokers and consultants who sold the loans. Mr Betts added that the Communities and Local Government Committee, which he chairs, could also re-examine local authority lobo lending.

The Independent this week reported how councils are said to be paying £30m in excess interest costs on lobos. British banks have allegedly made gross upfront profits of £300m on the deals.

The loans have also come in for criticism because some consultants paid to offer advice to the councils were also paid by organisations setting up the borrowing.

The councils criticised for taking out the loans insist they saved money for taxpayers, while the banks involved say they lost money on the loans.

The lobo loans – lender option, borrower option – typically run for around 50 years. But the lender has the option, on certain dates, to impose new interest rates. At that point the borrower can agree or choose to repay the loan. When the Financial Conduct Authority looked at a sample of the lobo loans’ terms in 2014, it found that a “handful may have unfair terms [in other words, big repayment penalties)”.

However, the FCA’s remit – determined by Parliament – means it does not typically regulate such commercial lending, and it concluded that lobo loans did not pose a general market risk.

Mr Betts said his Communities and Local Government Committee had shelved its inquiry into local authority lobo lending, but would look at the issue again if new evidence came to light.

“Some councils may have entered into bad deals, but we didn’t get evidence to show there was a systematic problem with lobos,” he said.

However, he added: “I am still quite angry with the so-called financial advisers … they are paid by the organisation setting up the borrowing. That is not acceptable in my view.”

Lawyers said some councils could have legal grounds to make a claim for breach of contract against their advisers over managing conflicts of interest or their obligation to advise on suitable products.

“If councils are not looking at this they should be,” said Janine Alexander, a partner at the law firm Collyer Bristow. “If they don’t act quickly, they may run out of time.”

She added that the high exit fees identified by the FCA could also be challenged. “The problem is, councils are stuck with these things and have to pay a prohibitive penalty to get out. But there is a question about whether they are enforceable.”