How Local Authority Debt is Draining Millions from Public Funds

by Debt Resistance UK

6 July 2015

Debt Resistance UK (DRUK) is initiating a local authority debt audit campaign to demonstrate how the framework of local government finance has been designed to work in the interests of private banks, and not in the interests of taxpaying citizens experiencing harsh austerity cuts, for a banking crisis they did not cause.

At 8pm on Monday 6 July, Channel 4 Dispatches in ‘How Councils Blow Your Millions’ will present its own analysis of 12 months of Debt Resistance UK – an issue we hope citizens and campaigners will take up as a campaign issue with their local council.

More than 300 Freedom of Information Act (FOIA) requests were sent by DRUK to 250 UK local authorities, via What Do They Know?, to learn the full extent and unnecessary cost of private bank debt being imposed on UK taxpayers via an obscure type of ‘teaser rate’ loan known as Lender Option, Borrower Option (LOBO) loans – sold to councils, housing associations and universities.

Inspired by citizen debt audits in Spain (PACD Municipal Debt Audit movement), debt audits in the global south (notably Ecuador in 2008), and the public debt ‘truth commission’ in Greece, DRUK has been working on a UK local government debt audit campaign to highlight systemic failures and odious debt in the UK financial system.

The local government debt audit campaign is not an attack on city councils, and we do not suggest councils are solely to blame for borrowing from banks via LOBO loans, which many councils could not price, and did not understand.

LOBO loans are a symptom of a financial system that no longer serves the interests of society. We need to reclaim our democratic institutions from the powerful clutches of the City of London, and to do this, we must understand how the financial system functions, demanding changes to ensure public finance operates in the public interest.

The existing local government financial framework is not fit-for-purpose and results in odious and unnecessary bank debts being imposed on citizens in order to finance council regeneration and housing schemes.

Under the cloak of austerity, odious bank bailout debt was socialised by central government, passed onto local authorities and transferred to households who are least able to bear it – forced to borrow from private banks and payday lenders to survive.

Local government has borne the brunt of austerity with 40% budget cuts since 2010. It’s absurd that councils are left in a situation where they have little choice but to borrow from private banks (with criminal pedigree) at usurious rates of interest.

Chancellor George Osborne has played an active role in encouraging bank borrowing, by increasing the interest rate on fixed rate Public Works Loan Board loans in 2010, causing a dramatic collapse in council borrowing and prompting local authorities to take on high-risk LOBO loans from private banks instead.

DRUK plotted the biggest LOBO loan borrowers with bank debts above £50m compiling the following chart:

drUK 1

What DRUK has found is a cabal of private financial firms, banks (RBS, Barclays), brokers (ICAP, RP Martin and Tullet Prebon) and advisors (ICAP and CAPITA) acting in unison to plunder the public purse, costing taxpayers millions.

Brokerage firm Tullet Prebon were found to be paying kickbacks on LOBO loans to CAPITA, when deals were routed through them based on CAPITA advice – payments undisclosed to council clients. Broker ICAP paid kickbacks to subsidiary firm Butlers when council business was exclusively routed via the parent company.

In both cases, kickback payments fundamentally compromise the independence of advice given to council clients – and open potential claims of fraudulent misrepresentation.

Of the UK lenders, RBS has been the worst offender, pushing a toxic LOBO loan known as ‘inverse floater’ LOBO on councils, after it was bailed out. On inverse floater loans, the council is effectively taking a bet on interest rates going up, with the amount of interest the council pays increasing, as interest rate benchmarks decrease. With interest rates at historic lows since 2009, some councils are locked into paying rates of interest as high 8-9% RBS LOBO loans.

In the London Borough of Newham, borrowing via LOBO loans is costing ratepayers an extra £13m in annual interest payments to banks, at a time when the council is passing emergency austerity budgets, and violently evicting the Focus E15 Mums and other social housing tenants to skimp and save mere thousands.

At Kent County Council, the difference between what Kent say their LOBO loans cost, and the actual repayment cost is greater than the council’s annual social welfare budget.

Billions of pounds of risky, variable rate, derivatives-laced bank lending to local authorities has gone on unregulated and unaudited by authorities, and unreported by the UK media.

The LOBO loan scandal could have been prevented, had the financial regulator, the Financial Services Authority (FSA), done its job and investigated Treasury Management Advisor firms including CAPITA and ICAP in 2009/10 as directed by Government.

Instead, the FSA refused to act, and has questions to answer as to why it failed to take action when presented with evidence of conflicts of interest that lie at the centre of the LOBO loan scandal.

As the debt crisis in Greece intensifies, the UK local authority debt audit is a timely reminder that debt problems are by no means isolated to Greece, but a globally systemic problem associated with financialisation and the despotic power of banks.

The UK, with London as the global centre of laissez-faire, deregulated finance capital, must take responsibility for the behaviour of criminal financial institutions operating within its jurisdiction, rather than simply moralising to their victims.

Amidst the current talk of local government devolution by UK elites, local authority debt audits send a clear message to decision-makers that local government finance should operate in the public interest and be based on the principles of democracy, transparency and participation, not vested City interests pimping obscure financial products at our collective expense.

DRUK is calling on citizens to implement local authority debt audits in their local areas to ensure transparency and accountability, and are developing resources to support this work.

Watch Channel 4 Dispatches at 8pm on Monday 6 July for further information, follow @debtresistuk and tweet us using the hashtags #Dispatches #LOBOscam.

For guidance and information on local debt audits, email [email protected]

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Donate one hour’s wage per month—or whatever you can afford—today.