RBS move on Lobo loans could save Scottish councils hundreds of millions

Research for Action, a workers’ co-operative producing research to support social, economic and environmental policies, says that local authorities stand to make savings totalling £16 billion across the UK, and £4 billion from the top 10 Lobo loan councils, if they can re-financed Lobo (Lender Option Borrower Option) loans.

Lobo’s  are local authority loans with commercial banks which usually start at a ‘teaser’ rate with low interest in the short-term, but the loans contain ‘break clauses’ which allow banks to ramp up the rates to sometimes as high as 7 or 8 per cent, significantly higher than the cost of borrowing from the UK Government’s Public Works Loan Board (PWLB).

Research for Action’s findings show Glasgow City Council has the third highest number of Lobo loans of any council in the UK, bringing in £449 million in total.

But the average interest rate on the loans is 4.2 per cent, and with each loan taking on average 42 years to mature, the aggregate interest costs are potentially huge.

The group says that switching to a PWLB loan with 2.21 per cent interest could save Glasgow £450 million, more than the total value of the original loan to the council.

Fife Council, eighth biggest user of Lobos of all UK councils, could save £382 million by refinancing, on a loan worth £357 million to the council.

Edinburgh City Council, 11th on the list, could save £298 million, on an original loan of £281 million.

RBS, which is still more than 60 per cent taxpayer-owned and a major issuer of Lobo loans, indicated last month that it was open to refinancing deals with local councils, after signing an agreement with Kent County Council which took out £60 million worth of Lobo loans between 2008-2011.

The deal agreed meant the Council paid off the loan on 1 October by replacing the 4 per cent Lobo loan interest rate with a 2.5 per cent government one and paying a £13.4 million premium charge to escape the contract early.

RBS, which is one of the main providers of Lobo loans to Scottish councils, would not comment on the specifics of the Kent Council deal but said it was “open to discussions” with other councils.

Northamptonshire Council also repaid a £20 million Lobo loan in October after striking a deal with RBS.

Shadow chancellor, John McDonnell, has called for a government investigation into the use of the high-cost bank loans on the back of Research for Action’s findings.

He said: “The government has a role to play now in ensuring there is a full, independent and open investigation into the use of these financial instruments and action taken to restore any historic loss to the public purse.”

As well as Royal Bank of Scotland, Barclays were among the largest lenders of Lobos to councils in the UK.

In 2016, Barclays scrapped Lobos by turning them into fixed-rate loans. But one of the Research for Action report’s authors, Joel Benjamin, said interest payments were not necessarily affected by those changes, and only resulted in a “slight reduction” in fair value and breakage costs.

Mr Benjamin said: “HM Treasury has been aware of the billions of pounds of savings available on mis-sold bank LOBO loans since at least March 2016, when they were asked to investigate toxic LOBO loans in an open letter signed by MPs, academics and councillors, yet two years on, the Treasury continues to ignore the problem, as billions of pounds of unnecessary further cuts decimate local services.”

Research for Action’s findings come as the Accounts Commission has today [29 November] published its annual financial overview on local authorities, which found that councils used savings and drained reserves to deal with funding shortfalls of 4 per cent in 2017/18.