Audit, Inspection and Safety

08.02.19

Newham LBC to sue RBS over £150m in LOBO loans

Newham London Borough Council is to sue the Royal Bank of Scotland over the terms of around £150m worth of LOBO bank-loans, making it the latest council to take legal action against banks over the highly controversial loans.

Previously labelled the ‘debt capital’ of the UK by campaign group Debt Resistance UK, the authority has filed a high court claim against RBS around the terms and interest of the complex bank loans.

The lender-option, borrower-option (LOBO) loans were popular amongst councils in the 2000s due to appealing teaser interest rates, but the loans give the lender the option to increase the rates at fixed points in the loan term.

With LOBO loans there are set days when the interest rate can be changed by the lender. The borrower can choose to accept the rate or repay the loan in full, but there are no breakage penalties at this point. The breakage penalties only apply if the borrower wants to repay at another point in time or when the rate is not changed – the same as a fixed rate loan would be.

The east London authority took out around £578m in LOBO loans between 2003-10, with around £150m of those loans provided by RBS.

Holding the highest number of LOBO loans of any UK council, Newham reportedly spent £87m in 2017 on interest payments, and pays the highest interest rates in the UK which the group attributes to under-investment in social housing, a history of chronic gambling, low wages and the closure of its docklands.

The legal action follows the news earlier this week that seven other councils were suing Barclays over LOBO loans worth over a total £500m – which the authorities claim were fraudulently set with high rates before the financial crash.

Last year, Newham’s legal team filed a separate claim against Barclays over its LOBO loans, along with 14 other authorities, and proceedings are reportedly ongoing.

A spokesperson from Newham Borough Council confirmed that the authority had issued the claim, but could not comment further as it is a live legal matter.

LOBO loans have been heavily criticised, most notably by the shadow chancellor John McDonnell who called for a government investigation in order to “restore any historic loss to the public purse.”

Analysis from Research for Action showed that 240 authorities in total had been involved with LOBO loans, and a total of £16bn could be lost over the lifetime of the loans if the councils do not refinance them.

Image credit - trenchcoates

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