Treasury adviser questions rivals over LOBOs

A leading local authority treasury adviser has questioned why rivals were paid by brokers to arrange Lender Option Borrower Option (LOBO) loans.

In a written submission to the House of Commons communities and local government select committee, which is investigating LOBOs, Arlingclose said that there were potential conflicts of interest in the payments.

In July, an oral evidence session of the committee heard concerns about payments received by treasury advisers when their local authority clients agreed to take out loans through broking companies with which they had a relationship.

In its submission, Arlingclose said: “Since, it is claimed, that the role of the adviser was to provide merely comparative information together with economic forecasts from a number of unspecified economists in return for a consultative fee, we wonder what service the adviser was providing to the local authority in return for the commissions paid to it by money brokers.

“It doesn’t appear to have been to rebalance the information asymmetry in favour of their clients.”

It said that commissions paid by money brokers were often well in excess of the consultative fee paid by the local authority as an annual retainer. Typically, the standard level a council paid for brokerage on a LOBO loan was £24,000 for a £10m loan, it said.

Arlingclose continued: “There is clearly a potential conflict of interest in the roles of advisers receiving commissions derived from borrowing or investing transactions of their clients.

“Whilst, it is stated that commissions derived from LOBOs between advisers and money brokers no longer takes place it is perhaps not down to chance that there is a high correlation between the money broker facilitating the LOBO and the adviser providing comparative information to the local authority ultimately borrowing it.”

Arlingclose also described as “disappointing” the attitude of the Financial Conduct Authority (FCA), which has said that it has no powers covering the selling of LOBO loans.

“It appears that local authorities are excluded from much of the regulatory protections that the FCA provide because of its view that the significant levels of  local authority borrowing that include inherently risky instruments are undertaken entirely in an unregulated space where no one appears accountable for anything,” it said.

The treasury adviser also cast doubt on the strong defence of LOBOs launched by a number of local authorities which borrowed using the mechanism.

It said that “in some instances these claims potentially demonstrate that the risks associated with LOBOs are still not fully appreciated”.

In its own written evidence to the communities committee made in September, Capita Asset Services insisted it has never hidden payments from money brokers arranging LOBOs.

The submission said: “Sector Treasury Services Limited was part of the Capita group of companies during the period in question (Sector was rebranded as Capita Treasury solutions in 2013).

“We can confirm that we do not currently receive any commission or other payment from Tullett Prebon or any other money broker operating in the LOBO market. Where we have received payments from money brokers in the past, these arrangements were disclosed to local authorities under our standard terms of business at the relevant times.”

Capita adds: “We are aware that a number of local authorities have gone on record recently to explain their use of LOBO products, in particular detailing the economic climate that was prevalent during the timeframe in question.

“Sector’s role in this context would have been to provide comparative information on the options available to the local authorities together with economic forecasts from a number of economists.

“The options presented would have related to the categories or types of funding which the local authority could consider, together with examples of loans available.

“For example, information would have been provided by Sector on the rates offered by the PWLB, plus indicative rates of other long-term loans, as well as the loss of income rate should cash be used.

“Sector would have received a consultative fee for these services but would not have executed or acted as an intermediary for any resulting council transactions.”

Capita also sought to explain its relationship with Butlers, a treasury advisor acquired by Sector. It told the committee: “You have asked specifically about the role of Butlers regarding LOBO Loans. We see from the transcript that the Committee’s focus is on the period prior to 2011.

“We should make it clear that Sector only acquired Butlers in October 2010 and from this date Butlers ceased to exist as a separate business. Up to this date, Butlers was owned by ICAP. As such, we are unable to comment on Butlers’specific role in these loans as we had no affiliation with them at the time.”

A separate submission to the committee from Cornwall Council, which was criticised in the Channel 4 Dispatches programme which led to the committee investigation, said evidence heard in the oral hearing had been “one-sided”.

It called for the committee to take evidence from other witnesses “that will give a more balanced approach”.