Whiteman raises question of LOBO litigation and mis-selling

Rob Whiteman, chief executive CIPFA

CIPFA chief executive Rob Whiteman has urged local authorities who think they were mis-sold Lender Option Borrower Option (LOBO) loans to consider legal action against banks.

Whiteman made his comments this week during a BBC Radio4 news item which took a critical look at the amount of interest some councils are paying on LOBOs in the wake of Northamptonshire County Council’s financial problems.

Responding to allegations councils had been ripped off over the controversial loans, Whiteman said that councils could consider suing banks over the issue.

He said: “If councils have made bad deals I think they should not be defensive about that but go to litigation and challenge the banks and say, ‘We think we have ben mis-sold’, or, ‘We think there are bad deals here and we want to change the nature of the deal’.

“It is very difficult for banks to defend what may be demonstrably a bad deal and so I see no reason at all why councils shouldn’t try and remedy this through the courts if that is the right thing to do.”

However, Whiteman hedged his comments by claiming that councils may find they don’t have any legal basis on which to sue.

He said: “Now I don’t want to see councils wasting taxpayers’ money on legal action that ultimately doesn’t bear fruit.

“Remember that these loans may be in watertight contracts and actually the banks may be able to demonstrate to the courts that what has been offered to local authorities are no different to what other parts of the economy has taken out.”

Left wing anti-debt campaign group Debt Resistance UK seized on Whiteman’s comments, with its lead campaigner Joel Benjamin, welcoming them for using what he described as CIPFA’s “considerable influence” in relation to legal action.

“We thank CEO Rob Whiteman for his intervention,” said Benjamin.

“Ultimately, it should not take media exposure to force council officials to act in the public interest. Not when councils have a legal duty to protect and serve the public, and billions of pounds of taxpayer money is at stake.”

However, after Room151 contacted CIPFA following the broadcast, Whiteman issued another, more nuanced statement which said that “legal action is a regrettable last resort and should only be considered where a council feels it was deliberately misled or the contract terms are challengeable by market comparison.”

He said: “Loans have been taken over a significant period of time and at different interest rates and it is not reasonable to compare historical interest rates to the current rate environment.

“LOBO loans, which became popular in the late 1990s, have attracted a number of councils over the years, because they can, at least initially, provide an interest rate that is below the Public Works Loan Board (PWLB).

“To take a step back, LOBOs, like all loans, carry risk and councils have to manage that risk on an ongoing basis.”

The last time LOBOs hit the national broadcast media was in 2015, in a Channel 4 Dispatches documentary entitled How Councils Blew Your Millions.

At the time, some in the sector criticised the documentary for comparing interest rates paid on LOBOs, fixed in a higher rate environment, with today’s low rates.

Speaking after this week’s Radio4 programme, a spokesman for the Local Government Association said: “Councils manage a range of borrowing to meet the needs they face. LOBOs are a legitimate financial instrument for them to use but must be viewed in the context of a council’s entire debt profile and borrowing, not in isolation.

“Any evaluation of the decision making of councils around LOBOs needs to take account of the information available when the decision was made, such as financial forecasts and risk assessments and not on the basis of hindsight.”