Barclays scraps controversial Lobo loans

Barclays has become the first bank to formally drop controversial Lobo loans that were sold to councils in the wake of the financial crisis.

More than 200 councils have taken out over £15bn worth of long-term Lobo (Lender Option, Borrower Option) loans, which are tied to complex interest rate derivatives set up by banks. Most were taken out between 2003 and 2011 when councils believed interested rates would stay high.

Last year, an investigation by Channel 4's Dispatches claimed the loans can carry an interest rates of up to seven per cent at a time when the base rate is at an all-time low and some of those involved in selling the products, including a former Barclays Capital trader, felt authorities did not really understand what they were getting into.

Expensive exit fees make it difficult for councils to get out of the loans, which run for between 40 and 70 years, it added.

Dispatches also claimed that some City firms paid to provide local authorities with independent financial advice were receiving commission from brokers if a council took out a Lobo loan.

The investigation, along with a campaign by London's Evening Standard and the Independent, led to CLG Select Committee chair Clive Betts to call for an inquiry into the loans.

Responding to the Dispatches programme, Barclays had said Lobo loans were "straightforward, fair and easily explained" and the average interest rate was around 4.5 per cent, typically cheaper than other public sector loans.

But the bank has now said it will end its use of the loans and existing Lobos into normal, fixed-rate loans.

Newham Council, which has reportedly borrowed more than £560m in 27 Lobo loans, told the Evening Standard that the change will "provide more certainty on our interest arrangements".

However, some campaigners have warned that converting Lobo loans into fixed-rate products could still prove damaging for councils by locking them into long-term debt.

Joel Benjamin, who ran a campaign calling on councils to challenge Lobo loans in court, said Barclays' decision "should not be viewed as a victory for local government".

"Councils and the taxpayers who fund them are now locked into high-cost credit for generations," he told the Evening Standard.  

"Council balance sheets will only now begin to reveal the folly of financing via Lobos."