Lender Option Borrower Option (“LOBO”) loans are fixed rate loans containing complex financial derivatives which are predominately sold to local authorities or housing associations as an alternative to loans from the Government Public Works Loan Board (“PWLB”). Council Finance Officers are frequently attracted to LOBOs as financial advisers at banks offer cheaper loans with long terms. However, the issue lies in the fact that the lender in effect sells its’ borrower option to the Bank, leaving the borrower with the substantial risk that the Bank could cancel the loan (with its’ associated break costs) and raise the interest rate at any time.
LOBO loans and financial derivatives are a complex subject matter and which most generalist lawyers simply won’t be familiar with or understand to a level adequate enough to be able to recognise and formulate a mis-selling claim. Our financial services litigation team will ensure your LOBO loans mis-selling claim achieves the best possible result in terms of putting you back in the position your business would have been in but for the hidden swap.
If you represent a council, local authority or housing association that has entered into a LOBO loan, you are strongly advised to seek independent legal advice urgently before time limits for commencing a claim against a bank or financial adviser expire.
As legal claims will be centred around breach of contract, claimants run the risk of their claim becoming time or statute-barred by virtue of s.5 of the Limitation Act 1980. This applies six years after the date of the hidden swap agreement. Therefore it is vital to instruct solicitors promptly.
What is a LOBO loan?
A lender option borrower option (“LOBO”) is a long term borrowing instrument that incorporates two options:
- Lender’s option: for the lender to set higher interest rates at predetermined dates e.g. annually; and
- Borrower’s option: for the borrower to pay the revised interest rate or to redeem the loan, which may involve break costs.
A range of banks and financial institutions provided LOBO loans to councils and housing associations which are usually for long terms of between 40 and 70 years.
Why are LOBO loans sold to councils controversial?
Councils are entrusted with taxpayer money and for that reason local authorities are prohibited from taking out swap contracts. This is established judicial authority following the decision in Hazell v Hammersmith and Fulham LBC [1992] 2 AC 1. In particular, Lord Templeman stated that local authorities had no power to engage in interest rate swaps as they were beyond the council’s borrowing powers and consequently that all such derivative contracts were void as it could not be lawful to conduct swap transactions under the guise of “debt management”.
“I am of the opinion that a local authority has no power to enter into a swap transaction”
Lord Templeman, Hazell v Hammersmith and Fulham LBC [1992] 2 AC 1
The controversy of LOBOs is that in effect banks have been providing local authorities with initial low interest rates (which in effect contain hidden derivatives)- a practice that is prohibited by case law.
Why were councils and housing associations mis-sold LOBO loans?
LOBO loans proved to be very popular with local councils and housing associations between 2003 and 2011 with attractive low costs in the short term and appearing as fixed-rate loans. Council Finance Directors, Councillors and Audit Committees were attracted to LOBOs by the fact that at the outset, these loans were cheaper than those being offered by the government.
However LOBO loans were in fact complex loans with embedded financial derivatives, which the bank would enter into on the customer’s behalf.
Can I claim against a bank for a mis-sold LOBO Loan?
Yes. LOBO loans have since been subject to legal action because while the interest rate is initially fixed, the lender can change the rate on pre-determined days, such as every five years. If the local authority tries to terminate and repay the loan, it would face high break costs. An example of a council loan, which featured on Channel 4’s Dispatches, was a loan of £25 million that had an extortionate break cost of £15 million. These significant break costs imposed on councils meant that local authorities faced (and still face) difficulties in exiting these unfair loans.
Top banks have faced litigation, negative press coverage and criticism by campaigners such as the shadow chancellor John McDonnell, who called for a government inquiry into any bank misconduct and for customers to recover their losses.
Case study: Seven Local authorites issue £500 million claim against Barclays Bank for mis-sold LOBO loans
A joint action by local councils led by Leeds City Council and including: Sheffield City Council, Oldham Council, Nottingham City Council, North East Lincolnshire Council, Newcastle City Council and Greater Manchester Combined Authority have commenced litigation in the High Court against Barclays Bank for the mis-selling of 49 Lender-Option Borrower-Option loans in a claim worth in excess of £500 million.
Barclays, the largest lender of LOBO loans, ceased to offer the loans in 2016. Barclays face a lawsuit by seven local councils over the terms of nearly £573 million in LOBO loans taken out between them.
A mis-selling claim is multi-faceted and the local authorities claim that the loans were mis-sold as:
- council finance officers were not provided advise on the risk that the variable interest rates could be changed by the Bank;
- the councils cannot exit the loan agreements without paying substantial break costs; and
- because regulatory findings demonstrate that Barclays was involved in LIBOR manipulation, that interest rates on LOBO loans were both fraudulently set and that there was an implied representation that the Bank had not participated in benchmark rigging (when it has bee demonstrated that Barclays were manipulating LIBOR rates).
In addition, earlier this year, Newham Council also commenced High Court legal action against the Royal Bank of Scotland (RBS), the second largest lender of LOBOs, over the terms of approximately £150 million in complex bank loans.
Can I claim against financial advisers who have mis-sold a LOBO loan?
Yes. From the course of investigations carried out by journalists and as part of the government inquiry into LOBO loans, it was revealed that many financial advisers gave specialist financial advice to councils on their borrowing and were paid for the same, whilst also earning commission on LOBO loans entered into by a council.
This presents a potential conflict of interest and gives rise to complaints from customers, particularly where the advisers are regulated.
In particular, CAPITA (Treasury Management Advisers) have been implicated in advising councils to enter into LOBOs and receiving facilitation payments.
Do I have a professional negligence claim against a financial adviser that has advised entry into a LOBO loan?
Our financial services litigation team work in tandem with our specialist professional negligence lawyers in considering a claim against a financial adviser. A high level of trust is placed upon such financial advisers by their clients- many of whom are not sophisticated consumers and rely heavily on the advice given. If a financial adviser fails to deliver the service to the standard expected of a reasonable professional in that speciality field, then a client has every right to bring a complaint (and court proceedings) if financial or personal loss is suffered as a result.
How do I resolve a mis-sold LOBO loan complaint?
If you have been mis-sold a hidden swap (or fixed rate or tailored business loan) there a number of possible solutions. These include:
- attempting to negotiate with the bank or financial adviser;
- complaining to the bank or financial adviser;
- complaining to the Financial Regulator and/or the Financial Ombudsman Service;
- sending a letter before claim, issuing legal proceedings at Court, and litigating against the bank or financial adviser;
- assisting you in preparation of evidence to support your mis-sold loan case;
- appointing experts or financial accountants to assess losses and ensure the best chance of success in litigation; and
- providing Court representation and advocacy.
The initial step may be to attempt to negotiate with the bank and to seek to reach an agreement although this is often very difficult to achieve without threatening and/or commencing legal action. Pre-action advice, information gathering and correspondence is managed by our specialist swaps solicitors who consider the facts of your case, the circumstances the fixed rate loan was sold in and the bank’s position. We then prepare a detailed pre-action letter of claim to start off the negotiations. If negotiation will not resolve a mis-sold swap then litigation will be considered. In the best outcome the contract can be rescinded which means that parties will be put in their original positions before they entered the contract.
Why use a specialist LOBO loan solicitor?
Our specialist LOBO mis-selling lawyers are degree level educated in banking and securities law and have professional experience in both financial services regulatory auditing and in litigation against banks. This experience has been gained not only at other leading city law firms but at the legal and compliance departments of the banks themselves.
Our financial services litigation team will ensure your LOBO loan mis-selling claim achieves the best possible result in terms of putting you back in the position your business would have been in but for the hidden swap. This usually means a refund of all balancing payments and escaping or recovering the contingent liability (i.e. the break fee which all LOBOs will have). We work to achieve our client’s interests by attempting to negotiate with the banks wherever proper and commercially sensible to do so. When the time comes to issue legal proceedings we know how best to do so.
If a without prejudice settlement approach is unsuccessful we seek on behalf of our client both litigation funding and after the event insurance policies and prepare and issue a claim without delay.
Book an Initial Consultation with Our Financial Services Litigation Lawyers
Our Financial Services Litigation team of Solicitors and Barristers in London are highly experienced in mis-selling litigation and specialise in representing SMEs, high net worth individuals and local authorities in high value banking disputes. Our high profile and high value cases regularly appear in the national and international media. We have successfully managed and settled mis-selling court litigation against all major UK banks and regulated financial advisers and have widespread experience in managing claims through redress schemes and complaints through the Financial Ombudsman Service.
Contact our specialist Lender-Option Borrower-Option lawyers for a consultation: ☎ 020 7183 0529