Sheffield Council to stop using ‘worrying’ private loans after investigation

Sheffield Council has pledged that it will no longer take out private loans with high interest rates – despite arguing that past deals were ‘lawful and rational’.

By Molly Williams, local democracy reporter
Tuesday, 18 June, 2019, 13:54

Since they were introduced, the council has had 19 of the loans, totalling £313 million.

But at a recent audit and standards committee meeting the authority made a commitment to stop using them.

When asked if the council would enter into any more of the loans, David Phillips, head of strategic finance, said: “No, they are out of fashion now and it would not be cost-effective.”

It comes following an investigation sparked by an objection from a member of the public in 2017. They questioned if the council’s loans were lawful.

Mr Phillips said: “In response to that our external officers launched a full investigation, requiring all sorts of paperwork going back to the early 2000s when we took them out.

“The results show we entered them lawfully and took a rational approach when entering into the loans.”

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The private loans, often referred to as LOBO loans (lender option, borrower option), are a long-term finance package provided by banks, brokerages and intermediary firms to be paid back between 40 and 70 years.

The interest rate is initially fixed, but unlike PWLB (Public Works Loan Board) loans, private banks have the option to propose or impose a new fixed rate with a predetermined date – such as every five years.

The borrower (the council) has the option to either accept the new rate or repay the entire loan – forcing them to pay a ‘breakage penalty’ in return.

The loans, which were mostly taken out prior to the financial crisis, provided councils with a cheap source of financing compared with the Government-run PWLB.

Sheffield South East MP Clive Betts previously said the loans were often ‘bad deals’ and that Parliament should examine the relationships between banks, brokers and consultants who loaned them.

Sean Kemp, an expert in banking and financial management at Sheffield Hallam University, has also called the council’s use of the loans ‘worrying’ given their high interest rates.