More parliamentary scrutiny over council loans 'conflicts'

Another parliamentary committee could be set to investigate loans to councils made by the likes of Barclays and Royal Bank of Scotland, which campaigners allege waste millions of pounds and force more cuts to services.

A letter signed by "66 MPs, councillors and academics, including the shadow chancellor John McDonnell", was sent to the chairman of the influential Treasury select committee calling for it to launch an inquiry into the sale of so-called "Lobo loans", reports The Independent.

Andrew Tyrie, the Conservative chairman of the committee, said in response that he is "concerned" and that it is "now important to establish whether there is a conflict of interest - and if so, as a consequence, local authorities and therefore council taxpayers have been charged excessively".

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A previous inquiry by the communities and local government select committee, chaired by Labour MP Clive Betts, "found no evidence councils had lost out on the loans". Betts has backed a fresh review.

Lobo – "lender option, borrower option" – loans are complex arrangements that allow lending banks to raise interest rates periodically, at which point the borrower can redeem the loan at face value if it pays an exit penalty. Campaigners argue the exit fees are so high they trap councils into loans that can run for up to 70 years and escalate to rip-off rates.

An investigation by Channel 4's Dispatches programme last year found that 240 councils had borrowed up to £15bn, with the loans accounting for around 20 per cent of all local authority borrowing and earning banks an upfront £1bn. Newham Council in London has £563m in loans and has been known to pay interest rates of as much as 7.6 per cent.

Councils generally took out the loans between 2003 and 2011, after rules that had forced all local authorities to borrow exclusively through the government's public works loans board (PWLB) were scrapped by the then Labour government. The rates were often initially low and the loans were offered at a time when wider interest rates were much higher than now.

The banks and councils themselves continue to assert the loans are good value. A spokesperson for Newham told the local Newham Recorder newspaper that "the loans have saved it £64m since 2002 because the average interest rate… was 4.6 per cent compared to 10 per cent on loans previously paid under the… PWLB".

Campaigners and Tyrie will be particularly keen to investigate allegations that brokers who recommended the loans were paid commission by the lenders as well as receiving a fee for their services from councils.

Such arrangements were not uncommon for financial advisers at the time – and council advice remains unregulated – but it raises the prospect that brokers were incentivised to recommended poor value loans to taxpayer-funded councils. Some of the bankers involved in the sector have renounced the practice.