Newham Council buries head in sand over mounting LOBO loan losses

A heated meeting of the Audit Board at the London Borough of Newham last week provided further evidence that the strategy of Council leaders for dealing with bank loans that have already cost the deprived borough £10m, is to do nothing and hope the problem goes away.

This was the first meeting of the Audit Board since objections to Newham’s accounts for 2014/15 were lodged with the external auditors PwC. These objections, made by a local resident and a Newham councillor, pointed out that the Council’s £563.5m of borrowing in the form of LOBO loans at the very least presented a risk to the authority’s finances which was misrepresented in the accounts and deserved a report in the public interest.

At the worst, the decision to take out the loans was contrary to law (since entering into a lose-lose bet with banks was a wholly irrational decision), in which case the auditor should apply to the high court to have the loans declared unlawful.

Analysis by the independent financial analyst and journalist Nick Dunbar has already shown that these loans – which netted the banks an upfront profit of £65million – are costing Newham Council millions in excess interest per annum, when compared to equivalent loans they could have taken out with the Public Works Loan Board.

However, the reaction by some members of the Audit Board to the objections – made by individuals exercising their democratic rights under the Audit Commission Act – was to instigate a witch hunt in an attempt to name and shame the objecting councillor before trying to blame the objectors for the costs of cleaning up a mess made by council officers between 2002 and 2009.

McCarthyist misdirection and speculative mathematics

The first mention of the LOBO objections came after a brief introduction from Newham’s new external auditor for 2016: Rachel Brittain from EY (another big four accounting firm). The first salvo came from Deputy Mayor and Cabinet Member for Finance Lester Hudson (who you might remember from December’s full council meeting on the Financial Strategy).

Cllr Hudson: In terms of the objections to the accounts, I understand that one of those objections has come from a councillor in the local authority, yes? (10:15)

So, the first concern of Cllr Hudson is not the possibility that the council’s accounts contain items that have been unlawfully entered but the possibility that one of the Labour flock has dared stray outside the closely-guarded fold (Newham is a ‘One Party State’).

Once the Chief Accountant, who provided the update on the external audit, had finished filling in the Audit Board on the scope of the objections it was over to Councillor and Mayoral Adviser Terence Paul.

Cllr Paul: Can you name the objectors and how much will this additional work cost us in terms of [inaudible]? (11:05)

Picking up Hudson’s baton of focusing on who made the objections rather than the content of the objections, Councillor Paul also deftly lays the groundwork for the leadership’s other key misdirection strategy: to make a big stink about how much PwC will bill the Council for investigating the objections.

On the first point – which Labour Councillor has dared to stick their head above the parapet to risk incurring the wrath of Sir Robin Wales’ administration – the Chief Accountant has the presence of mind to keep shtum, requesting that he be able to check whether he’s actually allowed to name the objector before naming names.

Unfortunately that’s not good enough for Councillor Andrew Baikie, Mayoral Advisor on Housing (and, incidentally, a Director of housing association Local Space, which was created in 2006 when Newham Council gifted 450 properties to the newly formed charity). Cllr Baikie was determined to unmask the rogue member.

Cllr Baikie: Chair, I would suggest that if it’s a councillor we should be able to name them. I’m not sure about the legal advice but if it’s a councillor you should be able to name them. I appreciate DPA considerations for a non-council member but if we know it’s a council member we should be able to name them. (11:15)

Following Cllr Paul’s lead, Councillor Ted Sparrowhawk then brings the conversation back to how much dealing with the objection will cost, pointing out that ‘scurrilous’ objections in the past had cost the council a lot of money. (11:40)

Cllr Sparrowhawk was referring to the Great Newham Parking Fines Scandal of 2009 to 2013, where the council used unauthorised parking cameras to issue tickets, got caught out and ended up paying PwC large sums to confirm that it was in the wrong before refunding motorists who’d been illegally charged.

Whether he did it wittingly or not, Sparrowhawk paved the way some serious huffing and puffing on the part of Cllrs Hudson and Paul over how much dealing with the objections might cost, punctuated only by Senator McCarthy Cllr Baikie’s continued calls for the objecting councillor to named (14:30). When the Chief Accountant couldn’t give an answer for the likely timescale or cost (because it will be determined by how many billable hours it takes PwC to come up with a decision) the two Councillors entered a bidding war where the figures of £20k, £100k and £200k were thrown out by Cllr Paul (12:50) before Cllr Hudson trumped him with a figure of £500k (21:50).

The completely baseless nature of this half a million pound estimate – which Hudson derived by dividing the cost of dealing with the parking objections (£100k) by the number of years involved and then multiplying this figure by the number of years spanned by the LOBO loan deals, and then adding an arbitrary premium – was made only more ridiculous when the Deputy Mayor made a point of comparing this sum with the additional tax due to be raised for funding adult social care services.

Of course the members of the Audit Board should be looking to minimise unnecessary expenditure but apparently we’ve entered a topsy-turvy world where the cost of dealing with the objections to the LOBO loans – which we have no reason to believe will be significantly larger than that of dealing with previous objections to the accounts – harms the Council’s ability to provide essential services, but the millions squandered in excessively high interest payments do not.

Here are a few of our own calculations to help illustrate where the real problems lie.

A rare moment of sanity before the inevitable slanging match

To be fair to the members of the Audit Board, once they did get down to discussing the substantive issues raised by the objections to the accounts (a good 10 minutes into the conversation), the Chief Accountant did a poor job of relaying the nature of the objections (26:15).

As a result there was serious confusion around the implications for the Council’s accounts which would arise if the loans were declared unlawful. But still the main issue under discussion was the potential costs incurred by the process, not the costs of the LOBO loans themselves.

Respite from this speculation was offered only by Councillor Rokhsana Fiaz, a latecomer to the meeting. It took her a while to get up to speed with the proceedings but she then asked the most pertinent questions of the evening before being shut down by Cllrs Baikie and Hudson.

First, Cllr Fiaz drew attention to chairman of the Treasury Select Committee Andrew Tyrie’s comments in the Independent from that day suggesting that there might be a further parliamentary inquiry into how LOBO loans were sold to Councils and asked whether action at a national level might mitigate the costs to the council (23:50).

If the government were to step in and force a restructuring of these deals then of course you’d expect Newham’s costs to be reimbursed. But that did perhaps fall outside the scope of the meeting.

But secondly, and more importantly, Cllr Fiaz reminded the board that they’d discussed the possibility of taking legal action against the banks over the terms of the loans at an Audit Board meeting in September (34:15). Apparently at this meeting the decision was made to sound out the Local Government Association about the possibility of mounting a group action. Chief Finance Officer Deborah Hindson responded (35:10).

Deborah Hindson: When that [inaudible] back in September obviously we pursued that with the LGA as requested, but the LGA are not taking forward any action in relation to the LOBOs nationally. [inaudible] The LGA are not taking forward any action. Their only involvement has been to provide evidence to the select committee [inaudible] there’s no active line of legal action by the LGA.

Cllr Hudson: And as you’ll recall from the discussions in the meeting, we all agreed that the London Borough of Newham couldn’t take on the banks alone, that would cost the council taxpayer a substantial amount of money. So therefore if there were any action it would be better if it was a class action. (35:40)

Cllr Fiaz then asked when that information had been relayed to the members. (We’re also curious about the conversation between the Council and the Local Government Association, so we’ve made Freedom of Information requests to both LBN and the LGA to try and find out exactly what was said.) She then went on to ask whether it was worth revisiting the possibility of mounting a legal challenge given the widespread media reporting and the fact that the time window for seeking legal action to extricate the Council from its toxic loans was limited. (36:05)

Alas, the sanity was short-lived and the it was here that the doors began closing on the sensible section of the debate. First the Council’s Finance Director reminds us that the Council still has it’s head in the sand when it comes to LOBO loans.

Deborah Hindson: This council does not say that they are toxic. (37:00)

Councillor Paul then pointed out that the Audit Board previously fingered some of the loans (the ‘inverse floater’ and ‘range’ LOBOs taken out with RBS and Barclays respectively) as problematic but goes on to say that the costs of unwinding the loans would be added to the cost of dealing with the objections and reasons that there’s therefore no point in taking legal action. (37:17)

In my opinion this is poor reasoning – the Council is out of pocket by £10m already and continues to lose substantial sums every year on the portfolio of loans. Fair restitution via the legal process could potentially recompense the borough for these past losses, as well as stopping the rot without incurring the huge breakage fees that are written into the contracts.

The portion of the meeting focusing on LOBOs went rapidly downhill from here. First Councillor Sparrowhawk attempted to out some councillors by pointing out that they’ve been named in recent press coverage. (39:45) Then, when Cllr Fiaz asked the board again about the costs of doing nothing, the Deputy Mayor again brought out his £500k figure, again compared it to the social care precept and brought the discussion to a premature conclusion. (42:10)

After one more attempt by Cllr Fiaz to get an answer Cllr Baikie took on the role of enforcer, using the verbal equivalent of banging the gavel to shut down debate, leaving Cllr Fiaz openly contemplating a formal complaint regarding Cllr Baikie’s behaviour. (43:45) Amid an angry exchange Cllr Hudson then suspended the meeting.

After the recess there was little further discussion of the LOBO issue, aside from Cllr Fiaz raising a concern about the sufficiency of Audit Board processes for providing proper scrutiny of some of the issues covered, making specific reference to LOBOs and the Treasury Management Strategy. (52:50)

Conclusion – Newham’s residents owe a debt of gratitude to the objectors

It’s clear after this audit board meeting that the council leadership is going out of its way to avoid engaging with the terrible losses it’s made, and continues to make, on the portfolio of LOBO loans.

It’s a shame that the efforts of independent councillors alone haven’t been able to force this issue onto the leadership’s agenda. But the objections to the accounts lodged by Rachel Collinson and the as yet unnamed Newham Councillor provide at least a glimmer of hope that the consequences of the loans will be recognised and that remedial action will be taken.

For the time being the ball is in the court of PriceWaterhouseCoopers LLP. We’ll have to hope that they can overlook their conflicts of interest (lucrative relationships with the big banks and substantial donations to the Labour Party) for long enough to recognise that the decisions of council officers to enter into LOBO loan agreements, which could only ever result in losses to the council, were wholly irrational and therefore unlawful.

Source: This post was modified from a version appearing on Debt Resistance UK local authority debt audit site and was written by Jamie Griffiths @Jamie_Griff