Barclays, RBS made over £300m selling questionable loans to UK councils

Barclays and Royal Bank of Scotland (RBS) have allegedly made over £300m in profits by selling a series of questionable loans to UK councils, thereby raising financial risks for local taxpayers, claim reports. Barclays and RBS are said to have made £224m and £84m, respectively, in gross trading profits between 2002 and 2012 after selling loans called "lobos" to councillors; Barclays has disputed the claims and RBS has declined to comment. These new claims have put the lobo market back in the spotlight amid fears there might have been conflicts of interest between banks, brokers and consultants involved in lobo deals.

For free real time breaking news alerts sent straight to your inbox sign up to our breaking news emails Sign up to our free breaking news emails Please enter a valid email address Please enter a valid email address SIGN UP I would like to be emailed about offers, events and updates from The Independent. Read our privacy notice Thanks for signing up to the

Breaking News email {{ #verifyErrors }} {{ message }} {{ /verifyErrors }} {{ ^verifyErrors }} Something went wrong. Please try again later {{ /verifyErrors }}

Two of Britain’s biggest banks allegedly made more than £300m in upfront profits by selling a string of questionable loans to UK councils, prompting claims that they have raised financial risks for local taxpayers.

Barclays and the taxpayer-owned Royal Bank of Scotland are said to have made at least £224m and £86m, respectively, in gross trading profits between 2002 and 2012 after selling loans known as “lobos” to councillors. Barclays has disputed the figures and said the gains are much smaller. RBS did not comment.

The new calculations, obtained by The Independent from the financial analyst Nick Dunbar, are based on lobo contracts for a sample of 47 councils. These show that the gross upfront profit made by all banks offering lobos in the sample was £728m. But the profit calculations are for just 49 per cent of all lobo borrowings by councils - meaning the total profits for banks on the deals could be considerably higher.

Lobo loans contain a complex derivative that can be sold on in the market and give banks an upfront gross profit on day one. The figures would not reflect the net profit for the banks made over time, and sources at Barclays insist the bank has lost money in the longer term on lobo deals.

“We’ve not made a penny of profit on these loans,” a source at the bank said.

But the calculations have put the lobo market under fresh scrutiny amid concerns that there might have been conflicts of interest between banks, brokers and consultants involved in lobo deals.

At least one lobo dealmaker has warned of the potential conflicts. Former Barclays lobo trader Rob Carver insists councillors were potentially left with a bad deal.

He worked for the bank’s investment arm Barclays Capital in the early 2000s but says he quit because he was so concerned about the products he was trading. “These were among the most profitable things we were doing in terms of revenues. When one of these deals arrived, everyone’s ears would prick up and there was a lot of pressure to get the deal done,” he told The Independent.

“Hedge funds would squeeze you on every deal down to the last basis point, but local authorities didn’t. The profit margins would be much lower for the deals we did with hedge funds compared to local authorities.”

Click HERE for larger annotated version of the graphic

Mr Carver, who later left Barclays to join the hedge fund AHL, last year told MPs looking into lobos that he “would not do these deals if you put a gun to my head.”

“It smelt and felt to me like there was something really dodgy going on. I cannot prove that, but there is clearly a kind of moral hazard and that made me deeply uncomfortable.”

Barclays said it “categorically rejects any suggestion that we haven’t acted in the best interests of local authorities”.

“Moral hazard” concerns may have been fuelled by the close links between consultants who helped councils manage their finances and brokers who stood to gain from the sale of lobos. If a council wanted to buy a lobo, it would approach a broker, who would approach several banks to get the best deal. Banks would then pay brokers a commission if they were chosen to provide the lobo loan. This was “standard market practice”, Barclays said.

But there were allegedly closer connections for local authorities to consider in the long chain of lobo fees. Councils paid brokers to help them buy lobos from banks, but they also relied on consultants, known in the council world as “treasury management advisers” (TMAs), for their independent advice on borrowing matters. One of the biggest TMAs, Butlers, was actually owned by lobo broker Icap and shared its London headquarters at the time of the lobo boom. It got paid a fee every time its council clients opted to use Icap for a lobo loan, according to a 2011 Competition Commission report looking into its takeover by a rival TMA called Sector.

Sector itself also had a similar deal with broker Tullett Prebon, according to the report.

Freedom of Information requests by activist group Move Your Money revealed that, on the information available, it appeared Butlers’ local authority clients went with Icap on 84 per cent of the Lobo deals on which it consulted.

No improper dealings are suggested, and Icap says “Butlers were paid a fee for providing information on rating agencies” in line with “standard market rates”. But concerns about the impact of broker fee payments back to consultants have also been raised by council consultant Arlingclose, which refused brokerage fee payments during the period.

Business news: In pictures Show all 13 1 / 13 Business news: In pictures Business news: In pictures Flybe collapses Airline Flybe has collapsed. All future flights on the Exeter-based airline have been cancelled – leaving more than 2,300 staff facing an uncertain future, and wrecking the travel plans of hundreds of thousands of passengers. The chief executive, Mark Anderson, said: “Europe’s largest independent regional airline has been unable to overcome significant funding challenges to its business. AFP via Getty Business news: In pictures Future product placement will be 'tailored to individual viewers' Marketing executives say that product placement in films and televison shows on streaming services such as Netflix may be tailored to individuals in future. For instance, if data shows that a viewer is a fan of pepsi, a billboard in the background of a shot would host an advert for pepsi, while for a viewer known to have different tastes it could be for Coca-Cola Paramount Business news: In pictures Corbyn wishes Amazon a happy birthday In a card sent to Amazon CEO Jeff Bezos on the company's 25th birthday, Labour leader Jeremy Corbyn writes: "You owe the British people millions in taxes that pay for the public services that we all rely on. Please pay your fair share" Business news: In pictures No deal, no tariffs The government has announced that it would slash almost all tariffs in the event of a no-deal Brexit. Notable exceptions include cars and meat, which will see tariffs in place to protect British farmers Getty Business news: In pictures Fingerprint payment NatWest is trialling a new bank card that will allow people to touch their hand to the card when paying rather than typing in a PIN number. The card will work by recognising the user's fingerprint NatWest/PA Wire Business news: In pictures Mahabis bust High-end slipper retailer Mahabis has gone into administration. 2 Jan 2019 Mahabis Business news: In pictures Costa Cola Coca-Cola has paid £3.9bn for Costa Coffee. A cafe chain is a new venture for the global soft drinks giant PA Business news: In pictures RIP Payday Loans A funeral procession for payday loans was held in London on September 2. The future of pay day lenders is in doubt after Wonga, Britain's biggest, went into administration on August 30 PA Business news: In pictures Musk irks investors and directors Elon Musk has concluded that Tesla will remain public. Investors and company directors were angry at Musk for tweeting unexpectedly that he was considering taking Tesla private and share prices had taken a tumble in the following weeks Getty Business news: In pictures Jaguar warning Iconic British car maker Jaguar Land Rover warned on July 5, 2018 that a "bad" Brexit deal could jeopardise planned investment of more than $100 billion, upping corporate pressure as the government heads into crucial talks AFP/Getty Business news: In pictures Spotif-IPO Spotify traded publically for the first time on the New York Stock Exchange on Tuesday. However, the company isn't issuing shares, but rather, shares held by Spotify's private investors will be sold AFP/Getty Business news: In pictures French blue passports The deadline to award a contract to make blue British passports after Brexit has been extended by two weeks following a request by bidder De La Rue. The move comes after anger at the announcement British passports would be produced by Franco-Dutch firm Gemalto when De La Rue’s contract ends in July. The British firm said Gemalto was chosen only because it undercut the competition, but the UK company also admitted that it was not the cheapest choice in the tendering process. Business news: In pictures Beast from the east economic impact The Beast from the East wiped £4m off of Flybe’s revenues due to flight cancellations, airport closures and delays, according to the budget airline’s estimates. Flybe said it cancelled 994 flights in the three months to 31 March, compared to 372 in the same period last year.

“We’ve never taken fees from brokers because we believe it could put pressure on the adviser to recommend the product with the largest fee, rather than the one that’s best for the local authority,” client director David Green told The Independent.

Brokers would typically receive about 0.24 per cent of the loan size in fees (so on a £10m loan, £24,000 would be paid), according to parliamentary evidence.

Sector said it did not direct local authorities to seek funding from any specific organisation, as the choice was that of the local authority alone. Tullett Prebon declined to comment but Sector strongly rejected any suggestion of inappropriate business activity and said the two were entirely separate independent organisations.

Icap says it gave analysis and information but not advice, and the decision-making was done by treasury officials at the local authorities. It adds it is no longer involved in such business and all individuals who were there have left.