Sunday, July 23, 2006

Commercial Terms

At the moment, most people seem to be of the view that the law (note, that's "law") on declaring loans to the Electoral Commission is concerned solely on the rate of interest which is charged on said loans. In other words, were the loans offered at an interest rate which is within the bounds of commercial rates? The secret loans which the Labour Party accepted were offered at 6.5 - 6.75 percent and these undoubtedly are rates which can be found commercially.

In fact though, there's more to this than just the basic interest rate charged. In March this year, after the secret loans became public, the Electoral Commission wrote to the main parties (PDF) reminding them of the actual rules on declaring loans. The key here is this:
[T]he interest rate is not the only term of a loan. In deciding whether or not a loan is on commercial terms, you would also need to consider, for example, any requirement for security, the repayment terms and flexibility - including a clear understanding that a loan may be converted into a donation at a later stage. The overall test must be the extent to which similar terms would have been available at the time of the loan from a commercial lender.
This, clearly, is not the same as a simple judgement over the interest rate being charged on a loan. What I'd like to know is, would any commercial lender have offered the same terms to the Labour Party as those which they actually received from their Lords in waiting secret lenders?

It's becoming clear that the terms of these unsecured loans were rather generous. Oh that my bank manager would be so flexible.

The repayment period specified on the loans is certainly unusual in my experience.
Labour's accounts disclosed it is being charged interest at 6.5 to 6.75 per cent, two points above the Bank of England rate [on the secret loans].

All the loans were taken out during 2005, with repayment terms ranging from 180 to 365 days.

But a note in the accounts said: "The terms of the loan agreements are such that, if the loan is not repaid on the expiry of its initial term, then the loan is generally repayable 180 days after the party receives a written repayment notice."
In other words, there was a nominal repayment period on the loans but it wasn't actually a fixed period. In fact, the loans are actually only repayable six months after the lender specifically asks for them to be repaid. If the lender does not do so, the loan might conceivably never be repaid. It's almost as if the terms of the loans have been specifically written so that they could be turned into donations at a later date. I'm no expert on matters financial, as my bank manager will be quick to attest, but that seems rather unusual for a commercial unsecured loan.

And then there's the interest payments themselves. As the Independent reports today, a year on from the issue of the loans, the Labour Party has not yet paid back a single penny of interest on them. Again, my bank manager is not quite so generous when it comes to interest payments.

Given the precarious state of the Labour Party's finances generally, and given that they don't seem to a great deal in the way of guaranteed income, am I wide of the mark when I say that they'd have been laughed out of the plush executive offices of every commercial lender in the country if they'd attempted to secure loans on these terms on the open market?

The answer to this question, you'll be glad to hear, isn't just of interest to me. From the Independent report:
Detectives are already looking into whether the loans were made on terms the party would not have been able to gain from a bank. They are examining whether the loans were made on the understanding that they would be converted to donations later and never repaid. Opposition politicians believe that the loans were not made at a commercial rate and that Mr Blair broke the law by failing to declare them.
Good old Knacker. Unless I'm totally off base here, this is going to get very interesting indeed.

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MatGB said...

Hmm. You have to see this one.

I think we're there. It's just a matter of time.

CuriousHamster said...

Thanks Mat. It'd certainly be a fitting end to his career.

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