Page last updated at 06:08 GMT, Thursday, 11 June 2009 07:08 UK

Councils rapped over Iceland cash

Landbanksi branch
The MPs also criticised spending watchdog the Audit Commission

An all-party group of MPs has criticised councils for not spotting warning signs that Icelandic banks were heading for collapse last October.

When Landsbanki and other banks went under they took nearly £1bn of investments from over 100 authorities.

The Communities and Local Government Select Committee says complacency, lack of expertise and inaction all helped put taxpayers' money at risk.

But a group representing councils said that they had received poor advice.

Since 2004, councils have been able to regulate their own borrowing and investment. Rules state they can only put money in institutions with high credit ratings, they must invest in sterling and it must mature within a year.

Councils were warned in late September 2008 of changes in credit ratings for Icelandic banks, before the country's financial sector collapsed the following month, but some still invested after September.

The government welcomed the report and stressed that no council has cut services or raised council tax because of the investments.

"It is right that councils continue to make responsible investments of taxpayers' money," a spokesperson for Communities and Local Government said.

"But the report also makes clear councils need further support in making investment decisions."

Advisers criticised

Some of the warning signs emerged as far back as 2006, the committee said, and while a number of councils acted on them and withdrew their money, others did not.

Some councils, it said, relied too much on credit rating agencies without any interpretation of the data and there was evidence that many staff lacked training or expertise in how to handle investments.

Our inquiry has exposed a significant level of misunderstanding, misinformation and complacency
Dr Phyllis Starkey, Committee chairman

But what caused the MPs most concern were some of the paid treasury advisers - outside bodies which act as middlemen between credit rating agencies and councils.

The committee says they found a discrepancy between what they said they offered and what they provide in practice.

Some said they were offering information only, others that they gave direct advice about investments.

"Unsurprisingly, there's some confusion among councils about what they can and should expect from these advisers," the report says.

'No excuse'

The committee also said that councils' position was made worse by poor management of finances.

"While few predicted the events that shook the financial system last year, their exceptional nature provides no excuse for the substantial failures that occurred in local authority financial arrangements," said Dr Phyllis Starkey, who chaired the committee.

"Our inquiry has exposed a significant level of misunderstanding, misinformation and complacency - not just within local authorities, but also among those who provide them with specialist investment advice."

This report clearly shows that councils were largely let down by the organisations that they were relying on to provide up-to-date and accurate advice
Richard Kemp, Local Goverment Association

The MPs even criticise the spending watchdog the Audit Commission, which itself invested £10m in Icelandic banks, for failing to issue rigorous enough guidelines for the financial climate at the time.

But the commission's chief executive Steve Bundred, said: "The commission continues to acknowledge mistakes were made in the management of its own deposits with Icelandic banks but rejects the view that it should have issued stronger guidance to auditors before the banks failed."

However, the commission agreed that safeguards should be re-examined.

Meanwhile the Local Government Association says many councils have already overhauled their investment procedures and have moved their money to less risky areas including government bonds.

After lengthy talks with bank administrators, councils expect to get up to 90% of their money back, although it is a process that could take up to several years.


Local authorities should still be able to decide where they invest their funds, the report found.

However, it came up with a string of recommendations, including:

  • Better information and advice needed to be provided to councils' treasury departments on where to invest
  • More scrutiny of investment decisions, with an emphasis on security ahead of liquidity and profit
  • Adequate training for local authority staff and all councils to have an audit committee
  • Auditors of councils should focus more on their treasury management

The committee also called for a fresh examination of the role played by advisers to treasury departments, including a full investigation by the City watchdog - the Financial Services Authority - into these advisers' services and potential conflicts of interest.

The Local Government Association (LGA) also blamed the advice handed out to councils.

Iceland was at the centre of a financial meltdown

"This report clearly shows that councils were largely let down by the organisations that they were relying on to provide up-to-date and accurate advice," said Councillor Richard Kemp, vice chairman of the LGA.

"Failings across the entire system have affected not just councils but also other parts of the public sector as well as charities, businesses and individual savers."

"Many local authorities have already overhauled the way that they invest and accept things need to be done differently in the future, but these investments have generated hundreds of millions of pounds every year that go towards keeping council tax down and frontline services in place."

A recent Treasury Select Committee report said that charities in the UK that lost millions of pounds when the Icelandic banking system collapsed should get a bail-out from the government, but local authorities should not be compensated.

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