Page last updated at 12:00 GMT, Thursday, 26 March 2009

Councils 'ignored Iceland risks'

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Councils insist frontline services have not been affected

Seven English councils have been accused of "negligence" for putting money into Icelandic banks days before they went bust last October.

The authorities paid nearly £33m into the banks just before they collapsed despite warnings about their solvency.

Spending watchdog The Audit Commission, which itself deposited £10m in the banks, said lessons had to be learnt.

Councils have rejected the criticism, one saying that it was a case of "the pot calling the kettle black".

The fate of the £954m deposited by more than 100 councils and other public bodies in Icelandic banks remains uncertain.

The Conservatives said the Treasury was aware of concerns about the stability of the Icelandic banking system early in 2008 but failed to pass this information onto local authorities.

"Someone has to take responsibility for what has happened," said shadow communities secretary Caroline Spelman. "It seems to me that someone in government was asleep on their watch."

And MPs called for a parliamentary debate on what Labour member Gwyn Prosser said were the "financial ineptitudes" of some local authorities.


The Audit Commission said most councils had "heeded warnings" about the declining credit worthiness of Icelandic banks during 2008 and taken action accordingly.

However, it said that some had not done this while a handful had behaved "negligently".

Undoubtedly some mistakes were made especially by the seven authorities which continued to invest money in Iceland at the end of September

Steve Bundred, Audit Commission

It reserves particular criticism for institutions which continued to deposit money after 30 September, when the credit ratings of Glitnir and Landsbanki were downgraded to "adequate" - below that deemed acceptable under guidance to town halls.

Just over a week later, the two banks went under.

According to the commission, the South Yorkshire Pensions Authority deposited £10m on 2 October while Kent County Council made two deposits totalling £8.3m on 1 and 2 October.

Other councils which made deposits during the period in question were: North East Lincolnshire Council, Redcar and Cleveland Borough Council, Restormel Borough Council, the London Borough of Havering and Bridgnorth District Council.

Alleged mistakes by authorities included the failure, by one, to open an e-mail notifying it of the ratings change, use of obsolete information and exceeding limits for deposits in a single bank.

'Absolutely refuted'

"Undoubtedly some mistakes were made especially by the seven authorities which continued to invest money in Iceland at the end of September," said Commission chief executive Steve Bundred.

"By the end of the September the Icelandic banks had been downgraded and it was known that the credit ratings agencies were issuing warnings. It was known that the Icelandic banking system was in crisis."

Training for council executives which manage investments should be improved, the Commission says, while it believes government guidance puts "undue reliance" on the opinions of credit agencies and they should take into account other information.


One of the councils censured - the London Borough of Havering - said that it "absolutely refuted" claims of negligence.

It said it scrupulously followed the ratings guidance and that it made its final deposit in one of the banks 20 minutes before the news it had been downgraded came through.

"We were absolutely following following all our policies and procedures," said its chief financial officer Rita Greenwood.

She added: "We spread our risks through different countries and institutions. That is part of the government guidance."

The South Yorkshire Pensions Authority said its investment procedures were "solid" and it had actually saved money by selling shares and property and putting it on deposit.

Ministers are to look at how investment guidance can be "clarified" to make more information available to councils.

The Conservatives said the guidance was "inadequate" and needed to be updated.

'Convenient smokescreen'

The Local Government Association, which represents 300 councils in England and Wales, said councils which deposited money after 30 September had carried out reviews as to why this took place.

It stressed that three out of four English councils had no money tied up in Icelandic banks while the total amount of deposits halved between January and October 2008.

South Yorkshire Pensions Authority
London Borough of Havering
Bridgnorth District Council
Kent County Council
North East Lincolnshire Council
Redcar and Cleveland Council
Restormel Borough Council

"There is no doubt we must learn the lessons," said chief executive John Ransford, adding that councils' banking policies would be more "cautious and measured" in future.

Kent County Council said it had been open about its conduct, admitting it had mistakenly made a £3.3m deposit on 1 October, and argued the commission needed to address its own situation.

"The position and language used by the Audit Commission is quite extraordinary," said Councillor Nick Chard, the council's cabinet member for finance.

"It really is a case of the pot calling the kettle black.

"I find this a convenient smokescreen for the Audit Commission which has twice the level of exposure in Icelandic Banks that Kent County Council has".

The Commission said there was no comparison between the two scenarios as it deposited its money a long time ago while the seven councils had done so at a time when the future of the Icelandic banks was being openly questioned.

Investment advice

Investments by councils and public bodies do not have the same protection as individual deposits, guaranteed by British ministers after the meltdown of Iceland's banking system.

Although the overall amount of money at risk accounts for just 3% of councils' total cash reserves, 18 authorities have more tied up in Icelandic banks than in their own reserves.

But ministers have stressed no councils have had to cut services or increase bills as a result.

It is still hoped that much of the money will be recovered.

Administrators for Heritable, the UK arm of Landsbanki and UK-based Kaupthing, Singer and Friedlander have indicated the banks may have sufficient assets to cover the bulk of liabilities.

Officials from the Treasury and the Icelandic government have held a series of meetings to try and resolve the crisis after it led to a short-lived diplomatic spat last autumn.

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Blyth and Wansbeck Today Northumberland spared criticism in Icelandic banking report - 15 hrs ago
Leitrim Observer Authorities 'neglected warnings on Iceland banks' - 38 hrs ago
Glasgow Evening Times - Warnings on Iceland banks ignored - 39 hrs ago
Milton Keynes Citizen Authorities 'failed to heed warnings on Iceland banks' - 39 hrs ago
Shropshire Star Councils failed to heed warnings over Iceland savings - 39 hrs ago

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