Page last updated at 04:09 GMT, Wednesday, 28 October 2009

MPs attack Iceland council advice

Public bodies placed about a billion pounds in Icelandic banks

MPs have criticised City regulators for being unwilling to investigate the advice given to councils about investments in failed Icelandic banks.

The Communities and Local Government Select Committee said the Financial Services Authority (FSA) should pursue a more "active role" on the issue.

Local authorities had £1bn worth of deposits frozen when the Icelandic banking system folded last year.

The criticism was "unfounded", the FSA said, as it did not have the powers.

The committee said it would vigorously pursue issues with the FSA after the regulator claimed advice on deposits fell out of its remit.

'Conflict of interest'

In June, a report by the cross-party group of MPs recommended an urgent investigation into local authority financial advisers.

They criticised councils for being too reliant on credit rating agencies and treasury management advisers.

Given the sums of public money involved, these remain matters of some concern to us. We are pursuing these issues with vigour
Phyllis Starkey

Committee chairwoman Phyllis Starkey said: "The FSA's response to our report seems to suggest that their activities in relation to local authorities are effectively unregulated.

"The FSA has also declined to follow up our concerns about potential conflicts of interest in some of these firms.

"Given the sums of public money involved, these remain matters of some concern to us. We are pursuing these issues with vigour with the FSA."

The committee said there were warning signs over the vulnerability of Icelandic banks as far back as 2006 and criticised councils for risking vast sums of taxpayers' money.

Compensation claim

It also found possible conflicts of interest between third party "advisers" who were part of bigger fund management groups and could therefore stand to benefit from investment decisions.

But the FSA said the scope of its regulation only applied to specific investment advice which did not cover unregulated deposit advice.

An FSA spokesman said: "An investigation of this kind... would be appropriate only if the FSA's scope were extended to cover many more of the activities in question. This would be a matter for government to decide."

Kent County Council faced a £50m shortfall - the biggest of any local authority - when Iceland's biggest banks collapsed last October, but expects to get more than 90% back.

Savers and charities were also left out of pocket to the tune of tens of millions of pounds, with the UK government forced to step in with compensation.

Iceland's parliament has vowed to repay the £2.3bn compensation paid out but councils have yet to receive any money back from their investments.

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