Councils 'failed to heed warnings' over Iceland savings

Thursday 26th March 2009

Local councils failed to heed warnings over the safety of £954 million of deposits invested in Icelandic banks.

A report by the Audit Commission indentifies some examples of negligence in the days leading up to the collapse of Icelandic banks in October 2008.

Councils were found to be over-reliant on credit ratings agencies and external advisors, shunning other sources of information.

However, the majority of councils were found to have acted properly and responded to warnings in April 2008 – halving deposits in Iceland.

The Audit Commission found seven local authorities breached guidance issued by the Chartered Institute of Public Finance and Accountancy (Cipfa), and their own treasury management protocols, by investing £32.8 million in Icelandic banks in October 2008.

In the six months leading up to the collapse new deposits in Icelandic banks were over £500 million.

Councils were attracted to Icelandic banks as at the time they were offering higher rates of interest. However, banking regulation meant cash was less protected in the case of a bank failure.

The Audit Commission found £31 billion at all 451 local authorities were invested abroad in October last year – with one in four councils having cash in Iceland.

The damning report revealed income from interest equalled income from council tax for some councils and 18 local authorities had more money at risk than in their reserves.

However, the Audit Commission had £10 million of its own deposits in Icelandic banks.

Steve Bundred, chief executive of the Audit Commission, said: "There is no doubt that the circumstances leading up to the collapse of Icelandic banks were highly exceptional, but the potential loss of nearly a billion pounds is of great concern.

"We found that most local authorities heeded the warning signs about Icelandic banks. But some did not, and a number were negligent."

The Local Government Association (LGA) claims councils are close to getting most of the money back.

Margaret Eaton, LGA chairman, said: "The LGA, working with councils, currently expects to get the lion's share of this money back and is working flat out to make sure that the council taxpayer is top of the list for repayment."

She added: "It is clear that some aspects of treasury management need to be done differently in the future.

"The main recommendation of the Audit Commission report is that the way that councils invest money needs to be adjusted rather than replaced.
"It is in everyone’s interests that councils continue to invest and ensure that they are doing so prudently."

The Conservatives hit out at the government for not sounding the warning bells loudly enough about the dangers of Icelandic investments.

Caroline Spelman, shadow secretary of state for local government, said: "It is a scandal that the Financial Services Authority and the Treasury knew that Icelandic banks were risky, but failed to sound the alarm bell or issue any warnings.

"There is now clear evidence of systemic failure across government, with a series of so-called watchdogs failing to act.

"Labour ministers must take personal responsibility for this public policy disaster, given they knew of the risks and created this flawed regulatory system."

She added: "It is sadly ironic for the Audit Commission to criticise local authorities for investing in Icelandic banks given they themselves deposited £10 million of taxpayers’ money in Iceland and failed to obtain external professional advice."

The seven councils named as being negligent were: London Borough of Havering; Kent County Council; Redcar and Cleveland Borough Council; Restormel Borough Council; Bridgnorth District Council; North East Lincolnshire Council; and the South Yorkshire Pensions Authority.

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