30 January 2009
By Mark Smulian
Local authorities were not reckless when they invested a total of £1.03bn in Icelandic banks that later collapsed, the Local Government Association has told a parliamentary inquiry.
LGA deputy chair Richard Kemp told the communities and local government select committee on January 27: 'The evidence shows that, overwhelmingly, councils acted prudently and within strict guidelines to get the best rates of interest on savings whilst investing in institutions that were rated as financially sound.
'Like many other organisations, councils were the victims of unprecedented economic events totally beyond their control.'
He added: 'The system for investing money has worked well and doesn't require a fundamental overhaul. Suggestions that this money has disappeared into a black hole are nonsense.'
Kemp said 'hugely encouraging' talks had been held with the banks' administrators.
Written evidence from the LGA said no council had reported immediate financial difficulties 'and there is no evidence of recklessness by authorities'. However, some would 'face a considerable medium-term budget challenge' unless the government responded rapidly to requests to capitalise losses.
The LGA said the CIPFA treasury management code should clarify the responsibilities of professional advisers and credit reference agencies and include country ratings. The association said it should be easier for councils to secure better terms by investing collaboratively.
Mike Weaver, president of the Society of County Treasurers, told the committee: 'The CIPFA code does need to be reviewed; we have to learn lessons from the Icelandic experience. The code is a very good statutory framework, but it will need looking at.'
MPs questioned representatives of three firms of financial advisers – Arlingclose, Butlers and Sector Treasury Services – on whether they had cautioned councils against investment in Iceland after concerns surfaced about the country's banks.
Arlingclose director Mark Horsfield said his firm had advised against such investments, but the other two companies said their role was only to collate financial information for councils from credit rating agencies and other sources, not to advise on investments in specific institutions or countries.
Society of District Council Treasurers representative Peter Antill said small councils relied heavily on the agencies' advice because 'districts don't have an awful lot of [investment] expertise and so external advice is fundamental'.
PFjan2009
