13 February 2009
By Tash Shifrin
The Audit Commission has admitted to MPs that councils' treasury management capability was not on its 'risk radar' until after the Icelandic banking fiasco that has swallowed up £1bn of local authority funds.
But the watchdog is likely to urge councils to take a much more cautious approach in a report on treasury management due to be published in March.
The admission came at a hearing of the Commons communities and local government select committee on February 9, where MPs also grilled the watchdog about its own investment of £10m in the failed banks.
Commission chief executive Steve Bundred conceded: 'It's clearly embarrassing for the commission to be exposed to the risk of loss in the way we are.'
Bundred told the MPs that local authorities had on the whole 'taken a balanced approach' to their investment portfolios. 'We've not seen any examples of authorities that have been clearly reckless in their investment strategy.'
But there were 'one or two where investment decisions didn't comply with their investment policy', he said.
In response to the MPs' questions, Martin Evans, the commission's managing director for audit, admitted that, until the Iceland fiasco, the watchdog had regarded councils' treasury management as 'generally a well-managed function — it wasn't on our risk radar'.
But the commission is now reviewing local authorities' treasury management and presented interim findings in its written evidence to the committee.
The document suggested that the watchdog would propose greater caution in future. 'Authorities need to ensure that they are either not taking any risk with their deposits by leaving them with the government's Debt Management Office or that they have a relatively sophisticated and well-resourced treasury management function,' it said.
Local government minister John Healey told the MPs he would not necessarily give councils with money tied up in Iceland permission to borrow against their assets to tide themselves over. He said this would break the principle that they should be responsible for their own decisions.
The government would 'consider additional help' where councils were in severe financial difficulties. This might 'include looking at the case for some capitalisation', Healey said. But he added: 'That hasn't been the case yet.'
PFfeb2009
