By Tash Shifrin
Councils have reacted with fury to being labelled ‘negligent’ by the Audit Commission in a report on local authority investments in the collapsed Icelandic banks.
One council said it was considering legal action over the report, Risk and return, published on March 26.
Kent County Council, the London Borough of Havering, Redcar and Cleveland Borough Council, Restormel Borough Council, Bridgnorth District Council, North East Lincolnshire Council and the South Yorkshire Pensions Authority were all named in the report.
Between them, the authorities have £32.8m at risk in Iceland, all deposited between October 1 and 3 last year. Local authorities in England have a total of around £1bn tied up in Iceland.
Audit Commission chief executive Steve Bundred told Public Finance the seven had been dubbed negligent because the investments had been made on or after October 1, ‘the point at which clearly it was widely known that there was a high risk in these institutions’.
He added: ‘In some instances, those local authorities will have been contractually committed to place those investments… but, nevertheless, in every instance we found that the authorities concerned broke their own rules.’
But Kent council’s Cabinet member for finance, Nick Chard, hit back, saying the commission’s position and language were ‘extraordinary’. He pointed to the watchdog’s own investment of £10m in the failed banks, saying: ‘It really is a case of the pot calling the kettle black.’
Kent had ‘admitted a human error’ that meant £3.3m was deposited on October 1, Chard said. But he added: ‘The Audit Commission’s own internal report stated that they were not aware of the potential problems with Icelandic banks until Monday, October 6, 2008.’
Chard described the report as ‘a convenient smokescreen’ for the commission, which had twice the level of exposure in Iceland that Kent had – 18% of its total deposits, compared with 9%.
Bundred denied his own organisation had been negligent or that it had broken its own treasury management policy – although its internal review said policy and procedures had been followed ‘with one exception’.
South Yorkshire Pensions Authority chief executive and treasurer Bill Wilkinson said the report did not take into account the circumstances of pension funds or the action taken by the £3bn fund before the decision to invest £10m in Iceland.
Wilkinson told PF the word ‘negligent’ was ‘unnecessarily emotive’, adding: ‘The Audit Commission’s letter was addressed to me as the treasurer, and to use the word negligent to someone who is responsible for public funds is not something to be taken lightly.’
At Havering, Rita Greenwood, group director of finance and commerce, told PF: ‘We weren’t negligent. It’s quite staggering that they’re using such a term.’ The council was looking at the possibility of legal action, she confirmed.
Havering council had placed its deposit 15 to 20 minutes before receiving a warning alert about the Icelandic banks, Greenwood said, noting that the watchdog’s December report on its own investment used ‘very different language’.
Authorities that broke their treasury management policies but did not invest after September 30 escaped the watchdog’s wrath. These included the London Borough of Barnet, where an internal review found that 89% of deposits, including those in Iceland, had been placed in breach of the council’s policy by an officer who has since resigned.
The watchdog’s managing director of studies, Peter Wilkinson, said: ‘Clearly, where authorities broke their policies, that’s a matter for the appointed auditor.’ The commission was using its ‘studies power’ to take a wider look, he said.
Richard Kemp, deputy chair of the Local Government Association, told PF it was ‘extremely harsh’ to accuse the seven councils of negligence. ‘You might as well accuse the prime minister, the chancellor, David Cameron and the governor of the Bank of England because they didn’t see it coming any more than our councils did,’ he said.
Kemp said he detected ‘the frantic sound of the application of the perfect science of hindsight’.
But Phyllis Starkey, chair of the Commons communities and local government select committee, took the watchdog’s side. ‘I think that the Audit Commission is quite right to describe these seven particular local authorities as negligent,’ she told PF. Starkey gave short shrift to councils that said they had been contractually obliged to place deposits in Iceland after September 30. ‘That’s rubbish,’ she said. ‘You have to weigh up whether breaking a contract is a lesser evil than putting your money in a bank that’s about to go down the tubes.’
She added that there were ‘other councils that have behaved less than sensibly’ and noted that the commission itself ‘had not been properly following its own procedures’.
Elsewhere in its report, the commission urged revision of the ‘weaker aspects’ of government guidance on council investments. Bundred said: ‘At the moment, the guidance places a bit too much emphasis on the credit rating agencies.’
CIPFA responded to recommendations to tighten its own code of practice on treasury management by releasing new interim advice.
