By Tash Shifrin
12 June 2009
MPs have criticised ‘complacency’ by local authorities and the Audit Commission in a report on council investments in the failed Icelandic banks.
Around £1bn of local authority money was frozen in Iceland after the banks collapsed in October last year.
The report by the Commons communities and local government select committee also slammed ‘misleading’ claims by professional treasury management advisers that they provided information rather than advice on local authority investments.
It said the exceptional nature of the financial crisis that emerged last year ‘should not be used as an excuse for failures that occurred in local authority financial arrangements’.
The report, published on June 11, added: ‘This inquiry has exposed a degree of misunderstanding, misinformation and complacency on the part of some crucial players, both within local authorities and in the wider financial sector, which contributed to [putting] taxpayers’ money at unnecessary risk.’
Committee chair Phyllis Starkey told Public Finance that the Iceland crisis uncovered flaws in many councils’ wider treasury management practice. ‘It’s not simply about those authorities that have invested in Icelandic banks. It reveals problems across the piece. Some other authorities also have issues to face,’ she said.
‘Local councils, the Audit Commission and regulators really haven’t revised their assessment of the risks [to] investments in relation to the financial turbulence.’
Starkey pointed to inadequate treasury management policies and a low level of staff expertise and scrutiny. She noted that in some authorities ‘the processes were in fact being flouted in various technical ways’.
Some councils had ‘huge’ amounts of money invested, Starkey said. She cited Torbay Council, which had £90m invested, against an annual expenditure of £300m. ‘The risk if they made a wrong decision... is very large.’
In the report, the MPs said they endorsed the Audit Commission’s ‘censure of... rudimentary mistakes’ made by seven authorities that invested in Iceland after September 30.
But the committee stopped short of using the word ‘negligent’ – the term the watchdog used to describe the seven in its earlier Iceland probe. Both the London Borough of Havering and Kent County Council have challenged their naming as ‘negligent’ and the watchdog has offered to withdraw the term – although it has refused to confirm this publicly.
But Starkey told PF the committee was aware of ‘discussions going on’ between the watchdog, Kent and Havering. ‘We decided to use slightly different wording,’ she said, adding that the commission ‘alerted us because of the consequences if we quoted from their report’.
The MPs found that the Audit Commission’s ‘complacency can be seen most clearly in the management of its own funds’, noting that the watchdog has £10m stuck in Iceland.
The commission ‘must share part of the blame for councils’ potential loss of funds’ because it failed to spot or adjust to the greater risk in local authority treasury management caused by the wider financial crisis, they argued. ‘The guidance issued after the Icelandic banking collapse shows that there were questions that auditors could properly have asked to ensure that local authorities were following agreed treasury management procedures,’ the report said.
Starkey told PF: ‘We think the Audit Commission should have been more activist.’
But the watchdog rejected this view, saying it had reviewed its guidance to auditors as soon as the banks failed. Commission chief executive Steve Bundred said: ‘The committee criticises us for taking the view that councils on the whole took a balanced approach to managing their deposits and [for] not advising auditors to do more work on treasury management.
‘We believe that, on a balance of risk and cost, this was and remains an appropriate judgement.’
At the Local Government Association, vice-chair Richard Kemp said: ‘This report clearly shows that councils were largely let down by the organisations that they were relying on to provide up-to-date and accurate advice.’
The MPs called for the government, the LGA and CIPFA to keep treasury management under review, and for a Financial Services Authority probe into professional treasury management advisers’ services and ‘potential conflicts of interest’.
