By David Williams
26 January 2010
MPs have called for a change in the law to ensure better oversight of local authority investments in the wake of the Icelandic banking collapse, which left £1bn of public money at risk.
They want the UK Financial Services Authority to be given powers to more fully scrutinise treasury management advisers employed by councils.
The communities and local government select committee’s report, Local authority investments: the role of the FSA, was released today. It follows on from the committee’s major study, published in June, on how Icelandic banks were holding deposits from UK public bodies worth £1bn at the time of their collapse in October 2008.
The FSA is currently charged with overseeing treasury management advisors when they make recommendations on investments, but not when they give advice on bank deposits.
As a result, FSA-regulated companies, required by law to advertise themselves as such, were able to advise councils on Icelandic banks with no regulatory supervision, the committee says. It concludes that the FSA should be given responsibility for both investments and deposits.
Committee chair Phyllis Starkey told Public Finance that reform is urgently needed, and that local authority investments are as much at risk now as they were immediately before the Icelandic banking crash.
‘Just because nothing much has happened recently, it is important not to get complacent – there could be other collapses,’ she said.
‘The local authorities investment saga has demonstrated that there is a gap in the powers of the FSA as a regulatory body.
‘Clearly the original regulations were not drawn up with any consideration given to public bodies with large cash flows, which add to their income with their investment policies.’
Starkey said that to draw a distinction between advice on investments and advice on deposits was not sensible.
She added that it was unreasonable to expect public bodies to have sufficient expertise in-house, because the salaries demanded by treasury management experts would be prohibitively expensive for many local authorities.
Mark Luntley, the Local Government Association’s programme director for finance, welcomed the report’s conclusions. ‘Councils are paying for advice and the idea that some of the advice is regulated and some not is not really sensible,’ he said. ‘The recommendation that the whole area is regulated by the FSA makes clear sense to us.’
26 January 2010
MPs have called for a change in the law to ensure better oversight of local authority investments in the wake of the Icelandic banking collapse, which left £1bn of public money at risk.
They want the UK Financial Services Authority to be given powers to more fully scrutinise treasury management advisers employed by councils.
The communities and local government select committee’s report, Local authority investments: the role of the FSA, was released today. It follows on from the committee’s major study, published in June, on how Icelandic banks were holding deposits from UK public bodies worth £1bn at the time of their collapse in October 2008.
The FSA is currently charged with overseeing treasury management advisors when they make recommendations on investments, but not when they give advice on bank deposits.
As a result, FSA-regulated companies, required by law to advertise themselves as such, were able to advise councils on Icelandic banks with no regulatory supervision, the committee says. It concludes that the FSA should be given responsibility for both investments and deposits.
Committee chair Phyllis Starkey told Public Finance that reform is urgently needed, and that local authority investments are as much at risk now as they were immediately before the Icelandic banking crash.
‘Just because nothing much has happened recently, it is important not to get complacent – there could be other collapses,’ she said.
‘The local authorities investment saga has demonstrated that there is a gap in the powers of the FSA as a regulatory body.
‘Clearly the original regulations were not drawn up with any consideration given to public bodies with large cash flows, which add to their income with their investment policies.’
Starkey said that to draw a distinction between advice on investments and advice on deposits was not sensible.
She added that it was unreasonable to expect public bodies to have sufficient expertise in-house, because the salaries demanded by treasury management experts would be prohibitively expensive for many local authorities.
Mark Luntley, the Local Government Association’s programme director for finance, welcomed the report’s conclusions. ‘Councils are paying for advice and the idea that some of the advice is regulated and some not is not really sensible,’ he said. ‘The recommendation that the whole area is regulated by the FSA makes clear sense to us.’
