MPs have launched a scathing attack on the ‘esoteric' world of local authority investments, accusing councils, private advisers, the Audit Commission and the City's regulator of culpability over the £1bn Icelandic banking debacle.
The CLG select committee today publishes its long-awaited report, Local authority investments, into the decisions that left cash from 127 local authorities trapped in four Icelandic banks when they collapsed last autumn.
Dr Phyllis Starkey, the committee's chair, said the report exposes ‘a significant level of misunderstanding, misinformation and complacency – not just within local authorities, but also among those who provide them with specialist advice'.
The MPs largely reject claims that town halls were simply victims of the global economic downturn. ‘The unusual nature of the financial situation at the time should not be used as an excuse for the failures that occurred in local authority financial arrangements,' they warn.
The report criticises:
Dr Starkey said: ‘Everybody has lessons to learn because this report is not just about the investments in Iceland's banks – this is about the wider world of local authority investments'.
Although the MPs reject restricting where councils should invest money, they call for ‘stronger standards of oversight' within treasury management frameworks.
Councils, they warn, must provide high-quality training to finance officials and members so they can understand, manage and monitor complicated investments. Amid evidence that some did not, councils are also reminded they must comply at all times with government guidance. Town halls should also establish a powerful audit committee to scrutinise investments, the report states.
The Audit Commission, which has £10M of its own money trapped in Iceland, is excoriated for ‘inadequate' guidance in the financial climate and is advised to review the priority it places on treasury management when deciding which aspects of council activity to audit.
‘Tougher regulation' of treasury management advisers is also recommended so that external firms provide the best possible advice. A ‘potential conflict of interest' within advisory firms – whose parent companies often provide other services to councils – must also be investigated by the FSA.
MPs also dismiss as ‘misleading' claims by some advisers they provide information – not advice – to councils.
The government and CIPFA are also advised to adjust credit ratings guidance so councils do not over-rely on them.
he LGA pointed a finger of blame at ratings agencies when the banks collapsed.
Stephen Jones, LGA director of finance, endorsed the MPs' findings as ‘sensible'.
‘I would be surprised if there's a council in the country which hasn't already looked very hard at its treasury management practices,' he said.
The Audit Commission said MPs had ‘underlined' its finding ‘that seven councils made elementary mistakes over their deposits… and deserve censure'.
Communities and Local Government Committee - Seventh Report: Local authority investments
