Headlines: March 26th, 2009

Eighteen councils have more money at risk in Icelandic banks than they have in their reserves. Even so, the Audit Commission has said that most councils acted properly, although a number breached financial guidelines.

Havering, Kent, Redcar and Cleveland, Restormel, Bridgnorth, and North East Lincolnshire councils, as well as the South Yorkshire Pensions Authority were described as negligent for depositing money in Icelandic banks on or after October 1, 2008, after credit ratings were significantly downgraded.

The Commission said that less cautious councils put too much faith in credit ratings agencies and external advisers. They also found that one council did not open an email warning of a ratings change, one used out of date information, and one exceeded its own limit for deposits in a single bank.

Nevertheless, the report, which looked at treasury management in local authorities, concluded that there were strengths as well as weaknesses.

Most local authorities with exposure to Icelandic banks had followed guidance from the Chartered Institute of Public Finance and Accountancy (Cipfa) which emphasised putting the security and liquidity of investments before maximising the rate of return.

The majority of local authorities saw warning signs in April 2008, and the total deposited in Iceland halved between April and September. Even so, more than £500 million was deposited in that time. The Audit Commission believes the Cipfa guidelines should be strengthened, suggesting they should emphasise the need to consider risks associated with countries or sectors as well as institutions.

The Commission also recommended training for councillors and council officers to help them interpret financial advice.

Audit Commission head Steve Bundred said: “Our report shows that there are lessons that must be learned by everyone – local government, central government, Cipfa and the Commission itself.”

Cllr Margaret Eaton, Chairman of the Local Government Association commented that she expected councils to get back most of the money. She said: “It is in everyone’s interests that councils continue to invest and ensure that they are doing so prudently.”