Local authorities are being told they must apply stronger standards of oversight to their treasury management frameworks following an investigation into council investments in the collapsed Icelandic banks. A hard-hitting report from the Commons Communities and Local Government Select Committee, says councils’ decisions should also be scrutinised by significant officials

The Audit Commission has welcomed the MPs’ findings but the Local Government Association says councils were let down by the organisations they relied on to give them accurate advice.

Dr Phyllis Starkey, who chairs the committee, said that the exceptional nature of the unforeseen events that shook the financial system was not an excuse for the substantial failures in local authority financial arrangements. “Our inquiry has exposed a significant level of misunderstanding, misinformation and complacency, not just within local authorities, but also amongst those who provide them with specialist investment advice,” she said.

In its key finding today’s report rejects the idea of restricting where local authorities invest taxpayers’ money. The MPs criticise the variation in the effectiveness of treasury management services and the ‘misleading’ claims of some professional treasury management advisers. The Audit Commission is criticised for failing to realise that council treasury management had become increasingly risky and for issuing inadequate guidance.

The report calls for Government, CIPFA and the LGA to work together so that the treasury management system is kept under review and it urges the Audit Commission to review the priority it places on treasury management in its auditing of councils’ activities. The MPs also want a full investigation by the Financial Services Authority of the potential conflicts of interests of local authority treasury management advisers.

Richard Kemp, Vice Chair of the LGA, said: “Councils accept that things need to be done differently in the future, but these investments have generated hundreds of millions of pounds every year that go towards keeping council tax down and frontline services in place.”