Seven English Councils Have Been Accused Of "Negligence"

Seven English councils have been accused of "negligence" for putting money into Icelandic banks days before they went bust last October.

The authorities paid nearly £33m into the banks between 30 September, when their credit ratings were downgraded, and 7 October when they collapsed. The Audit Commission criticised Kent County Council, which it found had paid in £8.3m in early October. Kent said it had been open about its conduct and hoped to get the cash back. But the fate of the £954m deposited by councils and other public bodies in Icelandic banks remains uncertain.

'Great concern'

These investments do not have the same protection as individual deposits in Icelandic banks, guaranteed by British ministers after the meltdown of Iceland's banking system. Although the overall amount of money at risk accounts for just 3% of councils' total cash reserves, 18 authorities have more tied up in Icelandic banks than in their own reserves. Spending watchdog the Audit Commission said most councils had "heeded warnings" about the declining credit worthiness of Icelandic banks during 2008 and taken action accordingly. However, it said that some had ignored the risks while a handful had behaved "negligently". It reserves particular criticism for institutions which continued to deposit money after 30 September, when the credit ratings of Glitnir and Landsbanki were downgraded to "adequate" - below that deemed acceptable under guidance to town halls. According to the commission, the South Yorkshire Pensions Authority deposited £10m on 2 October while Kent County Council made two deposits totalling £8.3m on 1 and 2 October. Other councils which made deposits during the period in question were: North East Lincolnshire Council, Redcar and Cleveland Borough Council, Restormel Borough Council, the London Borough of Havering and Bridgnorth District Council. Alleged mistakes by authorities included the failure, by one, to open an e-mail notifying it of the ratings change, use of obsolete information and exceeding limits for deposits in a single bank. "There is no doubt that the circumstances leading up to the collapse of Icelandic banks were highly exceptional but the potential loss of nearly a billion pounds is of great concern," said Steve Bundred, chief executive of the Audit Commission - which itself deposited £10m in Icelandic banks. The affair highlighted the "variable standards" within finance departments when it came to managing council investments. "Good treasury managers recognised those risks and managed them appropriately," Mr Bundred added. "Others either did not appreciate the risks or underestimated their significance." The Local Government Association, which represents 300 councils in England and Wales, said councils which deposited money after 30 September had carried out reviews as to why this took place, adding that some were contractually obliged to do so. It stressed that three out of four English councils had no money tied up in Icelandic banks while the total amount of deposits halved between January and October 2008. "The events of last October were part of a bigger financial crisis that affected not just councils but also other parts of the public sector as well as charities, businesses, savers and the Audit Commission itself," said LGA chairman Margaret Eaton. Kent County Council said it had been open about its conduct, admitting it had mistakenly made a £3.3m deposit on 1 October, and argued the commission needed to address its own situation. "The position and language used by the Audit Commission is quite extraordinary," said Councillor Nick Chard, the council's cabinet member for finance. "It really is a case of the pot calling the kettle black. "I find this a convenient smokescreen for the Audit Commission which has twice the level of exposure in Icelandic Banks that Kent County Council has".

Investment advice

After the extent of councils' financial exposure became clear, ministers identified about a dozen local authorities that might face short-term problems as a result of the Icelandic situation. Trouble-shooters were sent to three councils but it later emerged that none had required emergency financial assistance. Ministers were also forced to defend their investment advice to councils, describing it as "prudent and sensible". It is still hoped that much of the money will be recovered. Administrators for Heritable, the UK arm of Landsbanki and UK-based Kaupthing, Singer and Friedlander have indicated the banks may have sufficient assets to cover the bulk of liabilities. Officials from the Treasury and the Icelandic government have held a series of meetings to try and resolve the crisis after it led to a short-lived diplomatic spat last autumn.

Sews Source :news.bbc.co.uk

Seven English Councils Have Been Accused Of "Negligence"