Councils 'negligent' with Icelandic investments

Some local authorities behaved "negligently" by putting their money into Icelandic banks, a watchdog has said.

A report from the Audit Commission on council investments in Glitnir and Landsbanki criticised seven local authorities for unwise investments.

Amongst those criticised was the South Yorkshire Pensions Authority which deposited £10m on October 2, while Kent Council put two deposits worth £8.3m into the Icelandic banks on October 1 and 2.

The Commission attacked seven authorities which "negligently deposited money after credit ratings for Icelandic banks were downgraded below acceptable levels".

In total, it recorded investments in the banks totalling £954m by 127 English local authorities.

And the report added that it was still unclear how much of this money would be returned, although councils are not expecting to cut services or increase council tax significantly as a result of the problem.

"Confidence in the creditworthiness of some of the Icelandic banks changed relatively rapidly and, between January and September 2008, a number of credit rating downgrades were announced which should have prompted treasury managers to review the creditworthiness of the Icelandic banks," the Commission said.

"Treasury managers could and should have been aware that there were risks associated with making investments and that, in particular, there were risks associated with investing in some institutions.

"Good treasury managers recognised those risks and managed them appropriately. Others either did not appreciate the risks, or underestimated their significance."

But Rita Greenwood, finance officer at Havering Council, one of the councils criticised in the report, rejected the Commission's findings.

Havering made a deposit of £2m in the period despite a series of warnings over the creditworthiness of the Icelandic banks.

Greenwood told the BBC: "We absolutely refute that - the deposit that we made was made 20 minutes before the alert came through, which downgraded the banks to a lower grading.

"We absolutely refute being called negligent and we rely on ratings that are done by established international organisations.

"We were absolutely following all our policies and procedures. The Commission itself said that it didn't know about the downgrading until October 6.

"These banks were on the lists that enabled us to spread our risk."

Steve Bundred, chief executive of the Audit Commission, stated that the report was not just about seven local authorities.

"It is about the way in which all councils manage their money," he told the BBC.

"What distinguishes the seven local authorities that we have identified is that they were continuing to place money on deposit in Iceland in October when the banks had been downgraded."

"I suspect that what may have happened in that particular instance is that Havering didn't check what the rating was before it made its deposit."

But Bundred explained that "on the whole" councils managed their money well.

He warned that the Icelandic banking crisis must be kept in perspective, highlighting that 97 per cent of the money that councils invested wasn't in Iceland.

"These were very exceptional circumstances but there are lessons to be learnt from it," he said.

He recommended that councils should make sure that staff are well trained and said authorities could repay debt rather than just placing more money on deposit.

And he suggested that there was "too much reliance" on credit reference agencies.

"We believe that the government guidance also places undue reference on credit rating agencies," Bundred added.

John Ransford, chief executive of the Local Government Association, admitted that councils could improve elements of the system.

But he stated: "We must remember that this was primarily a problem with the banking system. Proportion is important and there is no evidence that this money is lost. It is at risk. We are very confident that the lion's share will be returned."

And he claimed that the majority of council investment policy works well, helping to keep council tax down and services secure.

He added: "We will have to review our policies. But the problem of ultra-cautious investment policies is the low rate of return.

"The whole banking system has less confidence than it did. Councils will take that into account.

"The money is still being invested in financial institutions. And the system is stabilising somewhat from the turmoil we were in back in autumn."