Councils 'risked billions', say MPs

Thursday, June 11, 2009

Councils made £1.8bn interest in 2008 which could be used to improve services but they put around £1bn of taxpayers' money at "unnecessary risk" by depositing it in high interest yielding Icelandic banks, the Communities and Local Government Committee has said. The main reasons were lack of information, poor advice and complacency among councils, despite early credit warnings that should have rung alarm bells. Maybe greed was also an issue.

The committee said the Financial Services Authority – itself severely criticised for handling the Northern Rock situation as well as its performance as a regulator – should look into why treasury management agencies let councils continue to put their money into risky bank accounts, even as late as summer 2008. One suggestion is that because the agencies got commission from the banks, it wasn't in their interests to advise councils to withdraw their cash.

The committee said: "The evidence which we have examined has raised concerns about potential conflicts of interest and questions as to whether there are any financial transactions between treasury management advisers and brokers that might compromise the independence of advice being given to local authorities. There is a strong case for a full investigation by the FSA."

However, the FSA said that it did not officially regulate treasury management agencies.

Richard Kemp, vice-chairman of the Local Government Association, claimed that councils had "led the way" in getting taxpayers' money back and had already done much of what the committee called for.

"Councils accept that things need to be done differently in the future," he said, "but these investments have generated hundreds of millions of pounds every year that go towards keeping council tax down and frontline services in place. It is in everyone's interests that councils continue to invest and ensure that they are doing so prudently."

A communities department statement said: "It is estimated that in 2007-08, councils made £1.8bn from the interest on investments, which could then be used as councils saw fit to meet local needs and priorities. But the report also makes clear that councils need further support in making investment decisions. That's why we are working closely with the Audit Commission, CIPFA and local government representatives to review our guidance."