Local Authorities that lost money when they banks that held their deposits collapsed have been labelled ‘Negligent’ by the Audit Commission today for not heeding warning signs.
On 7 October 2008, the day before the Icelandic economy went into meltdown, a quarter of local authorities and councils in England had in total close to £1bn deposited in Icelandic banks.
Many were able to react before the economic crisis swallowed their monety but seven authorities have been branded ‘negligent’ because they breached guidance issued by the Chartered Institute of Public Finance and Accountancy (CIPFA), and their own treasury management protocols, by investing a further £32.8M in those banks in the weeks before they failed.
They also failed to heed the very public decline of those banks in the national media.
The breaches included one council that failed to open an email warning of a ratings change; one using out of date information and another exceeding its own limit for deposits in a single bank.
Chief Executive of the Audit Commission Steve Bundred said: “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. So weare publishing this report, which contains rigorous analysis of why one in four local authorities has money at risk.
“We found that most local authorities heeded the warning signsabout Icelandic banks. But some did not, and a number were negligent. Our report showsthat there are lessons that must be learned by everyone - local government, centralgovernment, CIPFA and the Commission itself,” he said.
While the majority of councils were found to have acted properly, and reduced their deposits between April and September 2008, the seven authorities were less cautious and gave too much credence to credit ratings agencies and external advisers, to the exclusion of other information.
The seven authorities named by the Audit Commission as being negligent are:
- Kent County Council
- The South Yorkshire Pensions Authority
- London Borough of Havering
- Redcar and Cleveland
- North East Lincolnshire
The Audit Commission found that the CIPFA guidelines should be strengthened, for example by emphasising the need to consider risks associated with countries or sectors as well as institutions.
Local Authority finance and Icelandic bank collapses:
- Of the total of £31bn that all 451 local authorities had invested in the UK and abroad on 7 October 2008, 3.1% was in Icelandic banks.
- One in four (127) local authorities share £954M at risk in Icelandic banks, as follows:
- 15 county councils (44%) deposited £270M. 58 district councils (24%) £231 million.
- 11 London borough councils (33%) £153M.
- 13 unitary authorities (28%) £105M . 12 police authorities (32%) £85M.
- 10 fire authorities and other bodies (16%) £78M .8 metropolitan district councils (22%) £32M.
- Local authorities earned approximately £1.8bn in interest from short term deposits during 2008-2009.
- For some, income from interest has equalled that from council tax.
- 18 local authorities have more money at risk than they have in their reserves.