Pots and Kettles as the Audit Commission releases a report on Icelandic Bank investments.

Seven councils yesterday came under fire from the local government watchdog the Audit Commission. Criticising them for  mistakes which lead to £33million of taxpayer’s money being ploughed into Icelandic banks just days before their collapse, the report ‘Risk and return: English local authorities and the Icelandic banks’, accuses councils of acting negligently, breaching accounting procedures and failing to follow in-house protocols.  


In light of the news that council tax is due to rise by 3% it is a blow to taxpayer’s that such risky decisions by councils lead to 3.1% of total funds being locked up in the Icelandic banks when they went into administration in October. Some blame must fall on central government, which encouraged encouraged local government to invest income from taxes, business rates and other revenue where the best rates of return could be guaranteed. Until October last year the gambled paid off;  deposits yielded £1.8 billion in 2008, prior to the banking collapse, the equivalent to £80 for every household in England and Wales. And not all councils involved in the Icelandic banks lost out; one council closed its accounts with an Icelandic bank when concerns surfaced about the organisation acquiring too much risk, while another £1billion in deposits by local authorities were removed after a credit agency warning in spring and summer 2008.  


Which makes the actions and decisions of  the 127 local authorities which failed to heed these warnings, leaving a total of £953 million at risk in the failed banks, all the more unacceptable. Although the Icelandic banks offered high rates of return (too good to be true perhaps), it is unbelievable that councils were depositing taxpayer’s money in institutions that “had foreign assets worth about 10 times the country's GDP, with debts to match”, especially after the bailouts and collapse of major financial institutions such as Lehman Brothers, Merrill Lynch and HBOS had exposed the dangers of over-leveraged banks.  


In particular the Audit Office report highlights the £32.8m deposited by seven councils between 1st and 3rd of October, the time between the downgrading of the Icelandic banks rating to adequate on September 30 and the collapse on October 7. The largest investment was by the South Yorkshire Pensions Authority, which deposited £10 million on October 2, as well as Kent County Council with a total of £8.3 million over two deposits on October 1 and 2; North East Lincolnshire (£ 4.5million); Redcar and Cleveland (£ 4million); Restormel in Cornwall (£ 3 million), London Borough of Havering (£ 2million) and Bridgnorth (£1 million). 


 The London Borough of Havering made a deposit just 20 minutes before the alert which downgraded the banks to a lower security rating. Kent County Council failed to open an email warning them about the credit rating. All councils were criticised for exceeding limits on deposits made to individual banks, as well as using out of date credit risk information. The Guardian has indentified several more deposits in failed Icelandic banks by a number of UK councils and authorities such as Transport for London.


The role of the ‘Tripartite Authorities’ has once again been called into question after the failure of the Icelandic banks. Caroline Spelman, the Shadow Communities Secretary, highlighted the “clear evidence of systemic failure across Government, with a series of so-called watchdogs failing to act. Labour ministers must take personal responsibility for this public policy disaster, given they knew of the risks and created this flawed regulatory system”. Her comments followed news that the FSA, Treasury and Bank of England knew of the potential risk in the Icelandic banks at the beginning of last year. These authorities failed to pass these concerns on to the Department for Communities or the Audit Commission in order to warn councils of the risks to their deposits.  


The Audit Commission however, in a prime example of people in glass houses throwing stones, has itself lost 18% of its deposits, £10 million in taxpayer’s money, to the failed Icelandic banks.

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