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Audit Commission points to “negligence” over Icelandic banks

The Audit Commission has accused seven English councils of “negligence” for putting money into Icelandic banks, despite having a £10m deposit itself at the time of the collapse.

The Commission says seven local authorities, which paid almost £33m in the banks just before they collapsed in October, breached guidance issued by the Chartered Institute of Public Finance and Accountancy, as well as their own Treasury Management Protocols.

The watchdog says the common denominator for those seven councils was an over reliance on credit rating agencies and external advisers, and excluding other information. Specific gripes included one council that failed to open an email warning of a ratings change, another using out of date information and one exceeding its own limit for deposits in a single bank.

The report reads: “The majority of local authorities heeded warning signs in April 2008, and the total value of deposits in Iceland halved between April and September. Even so, new deposits exceeding £500 million were made in that period.”

The report found that of the £31bn invested by local authorities in the UK and abroad at 7 October 2008, 3.1 per cent was Icelandic banks. It also found that 18 authorities have more money at risk than they have in reserve.

The report has called for greater for a review of Cipfa guidance, training from staff and councillors so they can question internal and external advice such as credit ratings, monitoring a wider range of info and a review of the national framework with consideration given to liquidity, security and yield.

Audit Commission chief executive Steve Bundred says: “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 we are 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 signs about Icelandic banks. But some did not, and a number were negligent. Our report shows that there are lessons that must be learned by everyone – local government, central government, Cipfa and the Commission itself.”

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