Icelandic Banks and the Audit Commission June 26, 2009
Posted by Leader of Havering in Havering Council.trackback
The Audit Commission earlier this year published a report called ‘Risk and Return’ which branded Havering Council as ‘negligent’. The Council and I completely refuted this as the Commission failed to follow proper processes and undertake thorough research.
Havering Council was one of seven local authorities that depostited money into the UK registered subsidiary of an Icelandic Bank on 1 October. The deposit of £2m into Heritable Bank was made at 8.56am. Fifteen minutes later an email was recieved from our financial advisors informing us that the bank’s credit rating had been dropped from ’strong’ to ‘adequate’, with it now being too late for us to get the money back.
This week the Commission has issued an amended report dropping the label of negligent as circumstances were beyond the Council’s control and that our staff and management acted professionally in following guidelines and advice.
The branding of the Council as negligent was an unfair, damaging and unjustified slur. All our efforts are focussed on getting our money back and I would like to reassure residents that the Council is very confident that the majority of our deposits will be returned.
Michael
That is completely pathetic, and your blog entry is deliberately misleading.
Your council deposited money in an Icelandic bank on 1 October. Most councils had already stopped putting money into Icelandic banks from April 2008, heeding the wanings. On 29 September, the Icelandic government announced a rescue of Glitnir Bank, and all main Icelandic banks’ credit ratings were downgraded on 30 September by the Fitch credit rating agency.
Even the Sun newspaper had carried stories about the risks involved in investing in Icelandic banks.
I have read the Commission’s revised report, and it does not say what you claim it says. It does not say that “circumstances were beyond the Council’s control and that our staff and management acted professionally in following guidelines and advice.” The Commission’s report criticises the policy that your officers were following.
What the Audit Commission report actually says is “the Commission is of the view that [Havering and six other councils] did not take adequate steps to ensure the security of their deposits. While authorities that invested earlier may have breached their policies,
or be open to criticism for other reasons, the Commission considers that all authorities should have been alert to the extraordinary circumstances of the time. They should not have made new
investments without taking reasonable steps to ensure that they were using uptodate information, such as the credit
ratings from Fitch, which downgraded the credit-worthiness of the relevant institutions on 30 September, as well as fully complying with their policies. Irrespective of whether their actions
are described as negligent, careless, unprofessional, or over-reliant on policies that were inadequate for the rapidly-changing circumstances, there is no escaping the simple fact that a substantial sum of public money was put at risk which would not have been
if the seven authorities had responded effectively to the warning signals. In the Commission’s view, they should have been taking reasonable steps, certainly by the end of September 2008,
to ensure that they were using up-todate information prior to making further deposits in the relevant banks.”
The fact remains that £12.5m of Havering taxpayers money remains at risk because it was invested in Icelandic banks (worth 40% of Havering’s reserves). Rather than squabbling over whether this is ‘negligent’ ‘incompetent’ or just ’scandalous’, why can’t you just admit you got made a very expensive mistake with other people’s money?
Thanks for your comment and I’m happy to reply. Our deposit on the 1st October was made fifteen minutes before we received notification of the downgrading of the banks. It is this fact that separates us from the other Councils named by the Audit Commission and explains why we fought so hard to have the ‘negligence’ slur withdrawn – it probably also explains why the Audit Commission took the remarkable step of re-drafting a report that it had already published and publicised.
Like most councils we rely on expert advisors to inform our investment decisions and, in this instance, the advice came just too late. The media were reporting potential issues with many institutions in many countries, including the UK, and so we used experts to interpret the facts for us and let us know about the latest credit ratings, rather than relying on reports in the Sun, or any other newspaper.
When the banks collapsed, over 100 councils, as well as the Audit Commission itself, had many millions of pounds invested. It’s important to understand that the interest earned from investments is used to keep the council tax down, so that we can invest in your services without big hikes in council tax. Clearly, we all need to look at our procedures and see what we can do to safeguard investments and, in hindsight, I’m sure changes will be made across local government, but investment is a crucial part of our financial management.
We’ve heard very recently that the vast majority of the money that we invested in Iceland should be returned to us and this is great news. I’ll say again that Iceland crisis has had no impact on our services. We are a very large organisation and we have had very strong financial management procedures for years now which has meant we could weather the Icelandic collapse without cuts or big tax increases. Financial stability is our highest priority and we continue to focus on delivering excellent services for a stable council tax.
Thanks for taking the time to read the blog and for getting in touch.
Michael