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Today, Thursday 26 March, sees the publication of the Audit Commission report Risk and Return, the first in-depth examination of English local authorities' deposits in the Icelandic banks.

The Commission finds that the majority of councils acted properly in managing their investments and were alert to the risks. However, the report also identifies some examples of negligence during the days leading up to the collapse of the Icelandic banks on 7 October 2008.

The common denominator for those that were less cautious was an over reliance on credit ratings agencies and external advisers, to the exclusion of other information.

Seven local authorities breached guidance issued by the Chartered Institute of Public Finance and Accountancy (Cipfa), and their own treasury management protocols, by investing £32.8 million in Icelandic banks in October 2008. The breaches included one council that failed to open an email warning of a ratings change; one using out of date information and another exceeding its own limit for deposits in a single bank (see note 1).

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 identifies the following facts:

• Of the total of £31 billion 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 £954 million at risk in Icelandic banks, as follows:
• 15 county councils (44%) deposited £270 million.o58 district councils (24%) £231 million.
• 11 London borough councils (33%) £153 million.
• 13 unitary authorities (28%) £105 million.o12 police authorities (32%) £85 million.
• 10 fire authorities and other bodies (16%) £78 million.o8 metropolitan district councils (22%) £32 million.
• Local authorities earned approximately £1.8 billion 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.

The study focuses on the authorities' treasury management arrangements, a function which attracted little attention in the years of high interest rates and returns. It is a treasury manager's responsibility to follow guidance from Cipfa which emphasises the need to maintain the security and liquidity of investments, while only then maximising the rate of return.

Most local authorities with exposure to Icelandic banks had been following the Cipfa code, but 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.

The recommendations identified in the report include:

• the need for a review of Cipfa guidance, which will inform internal and external audit guidelines;
• training for staff and councillors so that they can question and interpret external and internal advice (including credit ratings);
• monitoring of a wider range of information continually; and
• revision of the national framework to reassess the consideration given to liquidity, security and yield.

Steve Bundred, Chief Executive of the Audit Commission, 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 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."

Notes to editors

1. The seven local authorities described as "negligent" in the report are: London Borough of Havering; Kent County Council; Redcar and Cleveland Borough Council; Restormel Borough Council; Bridgnorth District Council; North East Lincolnshire Council; South Yorkshire Pensions Authority. Source: Risk and Return table 3 (page 28)
2. The research involved specialist researchers from the Audit Commission and Deloitte visiting 37 English local authorities to examine their treasury management arrangements (the criteria, information and processes needed for decision-making), the creation of a detailed database collected by appointed auditors and a review of national guidance on managing cash reserves and deposits.
3. The report finds that spending on local authority services increased from £51 billion in 1998, to £112 billion in April 2009. The amounts authorities deposited rose from £15 billion in March 2000 to approximately £31 billion on 7 October 2008.
4. On 16 October the Audit Commission confirmed its own exposure to the Icelandic bank collapse. In December it published a review of its £10 million deposits. Full details on available on this link: http://www.audit-commission.gov.uk/press/islandstatement.asp
5. The Audit Commission is an independent watchdog, driving economy, efficiency and effectiveness in local public services to deliver better outcomes for everyone.
6. Our work across local government, health, housing, community safety and fire and rescue services means that we have a unique perspective. We promote value for money for taxpayers, auditing the £200 billion spent by 11,000 local public bodies.
7. As a force for improvement, we work in partnership to assess local public services and make practical recommendations for promoting a better quality of life for local people.
8. Further details about the role of the Audit Commission can be obtained from - http://www.audit-commission.gov.uk

Related Reports

Risk and return - English local authorities and the Icelandic banks