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Icelandic Banks (Local Authority Finances)

Volume 488: debated on Tuesday 3 March 2009

2. What assessment she has made of the effects of the recent performance of Icelandic banks on local authority revenue and reserves in 2009-10. (259885)

I, too, would like to send my very warmest thoughts to David and Samantha Cameron at this difficult time for them.

We are regulating to ensure that authorities need not make provision in their 2009-10 budgets for possible capital loss on these investments. The regulation will come into force on 31 March and will give local authorities time to be clearer about the effect on their budgets and indeed their council tax. We have worked closely with the Local Government Association on that approach. It has been warmly welcomed on all sides. No authorities at the moment are facing cash-flow problems or an impact on their key services.

I thank my right hon. Friend for that welcome reply. Sadly, Newcastle-under-Lyme borough council invested £2.5 million—more than 5 per cent. of its reserves—in the subsidiary of Landsbanki on 14 September last year, just three weeks before the bank collapsed. In doing so, it ignored the warnings of a previous Conservative cabinet member for finance to avoid Icelandic banks. However, since then it has been saying that it is confident that it will get the money back. Does the Secretary of State agree that it is important that councils are open and honest about the investment decisions they make, and that they should not mislead council tax payers about the losses that they face in such circumstances?

Clearly, transparency and openness in relation to financial decisions are essential. Integrity and probity go to the heart of local government. I am not in a position to comment on my hon. Friend’s individual council. That would be a matter for the district auditor. Clearly, those issues will be raised. What I will say is that the Government guidance said to local authorities that they need to have regard to both security and liquidity, and that in those investments the rate of return has to be consistent with proper levels of security and liquidity.

In the present political situation in Iceland, with whom are negotiations being held and what progress is being made to restore to local authorities, including the district council in my constituency, the substantial losses incurred as a result of having deposits with an Icelandic bank?

The Treasury has for some months been in negotiations and extensive talks with the Government in Iceland. The International Monetary Fund has approved a £2.1 billion loan to Iceland to ensure that Iceland can have a sound banking system. Those negotiations will continue. The Local Government Association is also in negotiations on behalf of individual local authorities to ensure that their position is protected.

The Secretary of State will know that the county of Cheshire disappears in just over three weeks and becomes Cheshire East and Cheshire West and Chester. The existing county council had some £8 million invested in Icelandic banks. Is not it inevitable that the new authorities will suffer financially as a result, particularly when account is taken of the £3.5 million that has been paid to chief executives of the current authorities who have not got jobs in the new authority? That will have to be paid for. In Cheshire East, the transition from the old council has not cost £10 million—it has cost £20 million. Is not that going to prove a problem financially for the council tax payers of Cheshire East?

I am sure that the hon. Gentleman is aware that the money held with the Icelandic banks is not money that has been lost; it is money that could be at risk. We are pressing extremely hard to make sure that local authorities recover the maximum amount of money that is due to them, in order to protect council tax payers. He will also know that although the reorganisation in Cheshire may involve some up-front costs, in the longer term it will save people in that area a significant amount and improve services for them.

My right hon. Friend will be aware that the Select Committee on Communities and Local Government is conducting an inquiry on this issue. We found that many local authorities do not have the necessary internal expertise on these matters, so they commission outside firms. What came as a shock to the Select Committee and the Local Government Association, however, was that in some cases that external help was not advice in the properly understood meaning of the term, but amounted simply to passing on to local authorities information that could have been gained from the internet, such as information about credit rating agencies. Does she agree that the guidance to local authorities should be changed to ensure that all of them have access to proper financial advice, either external or internal, on these matters?

I am grateful to my hon. Friend and the Select Committee for conducting the inquiry, and I very much look forward to seeing the report. It is essential that local authorities take proper advice and guidance on making investments. Our national guidance was issued in 2004. Of course, we keep it under review, but it was very clear to local authorities about the need to be conscious of security and liquidity, as well as about trying to get a decent return on their investments. I am delighted that the Committee has conducted the inquiry, and I have no doubt the report will have some lessons for all of us.

I will, of course, draw the attention of the Leader of the Opposition to today’s Hansard, which will contain the very kind comments that have been made in all parts of the House.

Parliamentary questions show that the Financial Services Authority knew in early 2008 that the Icelandic banks were in trouble. It is obliged to warn both the Bank of England and the Treasury of any concerns, so given that Ministers knew that alarm bells were ringing, why was no advice given to local authorities or other investors about the higher risks associated with Icelandic banks? Even the Audit Commission was misled into investing in Iceland. Given that the Secretary of State’s Department is responsible for issuing investment guidance to councils, is it not the case that both her Department and the Treasury were asleep on their watch?

No, I entirely reject that. Clearly, there has been an issue concerning the behaviour of banks and the investments that have been made in this country and in countries right across the world. The hon. Lady will be aware that Lord Turner, the new chair of the Financial Services Authority, has been asked by the Chancellor to conduct a review of the FSA’s approach and to report to him. I entirely reject the allegation that the Department was in some way negligent in its guidance. That guidance in 2004 made it absolutely clear to local authorities that they should look at security and liquidity and make sure that the return they sought was consistent with a very prudent approach.