Claims of negligence as Scottish Borders Council lose £3m+ in Icelandic Banks, authority’s Treasury advisers linked to Conservative Party Treasurer

AUDIT SCOTLAND are investigating claims Scottish Borders Council acted negligently & recklessly in investing a staggering £10 million pounds of taxpayers money in the now collapsed Icelandic banks. Such are the scale of the losses the council, which is now cutting public services across the Borders and has gone to two weekly garbage collections, is expected to lose more than £3 million pounds on its investment and that the final payment of its expected return is not due until October, 2018.

The state & scale of Scottish Borders Council’s financial investments and subsequent huge losses in Iceland have only become clearer after an investigation by retired Scotsman reporter William Chisholm, who was well deservedly awarded an MBE for his services to journalism.

During Mr Chisholm’s investigation of the way in which Scottish Borders Council invested in the Icelandic Banks, it became apparent its Treasury Advisers, Butlers, had been involved in widespread losses of hundreds of millions of pounds by Councils all across the UK.

Butlers Treasury advisers are run by the Conservative Party’s Treasurer, Michael Spencer, who was the subject of a report in the Independent newspaper, where, following a two month investigation, journalist Martin Hickman alleged that "councils who paid [a firm run by Mr Spencer] for strategic advice were almost twice as likely to have lost money in the three main Icelandic banks as those advised by other companies. The Conservative Party’s own website continues to list Mr Spencer as its current Treasurer.

The Independent’s investigation of Butlers and its connections to local authorities in the UK, continued : "Of the 116 local authorities who lost money, 51 received advice from Butlers. Their losses totalled £470m, more than half the total amount of council funds frozen in the banks."

Mr Chisholm’s investigation into Scottish Borders Council’s Icelandic investments follows :

WHO IS RESPONSIBLE FOR SCOTTISH BORDERS COUNCIL’S LOST MILLIONS?

Between May and August 2008 Scottish Borders Council (SBC) sanctioned the investment of some £10 million of council taxpayers’ money in two Icelandic banks despite several previous warnings from credit agencies as to the future stability of Iceland’s financial sector.

£2 million of the money invested has already been written off; £1.8 million has been recovered; and according to the council’s latest published accounts it could take until 2018 for some of the cash to be paid back into SBC coffers. Further write-offs may be necessary.

In a bid to find out who was responsible for the £10 million gamble which failed, I lodged a Freedom of Information (FOI) request with SBC on 20th August 2010. The questions asked and the council’s response can be found in their FOI archive (No. 3154) and quoted again at the end of this report. To me the most striking revelation in the response was: “There was no committee involvement in the specific investment decisions”, indicating that elected councillors were unaware that £10 million was about to be deposited in banks which were already being “abandoned” by other local authorities. More evidence to substantiate that fact later.

The council also told me: “The primary source of credit worthiness comes from credit rating agencies. For both banks, on the day the deposits were made, the short term ratings were F1” – the highest credit quality. But in fact both Moody’s and Fitch, two of the world’s leading agencies, had expressed doubts and issued warnings about the Icelandic banking sector, More on this later too. My FOI request also asked: “Has anyone been held accountable for the appalling losses?” I was told the council’s internal auditor carried out a review of all short-term lending following the collapse of the Icelandic banks and concluded there had been full compliance with the Council’s Treasury Management policy.

Because I was not satisfied with SBC’s response I requested a review of my FOI request. I asked for copies of any documentation relating to the catastrophic investment decision including written advice given to the council’s Treasury managers by external Treasury Management advisers. On October 4th correspondence to me from SBC (following consideration of my review request by the council’s FOI Advice Group) included a copy of the internal auditor’s 2008 report on short term cash deposits. But the letter added: “The information related to the advice received by the Council from its contracted treasury advisers, Butlers, was considered to be exempt under Section 36(1) of the Freedom of Information (Scotland) Act 2002, in that if the information was disclosed it would, or be likely, that the council would need to claim confidentiality of these communications.”

So this crucial information will not be placed in the public domain. Just what does the council have to hide? Therefore there must be a strong case for an independent inquiry into this entire sorry affair. SBC will soon be deciding to cut services to save £2.4m – almost equivalent to the sum already lost. A considerable number of those threatened services would have had a better chance of survival had there been an extra £10 million in the kitty. Other assets or resources have already been sacrificed to plug the financial gap left by the £2 million written off. In my view the saga requires urgent investigation, and those responsible must be held to account.

THE EVIDENCE FOR AN INQUIRY

It seems clear in the first instance that Scottish Borders Council – and many other local councils for that matter – did not learn a lesson in the wake of the spectacular crash of Bank of Credit and Commerce International (BCCI) in 1991. In that particular scandal some 35 councils across the UK lost almost £90m by gambling on the money markets. Western Isles Council was the prime “victim” when £23m – equivalent to 50% of the council’s entire budget – simply disappeared.

Scottish councils were warned after BCCI’s collapse: “The higher the interest rate the higher the risk.” Yet that stark warning appears to have been completely ignored by senior council staff at SBC, and by their so-called Treasury Management consultants when the struggling Icelandic banks upped their interest rates to attract multi-million investments. And elected councillors, said to be the guardians of the local public purse, simply abdicated their responsibility by neglect. From research carried out to date these are the events which led to millions of pounds of Borders taxpayers’ money disappearing down an Icelandic drain.

According to the Local Government Association, local authority deposits in Icelandic banks halved Between January 2008 and October 2008 from £2 billion to £953 million. The number of new deposits fell and declined sharply after April 2008. Only six councils and one pension authority in the entire United Kingdom deposited money after significant downgrades by credit agencies. So it is important to remember when SBC lodged our money with Landsbanki and its parent bank Heritable.

According to SBC’s accounts for 2009/10 the deposits were made as follows:

15th May 2008 - £3m Landsbanki;

25th July 2008 - £2m Landsbanki;

25th July 2008 £1m Heritable Bank;

22nd August 2008 - £4m Heritable Bank.

In other words these deposits were made long after the alarm bells started ringing.

For example on 30th January 2008 Moody’s credit agency placed Landsbanki on review for possible downgrade. Then on 28/2/2008 Moody’s downgraded Landsbanki from A2 to Aa3, reflecting concerns over asset quality. On 5th April 2008 Moody’s cut its outlook on Iceland’s sovereign debt from stable to negative. On 1st April credit agency Fitch downgraded Icelandic banks and placed Landsbanki on “negative watch”. Did no-one spot the actions of these credit agencies in the weeks and months before the £10 million was deposited? It would appear not.

Instead SBC seems to have relied solely on advice it was getting from its contracted treasury advisers Butlers. A total of 51 local authorities received advice from Butlers. Their combined losses in the Icelandic debacle were £470m. A subsequent investigation showed councils who paid Butlers for advice were almost twice as likely to have lost money in the three Icelandic banks than those advised by other companies. Butlers only warned councils about the desperate situation of these banks on 30th September 2008, the same day the Icelandic Government took control of the country’s third largest bank.

Mr Chisholm concluded his investigation saying “It seems to me that members of Scottish Borders Council were negligent by not keeping a very close eye on the authority’s money, and officials were reckless by choosing to make deposits in these unstable banks so late in the day. In total seven Scottish local authorities had over £45m of public money lodged in Icelandic banks on the day that they imploded. It seems 25 councils had more sense, steering clear of Iceland altogether.”

Mr Chisholm’s Freedom of Information request to Scottish Borders asked :

I would like to make a Freedom of Information request on my own behalf for information contained in any discussions or documents relating to the council's ill-fated £10 million investments in the collapsed Heritable and Landbanski Icelandic banks. Specifically:
(1) where did the £10 million come from to fund the investment?
(2) On whose advice was the investment made?
(3) according to SBC accounts the money was deposited only weeks before the 2008 collapse of these banks. What checks were made on the financial in/stability of the two banks?
(4) Please make available all committee and full council minutes relating to the investment.
(5) Has anyone been held accountable for the appalling losses exceeding £3 million? As a council tax payer contributing £246 per month I was extremely concerned to learn vast sums of public money had been lost in such a venture so:
(6) How much money does the council have invested elsewhere?

Scottish Borders Council’s response stated :

1 I can confirm that the funds were short term cash deposits made under the Council's Treasury Management Policy.
2 Investments were undertaken by Treasury Management staff in accordance with the Council's Treasury Management Policy and with advice from the Council's external Treasury Management Advisers.
3 The primary source of credit worthiness comes from credit rating agencies. For both banks, on the day the deposits were made, the short term ratings were "F1 - highest credit quality, indicates the strongest capacity for timely payment of financial commitments".
4 There was no Committee involvement in the specific investment decisions. The subsequent position has been reported in the Council's accounts and via Committee reports which are available on the Council's website.
5 The Council's Internal Auditor carried out a review of all short-term lending following the collapse of the Icelandic banks and concluded that there had been full compliance with the Council's Treasury Management policy.
6 At 31 March 2010 the Council had £3.5m on short term deposit with Barclays.

Borders MSP John Lamont was asked by one of our reporters for his reaction to the revelations of Scottish Borders Council’s gigantic losses of taxpayers money. He said : “I have written to the Accounts Commission to ask if they are able to investigate this further. I have not yet had a response.”

Audit Scotland were asked for their reaction to the claims of widescale losses at SBC. A spokesperson said : “We have received correspondence about this issue,asking for an inquiry. We are considering the correspondence and will respond in due course, in line with our usual procedures for correspondence."

No one at Scottish Borders Council was available for comment this evening.