Agenda item

Report of Head of Financial Services

The Panel received the report of the Head of Financial Services, which had been presented to Audit Committee to update Members on the Icelandic Bank situation and the work that the LGA had been doing over the last three weeks, together with the presentation notes of Butlers, the City Council’s Treasury Consultants, detailing the company’s role, the lead-up to the Icelandic banks losing liquidity and the Council’s position.

The Head of Financial Services reported that the Council currently had investments totalling £6M placed with three separate Icelandic Banks, two of which were ‘forward deals’, where contractual obligations were made at the trade date to place money with the institutions at later dates.

Decisions to take out forward deals were based on normal investment criteria, taking into account a longer-term view.  The contractual agreements had been entered into in-line with the Council’s investment principles and objectives, as set out in the Council’s Investment Strategy and the CIPFA Code of Practice on Treasury Management.

It was noted that there was more potential risk attached to forward deals and longer-term investments because of the timescales involved, through more scope for ratings changes.  However, the credit ratings used were such that a minor downgrading should not affect the full receipt of principal and interest, and provision for this was contained in the Council’s Investment Strategy.

It was reported that the Council would generally hold a mix of fixed term, short dated investments, longer dated investments, forward deals and monies in ‘call accounts’, where deposits could be recalled at any time, depending on cash flow needs, interest rate prospects and budgetary considerations. 

The main principles governing the Council’s investment criteria were the security and liquidity of investments before yield, and the yield or return on investment.  The security of investments was managed through the ratings attached to the counterparties involved.  There were three main agencies to manage the credit ratings, namely Fitch, Moody’s and Standard & Poor’s, referred to as Fitch ratings in the Council’s Investment Strategy. 

Concerns had been raised regarding one of the investments in the Kaupthing, Singer and Friedlander (KSF) bank, which had been traded on 15^th May 2007, with the Council entering into a contractual obligation to transfer £2M to the bank on 16^th May 2008.  On
9^th May 2008, the bank’s credit ratings had fallen to just below those required under the Investment Strategy and it was removed from the Council’s Counterparty list so that new investments could not be placed with it.

Members were advised, however, that the Council had an existing contractual commitment to transfer the £2M, and advice was sought from Butlers Treasury Consultants, who confirmed the contractual obligation.  In view of the relatively minor reduction in ratings, the view then was that there was no significant risk to the Council, and the investment was placed. 

At the time, there was much speculation in the press and media, but the Council’s Investment Strategy placed reliance on the credit ratings from the agencies, based on their objective assessments of counterparties and factoring the results into their ratings.  There was no information to warrant breaching the investment contract with KSF.  The bank was expected to continue to trade and would have taken legal action against the Council had the forward deal not been placed.  Further, the Council’s reputation had to be considered so that it was in a position of trust with other counterparties in order to be able to place investments and gain favourable rates. 

It was reported that, on 30^th September, KSF’s ratings had plummeted and it failed shortly afterwards.   Given the contractual position regarding investments and the relatively minor changes in credit ratings at the time, it was felt that no further actions could have been taken other than to place the £2M with KSF.

In terms of recovery action, the LGA was working with local authorities and it was hoped that more information would be available within the next few weeks, together with advice on how local authorities should approach their budget setting.  The Council would submit a bid to the Government’s Capitalisation bidding round to allow any losses to be spread over a number of years.

Members were informed that quarterly monitoring reports of treasury management were presented to the Performance Review Team (PRT) meetings and an annual report to Full Council via Cabinet.  An update on the investment position was included in Financial Services’ Quarter 1 PRT.   The Medium Term Financial Strategy would be continually reviewed and the impact of Icelandic investments would be included within those updates.

The resolutions of Audit Committee were also reported, namely:

(1)               That the report be noted.

(2)               That a report be requested regarding any future changes in investment policy.

(3)               That an update report be requested from Cabinet to each meeting of Full Council regarding the Icelandic investments situation.

Resolved:

(1)        That the report be noted.

(2)        That any proposed changes in Investment Policy be reported to Budget and Performance Panel.