Scottish Secretary to broker meeting with UK Treasury over Scottish Councils’ Iceland investments

Jm Murphy, the new Scottish Secretary at Westminster, is to arrange a meeting between UK Treasury officials and Cosla, the group representing Scottish local authorities. The meeting will discuss the business of repatriation of funds invested by nine Scottish Councils in Icelandic banks.

At issue is the matter of the source of compensation. Westminster has said that compensation to Scottish councils must come from Holyrood. The Scottish Government has pointed out that the meltdown in the banking world was caused by a sustained failure to regulate the behaviour of the banks and that regulation is a matter reserved to Westminster.

It is now known that the interest earned on the Icelandic accounts will inevitably be forfeited. Councils may get their capital investment back but not the accumulated interest.

In the matter of investments made by local authorities in Icelandic banks, we reported that it had emerged that a single company, Sector Treasury Systems (STS), had more or less cornered the market in financial advice to public sector organisations.

There were concerns over the nature of the advice given and the issue of possible commissions. For Argyll checked this situation with the Scottish Councils holding investments in Icelandic banks with the following result.

Moray currently uses STS for treasury advice and has done so for the past three months. STS is paid a fixed amount primarily to advise on ratings for investment purposes but also for technical advice for year-end accounts closure and management of outstanding debt. STS did not recommend Landsbanki but they did provide Moray Council with the credit rating information for that bank to appear on its approved list. STS was not involved directly in Moray’s two £1million deposits with Landsbanki. It would therefore not earn a fee from those transactions.

Scottish Borders Council used STS until four years ago. They are aware that STS emerged from a broking background in the wake of the Bank of Credit and Commerce International BCCI) collapse and were bought by Capita, the company then owned by Rod Aldridge. They were not advised by STS in the period when their Icelandic investments were made. Scottish Borers Council has £5 million with Landsbanki and £5 million with Heritable, a Landsbanki subsidiary.

North Ayrshire has used STS for financial advice. They employed the company through a tendering process and STS did not recommend their Icelandic investments. North Ayrshire has £5 million with Landsbanki and £10 million with Glitnir.

South Ayrshire is currently contracted to use STS on a fixed term basis. The company dos not recommend investment but advises on credit-worthiness. South Ayrshire do not pay STS commission.

Argyll and Bute, which does not have Icelandic investments, currently uses STS as financial consultants. As with Noth Ayrshire, it too employed them through competitive tendering and also did not receive recommendations from the company to invest in Icelandic banks.

The pressure on local authority finance directors is enormous. They are instructed by the Treasury – rightly – to spread their investments and, since these support the provision of local services, the responsibility is heavy. Many Council financial directors feel the need of advice to support their decision-taking in this matter, hence the market for consultancies.

The funds involved can be surprising large – Highland Council is investing around £100 million per day.