MPs hit out at FSA in row over council investments

Published on Tuesday 27 October 2009 19:32

THE City watchdog was criticised by MPs yesterday for effectively washing its hands of the furore surrounding the investment of local council money in Icelandic banks shortly before they collapsed.

The communities and local government select committee said it was taking up various issues with the Financial Services Authority (FSA) "with vigour" after the regulator's response to its report earlier this year.

The FSA said such deposits fell out of its regulatory remit and refused to act on the committee's recommendation for an urgent investigation into local authority financial advisers.

Labour MP Phyllis Starkey, chairwoman of the committee, said: "We are still worried about the regulation of local authority Treasury management advisers.

"The FSA's response to our report seems to suggest that their activities in relation to local authorities are effectively unregulated."

The committee added: "The FSA has also declined to follow up our concerns about potential conflicts of interest in some of these firms … these remain matters of some concern to us. We are pursuing these issues with vigour with the FSA."

The committee raised concerns over the advice given to councils in the wake of last year's collapse of Icelandic banks – nearly 1 billion of local authority deposits were affected.

It found evidence of warning signs over the shaky stake of the Icelandic banks dating as far back as 2006 and hit out at "complacent" councils for putting vast sums of taxpayer cash at risk. The committee also uncovered potential conflicts of interest between third party so-called treasury management advisers.

The committee called for the FSA to take a more "active role" in the regulation of council investment advice and to look at this potential conflict of interest as part of a full investigation.

But the FSA said: "Advising on deposits is not a regulated activity and therefore we do not monitor the activities of regulated firms in this area."

It added: "An investigation of this kind by the FSA would be appropriate only if the FSA's scope were extended to cover many more of the activities in question. This would be a matter for government to decide."