Councils' £800m losses spark MPs' inquiry

City investment experts who advised local councils which sank £800m of public money into shaky Icelandic banks with disastrous consequences are to be investigated by MPs.

In the Commons next week, the Communities Select Committee will interview directors of Butlers and Sector whose clients were apparently unaware that the Icelandic economy was too weak to support its over-extended banks.

A total of 97 local authorities advised by the two companies ploughed £800m into Iceland's three biggest banks Glitnir, Landsbanki and Kaupthing and their UK subsidiaries before their demise in October.

The public session on Monday is the latest sign that the recriminations have only just begun into how £800m of public money was invested in the banks, which were aggressively touting for business as they slumped towards disaster.

As The Independent disclosed yesterday, an investment firm run by the Conservative Party treasurer Michael Spencer, Butlers, advised 51 councils that invested £470m in Iceland while at the same time its parent company ICAP collected commission from the banks for brokering several deals.

Many of the investments were made by Conservative councils, in what could become a major embarrassment to Mr Spencer, one of the Tories' business supporters.

Another, unrelated company, Sector Treasury Services, will also face tough questions after it advised at least 46 councils who sank £313m into Icelandic institutions. Sector – which is owned by Capita and has been criticised for bungling public sector contracts – did not broker any of the investments.

Richard Dunlop, director of Butlers, and David Whelan, managing director of Sector, will appear before the cross-party committee. Mark Horsfield, director of a third adviser, Arlingclose, will also testify.

None of Arlingclose's 40 local authority clients lost any money in Iceland because the company had strongly warned against investing there.

Butlers and Sector insist their role was limited to passing on credit ratings supplied by the likes of Moody's and Fitch and did not recommend individual transactions, but attention has focused on whether they gave sufficient warnings about the parlous state of Iceland's economy. Several national newspapers and politicians had warned by last summer that Iceland was in danger and yet some councils were investing millions of pounds days before its economy collapsed.

Yesterday the Liberal Democrat Treasury spokesman Lord Oakeshott, who issued a warning in the Lords in May last year, said: "As The Independent has shown, Butlers' council clients were hammered hardest by bankrupt Icelandic banks. This raises serious questions of conflict of interest where Butlers advised councils for an annual fee while its parent, ICAP, took commissions from Icelandic banks for placing deposits."

For Arlingclose – which had been warning its 40 local authority clients against investing in Iceland since summer 2006 – Mr Horsfield said: "The Icelandic economy was basically fish and yet they had these huge liabilities. We thought: 'We won't rely on these ratings. We will rely on our own analysis, our own common-sense."

ICAP Group said the roles of Butlers and ICAP's broking arm had been kept separate to avoid a conflict of interest. Sector Treasury Services said: "Local authorities are required to invest with highly credit-rated institutions and some of the Icelandic banks had such ratings at the time the deposit was placed."

The Communities Select Committee's chairwoman, Phyllis Starkey, praised The Independent's research for illuminating the relationship between councils, their advisers and their brokers. She said: "It will be particularly helpful in the evidence session we have with the companies involved."