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Tory chief's firm faces questions

Martin Hickman
Sunday 18 January 2009 20:00 EST
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Michael Spencer's proposed peerage has caused controversy
Michael Spencer's proposed peerage has caused controversy (Reuters/James Boardman )

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A company run by the Conservative Party treasurer Michael Spencer gave advice to almost half the councils facing a funding crisis as a result of the collapse of Iceland's banks, an investigation by The Independent reveals. Councils who paid Butlers for strategic advice advice were almost twice as likely to have lost money in the three main Icelandic banks as those advised by other companies.

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.

The Independent's two-month investigation has been passed to the Communities Select Committee, which today begins an inquiry into local government finance, sparked by the disastrous decision of councils to invest £886m in Iceland's economy.

Councils such as Kent (£50m), Norfolk (£32.5m), Dorset (£28.1m), Hertfordshire (£28m) and Barnet (£27.4m) ploughed millions into Iceland's tottering banks to take advantage of market-beating interest rates. Those councils who have used Butlers also brokered their investments through its parent company, ICAP, among other brokers, all of whom received commission from the Icelandic banks.

ICAP insists the two divisions were "segregated" and regulated by the Financial Services Authority, adding that Butlers supplied councils with creditratings of institutions, rather than advising on individual transactions.

Several councils claim they were not warned early enough about the vulnerability of the banks, despite Butlers being contracted to evaluate and monitor their creditworthiness.

Credit agencies began downgrading the banks in February 2008. In April, Fitch put the three banks on negative rating watch. Their ratings were downgraded in May, September and October.

An inquiry by the accountants PricewaterhouseCoopers at Tory-controlled Kent County Council found that Butlers had only warned Kent about the banks on 30 September, the same day the Icelandic government took control of the country's third largest bank, Glitnir.

PwC's report quoted KCC saying Kent did not employ specialist treasury staff and relied on the expertise of Butlers: "We are surprised and disappointed that despite meeting with senior managers on September 29, the advisers did not raise any concerns about the situation in Iceland." An email on 30 September notifying the council of the situation was sent to a junior staff member and was not read in time – Kent sank a further £3m into Landsbanki's UK subsidiary, Heritable.

The investment is a fraction of the £1.2bn of public money trapped in Iceland. Transport for London had £40m invested and the Metropolitan Police Authority had £30m, including £20m invested on 23 September. Overall, police authorities had £92m invested and universities £77m but the biggest losers were councils.

The Independent's research shows that 35 per cent of councils advised by Butlers lost money in Iceland, compared with one in five that employed other advisers. The investments of councils advised by Sector Treasury Services accounted for £313m of frozen council funds. About half of all UK councils use the services of the company, which is part of the Capita group.

The 40 local authority clients with Arlingclose lost no money because the company had been warning against investing in Iceland since May 2006. "There were plenty of signs that things weren't adding up," the company director, Mark Horsfield, said.

ICAP said that Butlers had advised local authorities on the "structure and organisation" of their investments: "The decision as to with which institution to place funds was made by each local authority."

The scale of Butlers' involvement in the crisis will embarrass the Tories, who control many of the affected councils. It is also a blow for Mr Spencer, the chief executive of ICAP who holds a 20 per cent stake in the listed company.

UK LOCAL AUTHORITY INVESTMENTS IN ICELAND*

*Collapsed Icelandic banks Kaupthing, Glitnir, Landsbanki and their UK subsidiaries

Total number of UK councils: 468

Total UK council investments in Icelandic banks: £885.3m

The Independent’s figures include UK district, borough, metropolitan, unitary and county councils. They exclude fire, police, and transport authorities

Butlers

Claims to advise 144 UK councils: 31 per cent of total

Number with investments in Icelandic banks: 51

Proportion of total UK council exposure to Iceland: 53 per cent

Scotland £22.5m, Wales £0, England £447m

TOTAL: £469.5m

Sector Treasury Services

Claims to advise 250 UK councils: 53 per cent of total

Number with investments in Icelandic banks: 46

Percentage of total UK council exposure to Iceland: 35 per cent

Scotland £23m, Wales £49.7m, England £240.4m

TOTAL: £313.5m

Sterling Consultancy Services

Will not disclose number of UK councils it advises

Number with investments in Icelandic banks: 3

Percentage of total UK council exposure to Iceland: 2 per cent

Scotland £3.7m, Wales £0, England £13.5m

TOTAL: £17.2m

No external advisor

Number of UK councils without advisors: at least 16

Number with investments in Icelandic banks: 16

Percentage of total UK council exposure to Iceland: 1 per cent

Scotland £0, Wales £0, England £13m

TOTAL: £13m

Arlingclose

Claims to advise 40 (now 50 after Icelandic collapse) UK councils: 9 per cent

Percentage of total UK council exposure to Iceland: 0

Number with investments in Icelandic banks: 0**

TOTAL: £0

**Arlingclose has taken on several local authorities with Icelandic investments; none of these investments was made while it was advisor

Note: Rhondda Cynon Taff (£3m) and Doncaster (£3m) failed to respond

Top 10 council investors in Icelandic banks

Council (Political control); Investments; Advisor; Brokers

1. Kent (Con); £50.3m; Butlers; ICAP, Martins, Tullett Prebon, Garban
2. Nottingham (Lab); £41.6m; Butlers; City Deposit, Martins, Sterling
3. Haringey (Lab); £37m; Sector; Martins, Tullett Prebon, Sterling
4. Norfolk (Con); £32.5m; Butlers; ICAP, Sterling
5. Dorset (Con); £28.1m; Butlers; ICAP, Tullett Prebon, Tradition
6. Hertfordshire (Con); £28m; Butlers; ICAP, Martins, Tullett Prebon, Sterling, Tradition
7. Barnet (Con); £27.4m; Butlers; ICAP
8. Somerset (No overall control); £25m; No advisor; ICAP, Sterling, Tradition, Tullett Prebon
9. Northumberland (No overall control); £23m; Sector; ICAP, Martins, Tullett Prebon
10 Surrey (Con); £20m; Butlers; Martins, Stirling, Tradition, Tullett Prebon

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