News Centre

23 Oct 2009 (archived)

Council investments and Icelandic banks

Oxfordshire Councils are among 127 English local authorities (comprising 105 councils, 12 police authorities and 10 fire and other authorities) that have funds invested in Icelandic banks. Many other institutions including building societies, universities, charities and the Audit Commission also had money invested in Iceland.

So far we've received £325,000 back from one Icelandic bank (Kaupthing Singer and Friedlander) and we're waiting to hear how our other investments will be re-paid. We have had a number of queries from residents about how this will affect them. Below are some answers to your questions:

Why does the Council have money invested in money markets yet you charge so much for Council Tax?
Like any saver, councils invest money to earn interest which keeps council tax down and funds vital frontline services. In West Oxfordshire we maintain reserves for Revenue and Capital purposes:

Revenue reserves are used to help keep Council Tax low and in recent years have been using in the region of £1m per annum to subsidise Council Tax and keep West Oxfordshire's tax the second lowest in the country.
Capital reserves are kept to invest in the future infrastructure of the community such as Village Halls, Play Areas and Leisure schemes, and also to generate interest payments to keep Council Tax low. Regulations mean this money cannot be returned to taxpayers directly.

What does the Council do with the interest on its investments?
Last year we generated £3.5m in investment interest, this kept your Council Tax the second lowest in the country. If we did not receive this income, local Council Tax would have to increase from £75 to around £160 for a Band D household. This saving equates to around £1,500 per household since Council Tax was introduced in 1993 and this reduction will continue in the future.

Why do you not just give taxpayers all the investment back?
Under national accounting rules only the revenue funds could potentially be returned to taxpayers. As a prudent Council we need to keep a minimum level of reserves to deal with issues that might arise during the year - such as flooding - that could cause a problem if we did not have ready access to funds.

We continue to utilise these reserves to ensure you, our residents, get high quality services at a very low level of Council Tax. Our ten year financial strategy sets out a managed reduction in revenue reserves whilst maintaining a low level of tax.

Why did the Council invest in Icelandic Banks?
As required under government guidance we only invest in highly credit rated banks to get the best return for taxpayers with minimum risk. We invested £9m in three Icelandic Banks in the June/August 2007 for a period of two years. The Icelandic banks fulfilled these criteria at that time.

To further protect your money we spread our investments in around 25 different institutions - predominately in the UK and Ireland but also in other countries - to try to ensure that we spread the risk and minimise the chance of major losses.

I've heard that the Credit Ratings were poor - so why did you invest with them?
The Credit Ratings of Icelandic Banks remained high until the middle of 2008 and indeed two of the Icelandic banks were highly rated until the end of September 2008. When the Council invested in these banks they were properly rated and we took external professional advice prior to making these investments.

Why didn't you pull this money out when the ratings started to fall?
The deposits we make are not like retail deposits that you can make where funds can be returned under penalty of loss of interest. These deposits are for a fixed term and will only be returned upon their maturity which is summer 2009.

Are councils likely to get their money back and how will it affect council tax?
So far we've received £325,000 back from one Icelandic bank (Kaupthing Singer and Friedlander). We're continuing to work closely with the Local Government Association (LGA) to ensure that the best return for taxpayers is achieved on the rest of our investments.

At this stage we remain confident, based upon the advice of the LGA, that the vast majority of funds will be returned and we are claiming interest until the date of repayment of these funds. Both the timing and actual amounts of repayments remain unknown at this stage and will be subject to results of action taken in the Icelandic and UK courts.

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