More than £1 billion of taxpayers’ money was put at “unnecessary risk” in Icelandic banks as a result of misinformation and complacency in a range of public organisations, a Commons committee concluded yesterday.

The Commons Communities and Local Government Committee called on the Financial Services Authority to investigate why treasury management agencies, which give financial information to public authorities, allowed dozens of councils to invest in Icelandic banks despite early credit warnings.

One of these agencies, Arlingclose, told town halls to withdraw money from Icelandic banks as early as 2006. But other agencies advised councils to continue to invest in Icelandic banks as late as the summer of 2008 shortly before they collapsed, the committee claimed.

The treasury management agencies act as independent financial advisers to local councils advising them where they should put billions of pounds of investments.

But yesterday’s report from the MPs suggests that there could be a conflict of interest between advising councils what to do with the money they have to invest when they, or the brokers they instructed also received commission from the banks.

Phyllis Starkey, the committee's chairman, told The Times that the committee did have concerns that the high rate of interest that the Icelandic banks gave had been been reflected in high rates of commission.

“From the evidence given to us there remains a concern of potentially inappropriate relationships between local authority financial advisers and brokers but only the FSA could investigate how widespread the problem has been,” Dr Starkey said.

The report suggests that companies marketing their services as treasury managers should be transparent about their fees, sources of revenue, including commissions.

In addition it calls for the FSA investigation. “The evidence which we have examined has raised concerns about potential conflicts of interest and questions as to whether there are any financial transactions between treasury management advisers and brokers that might compromise the independence of advice being given to local authorities. There is a strong case for a full investigation by the FSA.”

The FSA disputed last night that it officially regulated treasury management agencies and said it would reply to the committee’s report at a later date with a full response. It refused to comment on whether it would begin an investigation. A spokesman for the Treasury later made clear that the FSA was the authority responsible for the agencies.

The Local Government Association said the committee’s report showed that councils, which have still not received a penny back from their investments, were let down by organisations they were relying on to provide up-to-date and accurate information.

Richard Kemp, vice-chairman of the Local Government Association, said: “Councils have led the way in retrieving the money and have already done much of what the committee recommends. The LGA, working with councils, currently expects to get up to 90 per cent of this money back through the administration process. Many local authorities have already overhauled the way that they invest.”

The Audit Commmission, which is also criticised for failing to monitor the advice given to councils, welcomed the committee’s advice to set up local authority audit committees.

“The commission continues to acknowledge mistakes were made in the management of its own deposits with Icelandic banks but rejects the view that it should have issued stronger guidance to auditors before the banks failed,” said Steve Bundred, chief executive of the Commission.

A spokesman for the Communities Department said: “It is estimated that in 2007-08, councils made £1.8 billion from the interest on investments, which could then be used as councils saw fit to meet local needs and priorities. But the report also makes clear that councils need further support in making investment decisions. That’s why we are working closely with the Audit Commission, Cipfa and local government representatives to review our guidance.”

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