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Councils urged to improve due diligence in wake of banking crisis
Britain’s local authorities may have avoided some of the problems caused by the banking crisis if they had beefed up their due diligence procedures.
Specialist law firm O’Connors LLP claims that councils may have reduced their risk by checking more closely the small print of the investment advice they were given.
Representatives of more than 100 councils are trying to recover more than £800 million which they had invested in failed Icelandic banks. They have warned of cuts in jobs and services as well as council tax rises if their attempts are unsuccessful.
O’Connors partner, Paul O’Connor, said: "It is clearly impossible to avoid investment risk completely but there are tried and tested ways to reduce risk and vital lessons which councils can learn for the future. They could, for example, have considered buying credit wraps, which is an insurance to protect against an investment house failure."
"They should also vet their investment advisers extremely thoroughly and formalise their relationship in a service agreement which offers proper recourse in the event of negligence or breach of contract. In addition, they should double-check that their advisers have adequate professional indemnity insurance cover in place to cover the advice being given."
The Local Government Association (LGA) has been meeting with officials from the British Treasury and the Icelandic ambassador in an effort to head off acute financial difficulties as a result of that country’s banking collapse. The LGA has argued that local authorities invested their money prudently and should be top of the list of creditors when repayments are made.
"Not all investment advisers are familiar with credit wraps and are, therefore, hesitant to recommend them as additional protection for investors. Likewise, not all public sector bodies fully appreciate the intricacies of indentifying, selecting and appointing the right investment advisers and how to best secure proper protection in their engagement contract. Different departments tend to deal with different pieces of the jigsaw and without an overarching approach to risk management, this compartmentalisation inevitably increases the risk of things being missed. Questions about the broader risks inherent in investment policy should be as central to local authorities as the forecast investment return, just as it should be for other organisations caught out in the current banking crisis."
O’Connors is regularly brought in to advise on the insurance aspects of corporate, commercial, property and investment projects by public sector bodies and blue chip private and public companies.
To discuss on how our involvement might benefit your organisation, please call Nigel Wallis on 0151 906 1000.
