Examination of Witnesses (Questions 140-159)
MR MARK
HORSFIELD, MR
CHRIS ANTHONY
AND MR
DAVID WHELAN
26 JANUARY 2009
Q140 Chair: Can I move to specific
questions about investments in Icelandic banks and ask each of
you a very specific question, which is, for each of you, did you
at any point advise local authorities to stop investing in Icelandic
banks, and if so when?
Mr Anthony: We pass the information
on to our clients with regard to credit ratings. We keep them
fully informed on that and we believe that with all the information
they have at their fingertips as professional investors they should
be able to make the decisions themselves.
Q141 Chair: I think the short answer
is, you did not at any point advise them to take their investments
out of Icelandic banks?
Mr Anthony: No, we do not provide
advice, we just give out information.
Q142 Chair: Mr Horsfield?
Mr Horsfield: Yes, we did and
we started doing that in the spring of 2006 and increasingly thereafter
as well. We did not just do it once, we repeated that advice.
Q143 Chair: Which is presumably why
none of the councils advised by you has any investments in Icelandic
banks at risk. Mr Whelan?
Mr Whelan: No, we did not. We
passed on the downgrades from the credit rating agencies as they
came through to local authority clients on a timely basis. We
do not give specific advice in this area.
Q144 Anne Main: On the one word "advice"
which was quoted by various councils before us, are you satisfied
that the letters you send make it expressly clear that what you
are giving is a package of information for them to interpret?
Are you absolutely convinced that your letters and communications
state that?
Mr Anthony: Our mandate makes
it abundantly clear exactly what the clients are going to get
with regard to our entire service and in particular with regard
to what they receive from counterparties.
Mr Horsfield: Absolutely.
Q145 Chair: So there can be no uncertainty
on behalf of those who are receiving information from you that
it is information, "Make your own minds up, guys"?
Mr Anthony: Yes. They are professional
investors. They are not stupid and they are fully able to make
their own decisions.
Mr Whelan: Just for completeness,
can I just answer that question as well and say within our mandates,
our standard terms of business, that is made very clear and in
the contracts we entered into with our clients as well.
Q146 Chair: Can I just press you,
Mr Whelan, in relation to one of your clients, which is Restormel
Borough Council. We understand that they got their broker to deposit
£3 million in Landsbanki I think it was on 29 September and
the money went out of their account on 1 October. You will know
the bank went insolvent on the 7th. Given you were advising them,
were you surprised by them taking this action?
Mr Whelan: First of all, thank
you, Chairman, for allowing the Committee clerks to provide that
information to me on Saturday evening. We are a bit confused by
the actual letter. It is not from the council at all, it is from
parliamentary candidates, and we have looked into the matters
which have been raised in that letter over the weekend. As I have
said, and I will repeat it just for the interest of clarity, we
do not advise local authorities which organisation to pass their
funds to or invest with, or sovereign states, so we have not been
party to that conversation. The evidence we have in the office
is that we have never had that conversation with the local authorities,
which is what we would expect not to have as well. However, in
order to clarify those matters, I have today rung Restormel Borough
Council and arranged to see their director of finance to talk
through the letter and passed a copy of the letter to the director
of finance at the council and I will report back to this Committee
once that meeting has finished.
Q147 Chair: I think that is not really
the substance of the matter. I think most of us feel that if that
council, even with the information being passed on to you that
it was paying for, could take such a foolish decision, the advice
it was getting probably was not worth any money at all?
Mr Whelan: Once again, we do not
advise the local authority which organisations to place their
funds with. We do need to get into detail with the authority concerned,
because clearly this has not come from the local authority.
Q148 Anne Main: Can I put it a different
way then? If you do not advise them, can you have any concerns
that the information they were given—which they seem to
have made what seems to have been a calamitous decision based
on—was sufficient? If you said they had the most recent
downgrading of the credit ratings for the bank, how can you interpret
the reasons as to why this could have happened?
Mr Whelan: To the best of my knowledge,
the date the decision was made to make the transaction the bank
had not been downgraded.
Q149 Andrew George: The decision
was made on 29 September according to the letter. What I think
is crucial here is that in the letter it says—and you have
seen the letter—that the borough council sought the advice
of their investment advisers, Sector Treasury Management. You
are saying in relation to Restormel Borough Council—and
for a small borough council £3 million is a very substantial
amount of money—that at that crucial moment in a jittery
market, with financial markets in high anxiety, they did not speak
to you or seek your advice about how best to place their £3
million?
Mr Whelan: Could I just take one
minute, please, just to explain the process local authorities
go through when looking to place deposits, because there is a
bit of a misunderstanding which I just want to clear up? When
local authorities get the rating advice through from ourselves,
they adopt their lending lists and limit structures. When they
have funds to invest in the markets they will approach a bank
direct or a firm of money brokers and ask which organisations
are bidding for those funds. At that stage they then will decide
which organisation to place the funds with and a deal is transacted.
Sector has no role in that process whatsoever.
Q150 Andrew George: So you offered
no advice and you are saying that no advice was sought at that
stage?
Mr Whelan: Absolutely.
Q151 Chair: They did not get any
advice from you, but they might have sought it from somebody else?
Mr Whelan: They certainly had
not approached us because our records would indicate had they,
but in the context of that process Sector is never involved in
the process of placing funds in the marketplace.
Q152 Chair: Mr Horsfield, can I just
ask you, if they placed it with a broker, you would have just
thought that the broker might have been reading the FT if nothing
else?
Mr Horsfield: I think, looking
at this particular point in time, the end of September, that is
some 13 months after we had the first run on a British bank and
queues around Northern Rock in the High Street. That for us was
a fairly visible episode that demonstrated that something is happening
out there which at the very least needed some degree of additional
caution in terms of what was happening with banks, building societies
and other financial institutions in the market. Into September
and early October last year I would suggest that the risk in financial
markets and with banks was ratcheted up by a significant number
and so the advice, the information, call it what you will, we
were using at that particular stage and throughout those months
was extreme. On 29 September we issued a note saying, "Do
not invest in any banks or building societies with any of your
funds, put it in the DMADF (Debt Management Account Deposit Facility)",
because it was that serious at that point in time from our perspective.
Q153 Chair: Before I pass over to
Mr Betts, can I just ask Mr Anthony and Mr Whelan, given the explanations
the three of you actually gave at the beginning of this as to
what you were providing to local councils, the level of advice
you were providing and the level of responsibility you were offloading
onto the council's own advisers, do you think that councils which
currently have contracts with you might be reconsidering and transferring
to somebody else?
Mr Anthony: No, on the contrary,
I think they are very keen to continue to receive the sort of
full knowledge of what the credit rating agencies assess on investment
counterparties.
Q154 Chair: Even those of your clients
who have investments in the Icelandic banks?
Mr Anthony: Yes, indeed, and in
fact some of the evidence which is provided to the Committee does
indicate quite clearly that the officers there regarded it as
their responsibility to make the final decision as to who to invest
with.
Mr Whelan: A similar response.
This from the local authority perspective is all about having
objective quality advice and we provide that information through
from the rating agencies for that purpose.
Q155 Mr Betts: The words "advice"
and "information" keep getting used one after the other,
which I think the evidence probably shows is a reason for confusing
us slightly, but let us go back to the word "information"
then, which Mr Anthony and Mr Whelan seemed more content with
in terms of what you were doing. Was there any information provided
to any of your clients at any stage which ought to have led them
not to invest in Icelandic banks?
Mr Anthony: I think the speed
at which some of the ratings were falling with the Icelandic banks
should have rung a few alarm bells with clients during the final
stages of the process. They were fully in receipt, as I say, of
all the rating agency information, which was showing the downgrades
of the credit ratings.
Q156 Mr Betts: But with no comment
from you which might have just said, "Have a look at this
particularly"?
Mr Anthony: No. We pass on that
information and it is the officers—
Q157 Mr Betts: It is a rather expensive
carrier pigeon, is it not, you operate?
Mr Anthony: It is not. It is a
very reasonable service in fact. We do not charge a lot for passing
the credit rating information on. It gathers and collates information
and sends it on to clients in a user-friendly format and keeps
them fully abreast of all the developments on the rating agencies.
Q158 Mr Betts: I can see that you
might say your fees are reasonable and probably not what your
organisation's profits are generally made out of, but in terms
of the cost to the poor council tax payer it is some £469.5
million in Icelandic banks that has gone. It is rather a big cost,
is it not?
Mr Anthony: I think that is money
at risk at the moment. If you are alluding to an article in The
Independent, I just note that there has been an apology and
a retraction over the weekend.
Q159 Mr Betts: Which was about whether
it was advice or information rather than about the amounts. I
do not think anyone is disputing the amounts, are they?
Mr Anthony: No, you cannot dispute
the amounts, they are there for everybody to see.
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