Libor advice illustrates ‘conflict of interest’ within public financial advisory firms

Financial consultants involved in advising local authorities to take high-risk investments in Icelandic banks that subsequently failed are now advising councils on Libor rate-rigging losses, despite “conflict of interests”, a campaign group has said.

Following the collapse of Iceland’s banks in 2008, it emerged that close to £1 billion of UK taxpayers’ investments were at risk, across 123 public authorities. Consultants Butlers, Sector and Stirling lured local authorities into Iceland for high-risk return on investments, according to Move Your Money. Brokers including ICAP and Tullet Prebon were also involved.

While four former bosses from Icelandic bank Kaupthing have been sentenced to between three and five years in prison for fraud, prosecutions in the UK appear unlikely.

Joel Benjamin, local authorities campaigner with Move Your Money, said, “The prosecution of bankers in Iceland highlights the gulf in regulatory vigour between Iceland and the UK.”

Move Your Money has pointed out that of the 10 biggest council losses suffered in Iceland, Butlers and Sector advised the majority of these, with their clients losing £469.5m and £313.5m respectively.

Butlers was a subsidiary of ICAP and during 2011, in a deal referred to the competition commission, Butlers chose to exit the market and was bought up by Sector, a Capita subsidiary.

Between 2006 and 2008, both Butlers and Sector advised councils on Icelandic investments. ICAP, amongst other brokers, then executed the deals, and generated profits for the firm on both sides of the trade. This created “obvious conflicts of interest”, the campaign group claims.

During the 2009 Communities and Local Government (CLG) Iceland Select Committee it was noted that the Butlers’ website stated local authorities would have “the whole [ICAP] group at their disposal”.

When giving evidence to the CLG, Martin Hickman, consumer affairs correspondent with the Independent, said, “Together advisers and brokers hold conference calls with local authority finance officers in which they act in concert to give such advice.”

According to ICAP, Hickman’s accusations could not have happened due to separation. The CLG recommended an investigation into Sector and Butlers but the regulator, the Financial Services Authority (FSA), failed to act on this recommendation.

Benjamin added, “Hickman’s evidence suggests that the so-called ‘Chinese walls’ meant to separate Butlers and ICAP staff from conflict of interest situations were effectively non-existent.”

During September this year, ICAP was fined $87m (£53m) for its part in the Libor rate-rigging scandal. A Freedom of Information request sent by Move Your Money found that Barnet council, which notes that it has not fully assessed the impact, claims the scandal has had a “very limited impact” on council finances, referencing advice from Sector, which it refuses to disclose.

Benjamin added that ICAP’s Libor fine casts “a shadow of doubt” over the independence of advice that both Butlers and Sector are giving public authorities regarding Libor losses.

In order to combat the lack of choice local authorities have when it comes to financial advice Benjamin said they should look to “boost their own skills internally”.

This would also allow public authorities to consider the flow and impact their money is having on the economy and “how they can maximise the economic benefits for their constituent and small businesses in the local area”, he told Blue & Green Tomorrow.

“Local authorities would be well advised to think about to think about a longer term investment strategy that looks to re-circulate investment within the local catchment.”

Capita, the parent company of Sector, was unable to comment at this time.

Further reading:

Bob Diamond among Barclays execs called to give evidence in Libor trail

Banks will be allowed to fail In the future

Dutch bank Rabobank to pay £637m fine for Libor scandal

RBS among eight major banks fined by EU over rate-rigging

‘No let-up from UK regulators as unruly finance firms are held to account