Sutton Council has faced fresh criticism for jeopardising £4m of public money by failing to heed repeated warnings about tottering Iceland banks.

A new report published by the Communities and Local Government Select Committee says the danger signs appeared as early as 2006.

Local authorities put taxpayers’ money at “unnecessary risk” as a result of complacency, lack of expertise and inaction, the committee claimed.

But the Local Government Association said the report also revealed councils were let down by organisations they relied upon for up-to-date information.

An independent review previously found that Sutton Council invested money in line with local government best practice.

Dr Phyllis Starkey, the committee chairman, said: “While few predicted the events that shook the financial system last year, their exceptional nature provides no excuse for the substantial failures that occurred in local authority financial arrangements.

“Our inquiry has exposed a significant level of misunderstanding, misinformation and complacency – not just within local authorities, but also among those who provide them with specialist investment advice.”

Some councils were found to be overly reliant on the credit rating agencies and to employ staff lacking training in handling investments.

Councillor Ruth Dombey, the deputy leader of Sutton Council, is confident of recovering at least 80 per cent of the funds sunken into a UK subsidiary of Landsbanki.

She said: “The money frozen in Heritable has had no impact on council services or the level of council tax this year.

“However, we acted quickly after the events of last September to review and subsequently change the way we invest money and tighten the credit rating criteria for banks we invest with.”

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