2018 – A year in regulation
0David Green casts an eye over a year of numerous changes.
2018 was a big year for regulatory change in local authority treasury management. No sooner had the New Year’s Eve fireworks stopped, then MiFID II started with a bang. Many of the directive’s 30,000 pages and 1.5 million paragraphs passed local authorities by quietly, but the new client classification rules caused plenty of paperwork for authorities and their financial services providers.
Treasury managers wishing to retain their existing status as professional clients had to demonstrate their experience, expertise and knowledge and confirm the size of the authority’s investment balance. In a classic example of the UK gold-plating EU rules, our national regulator decided to multiply the directive’s €500,000 minimum balance by around 23 to £10,000,000.
In the end, around 90% of principal local authorities successfully opted up to professional client status, with the remainder mostly unable to meet the £10m threshold ( rather than lacking suitable experience), or expecting higher protection as a retail client.
CIPFA published its revised Prudential Code and Treasury Management Code on what for many people was the last working day of 2017, so the first week of 2018 was spent digesting the various changes. As trailed in the consultation, the Treasury Management Code was expanded to cover investments made for service and/or commercial reasons. One year on, authorities should now be well on their way to compiling their catchily named Non-treasury Investment Management Practices.
The biggest new entry in the Prudential Code was the requirement to produce an annual Capital Strategy report, summarising the detail contained in many other reports including the capital programme, capital receipts, asset management, treasury management, other investments and liabilities, knowledge and skills, and minimum revenue provision. It also seems the logical report in which to get all the prudential indicators approved, although the Code only requires a couple of them to be included.
The Prudential Code is one of the pieces of statutory guidance that local authorities are required by law to have regard to. CIPFA published accompanying guidance notes in September 2018, but apparently frustrated by its own ambiguous wording in both documents over borrowing in advance of need, announced in October that it would be issuing further guidance. We wait with bated breath for further exhortations not to borrow to invest.
Not wanting to miss out on the surfeit of statutory guidance, the newly renamed Ministry of Housing, Communities and Local Government issued two documents in mid-January for English authorities.The investment guidance is wide ranging and will require much work from finance and property teams if it is to be fully complied with, for example in disclosing the contribution that investments make towards the place-making role of the authority and assessing the barriers to entry and exit in the markets in which it is competing.
It also extends the scope of some accounting standards, by requiring annual valuations in line with IAS 40 to be applied to all properties held even partially for financial gain (the standard itself only applies to those held purely for profit) and extending the impairment provisions of IFRS 9 to all loans irrespective of accounting classification.
Some aspects of the investment guidance will actually be quite difficult to comply with – e.g. explaining how properties can be liquidated at short notice, setting maturity limits on shares in subsidiaries and declaring how each investment is funded. We expect that most authorities will adopt a pragmatic approach to compliance in these areas.
March saw the publication of long-awaited regulations permitting local authorities in Wales to invest in money market funds on the same basis as those in England. Its good to see that 14 years of lobbying since the introduction of the prudential regime in 2004 has finally paid off.
April Fool’s Day is always an amusing date to start the new financial year, and this time round we adopted the new IFRS 9 accounting standard for financial instruments. The main changes affect the accounting for investments including shares and service loans, with more instruments being “marked to market” annually through the General Fund, and a provision for doubtful debts being put aside for all loans whether made for treasury management or service reasons.
The impact of “marking to market” the billions held in pooled investment funds drew much attention late in the day, and English authorities finally achieved a statutory override in November to show such gains or losses in an unusable reserve instead of the General Fund for at least five years. Let’s hope it takes rather less than 14 years for the devolved administrations to put a similar override in place.
Although IFRS 9 took effect from April 2018, since the first accounts incorporating it need not be published until May 2019, not all authorities have fully grasped its implications yet. This unwelcome situation is exacerbated by government and CIPFA amending the rules mid-year, although I must admit the pooled funds override was better late than never. At this late stage in the year, CIPFA still plans to issue an update to the 2018/19 Code of Practice and revised guidance notes on the subject of debt restructuring.
If Wintertime rule changes are untimely, I’m not sure of the adjective to describe the so-called clarification note on LOBO loans issued in May this year and applying retrospectively to 2017/18. Reading between the lines, this suggested that the ten or so local authorities with inverse floating LOBOs had been accounting for them incorrectly, delaying their audits beyond the July deadline. Most of the affected authorities have subsequently had their accounts signed off without making any major adjustments and it seems to be a bit of a storm in a tea cup.
Thankfully, we heard in December that the planned adoption of IFRS 16, the new lease accounting standard has been delayed for a year to 2020/21. Bringing more leases onto balance sheet and changing the definitions of lease term and payments will have wide-ranging effects and local authorities should use the extra 12 months to understand the impact on their lease and PFI contracts.
Wishing all my readers a Merry Christmas and a regulatory change-free New Year.
DavidGreen is Strategic Director at Arlingclose Limited
