Cutting the red tape on specified investments
0I had a most enjoyable time at the 4th annual Local Authority Treasurers’ Investment Forum this week. It was great to meet so many of my blog’s readers, and there was an excellent mix of speakers to listen to and panellists to fire questions at.
For my 20 minutes at the lectern, I did my best to rip the specified investments regime to shreds, despite spotting the original author of the Guidance on Local Government Investments in the audience about a minute into speaking. I’m fully in agreement with the spirit of the guidance, which as Trevor Emmott kindly reminded me in the interval, is just to recommend that local authorities think more carefully about their higher risk investments. It’s the detail on determining high security and high liquidity that I have a problem with.
To get into the “low risk” specified category, an investment must be of high credit quality. So far, so good. But since each authority is free to set its own definition of high credit quality, the temptation is to adjust the definition to meet whatever you want to do. After all, I don’t see many councils listing the low credit quality investments they intend to make in their annual strategies. On liquidity however, the government gives us a strict limit – anything maturing within 12 months of being arranged is apparently liquid enough. You can’t pay your bills very quickly with a deposit that’s still got 10 months left to run, though. The guidance also ignores the fact that instruments like gilts and bonds can be sold or repoed before maturity – you can pay your bills using cash from your 2 year gilts.
My other bugbear is that investments are permanently classified as specified or not when they are made, with no allowance for changing circumstances later. So your investment in a recently downgraded bank can remain specified and supposedly “low risk” no matter how low the rating falls, while a government bond that matures tomorrow will still be non-specified and allegedly “high risk” if it was originally bought more than a year ago. Indeed, some local authorities will still have Icelandic investments on their books that are still specified investments, as they were originally made with a bank meeting their definition of a high credit rating and were due to mature within one year. Would any sensible person class these as low risk today?
It’s interesting to compare the local authority rules with Monitor’s statutory guidance for Foundation Trusts. In the NHS, safe harbour investments must have an A+ credit rating and mature within 3 months – the same time limit as the definition of cash equivalents in International Accounting Standards. And the FSA rules for banks’ liquid assets buffers only allow investments in governments, central banks and supranationals that can be realised for cash within 8 days. Both of these seem rather better definitions of high security and high liquidity than CLG’s.
Trevor was asked to comment on my points, and while Sir Humphrey Appleby might have defended his nine-year-old work to the death, it was refreshing to hear CLG’s capital finance guru agree that it could be time for a review. Any decision will clearly be for ministers to make, but Trevor did remind us that the government hasn’t seen the need to issue any guidance on local authority borrowing. And so if CIPFA’s Prudential Code is good enough to regulate how we contract to pay interest for 50 years or longer, maybe the Treasury Management Code can be trusted to guide how we manage our investments, allowing the government guidance to be withdrawn? Cutting red tape and central bureaucracy while promoting local accountability – this will be music to Eric Pickles’ ears!
