Investment guidance: are regional rules helping?
0Local Government is a devolved matter in the UK, meaning that the regional governments in Wales, Scotland and Northern Ireland set their own laws, regulations and official guidance for local authorities to follow. At first glance, this seems one of the most obvious areas for Westminster to devolve responsibility. But since most decisions are devolved further to the local councils themselves, do we really need four separate sets of rules on how those decisions should be made? Investment regulations are a good example of where we have some odd regional differences.
The purchase of certain investments such as shares and bonds can be classed as capital expenditure, as a method of government restricting, but not prohibiting, their use by local authorities. Corporate bonds, for example, are only capital expenditure in England if they were bought before April 2012. In Wales and Northern Ireland, it is not the date, but the purpose of the purchase that is important – corporate bonds bought for service purposes are capital expenditure, whereas those bought for treasury management reasons are not. Share purchases are always capital expenditure in Wales, and usually are in England too, unless they are shares in a pooled fund or unit trust. Listed shares are not capital expenditure in Northern Ireland if they were bought for treasury management purposes.
Official investment guidance in England, Wales and Northern Ireland includes the concept of specified investments, which are supposed to be relatively low risk and to which authorities “need only make minimal reference in their strategies”. But due to small differences in definitions, building societies without credit ratings but otherwise of high credit quality are specified in England and Wales, but not Northern Ireland. Constant net asset value money market funds are specified in England and Northern Ireland but not in Wales, while accumulating money market funds are only specified in England. Certificates of deposit can be specified investments in Northern Ireland if bought from the issuer on the primary market, but not if bought from another investor on the secondary market. This rule was introduced in 2011 despite the Welsh Government dropping a similar rule in 2010.
Scotland does not have specified investments, but permitted investments instead. There is no restriction on what can be permitted, including company shares and investment properties, but limits must be set on the maximum held in each type of permitted investment. In the rest of the UK, limits are only required on non-specified investments. Making non-permitted investments is against the law. Scottish guidance is the only one to require an investment report after the end of the financial year, in addition to the strategy report before the start of the year. It is also the only one requiring authorities to review their holdings of long-term investments; the governments of the other three nations are apparently content for local authorities to buy and forget.
I’m all in favour of localism, devolving decisions down to the most appropriate level. But I fail to see what purpose is served by having four sets of investment guidance, unless it’s to keep people like me in a job! Surely deciding whether money market funds or certain corporate bonds are low risk depends entirely on each individual council’s risk appetite and investment profile. It’s a subject that Westminster, Holyrood, Cardiff Bay and Stormont should interfere with as little as possible.
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The Local Authority Treasurers’ Investment Forum September 25th, 2012, London Stock Exchange
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