Sean Nolan steps into Room151

With over 16 years of local authority treasury behind him, Sean Nolan, East Sussex’s Deputy Chief Executive and Director of Resources, is the longest standing county treasurer in the country. This year he took over the presidency of the Association of Local Authority Treasurers’ Societies (ALATS) adding to his portfolio of responsibilities which include a lead advisory role to the Local Government Association and management of the £2bn East Sussex pension fund. We spoke to him about risk, Iceland and his plans for ALATS.

Room 151: Local authorities (LAs) came in for a good deal of criticism following the Icelandic banking collapse, arguably at a time when most institutional investors lost a lot of money, one way or another.  What positives came out of that?

Sean Nolan: I think Iceland reminded all treasurers that when it comes to treasury management an additional basis point or two on your investment is really not worth it if there’s any additional risk at all to security. That’s not a criticism of those who lost money but it made that risk equation even starker. So, I think one of the main positives is that yield has been relegated to a pretty lowly third place in the pecking order behind security and liquidity. The other positive, for me, is that treasurers, generally, are now much more involved on a day-to-day basis than they were before Iceland. There was some inertia in the system and, again, that’s no criticism of those who got caught up in Iceland; pre-Lehman’s it was quite common for people to be advised to look at their cash flow and take a view of what could be lent out over more than one year, for example, and some colleagues were caught out doing that. Treasury practice has tightened up since then.

R151: Do you think LA treasury risk management systems and processes have undergone the kind of transformation they needed after 2008?

SN: The answer is yes but I would make the point though that change has been behavioural. I’m unaware of any piece of software or kit out there that makes (local authority treasury) risk management any easier or better – it doesn’t. So you’re talking about people taking practical steps to avoid bad luck. Going back to Iceland, most local authorities that I’m aware of were complying with the letter of governance arrangements; very few hadn’t taken their treasury management strategy to the appropriate board – but that didn’t avoid bad luck. So I think two things have happened, which are nothing to do with systems: firstly, treasurers are keeping much smaller counterparty lists and, secondly, there is much more active scanning of the information that was always there.

R151: Do you think treasurers are as reliant on ratings and their advisers as they were before?

SN: I’ve always taken the view that I don’t really ask advisers who should be on my counterparty list, although I may ask them who shouldn’t be on it. But I would certainly get nervous if a lot of colleagues started leaving certain institutions. To give you an example, I’ve seen a number of colleagues get out of Lloyds and RBS, I can’t comment on whether that’s off the back of advice or from following the ratings too closely but I thought I’m not going to do that because both organisations are owned by the government. My counterparty list is now very concentrated around British high-street banks and there’s an irony in that; the way of avoiding bad luck and of avoiding being in something that you shouldn’t be in, as I see it, is by being less diversified and taking a bet on the British government. To me, the next safest bet after the DMO is being in a bank that is 80% owned by the government.

R151: So you’re treasury allocation to un-specified investments is currently zero?

SN: Correct.

R151: And what about money market funds?

SN: Money market funds are on the list but they’ve had to work harder than they have in the past to demonstrate their transparency. In the past I don’t think they were as transparent as they needed to be but you can feel more comfortable today about the use of money market funds. In terms of risk, being able to defend your use of money market funds is important.

R151: Some local authorities would like to use derivatives, such as interest rate swaps, to protect against volatility in their cash investments.  As long as they don’t bet one way, that’s fair enough isn’t it?

SN: The proviso you raise is a really important one and it seems to me to be quite a difficult process to satisfy oneself about. I think the local authority sector would need a lot more training and there would need to be much more transparency around the understanding of risk when using derivatives products than is currently required.  You would also need to think through how you monitor and report any additional risk using derivatives might give you. Counterparty risk is fairly easy to report, I’ve got X with Y, but if you have lots of derivatives contracts floating about, I think one would need to understand the reporting process for that. There are some quite simple derivatives contracts and some much more complicated ones – we need to be mindful of that.

R151: Do you envisage greater treasury investment in bonds as opposed to cash instruments in the future?

SN: The problem with bonds is they carries a capital risk and personally, I would be very cautious about treasury investment directly in bonds. You get a bit of exposure into bonds through money market funds but they are taking a view on that capital risk for you and it’s part of a very diversified package. But if you were to take short term bets on bonds yourself, you would be taking on more capital risk than I would be comfortable with.

R151: And what of local authorities issuing their own bonds?

SN: I’d say a couple of things. In defence of the Public Works Loan Board – I think that’s a great institution and I think it’s been a great servant to local government and I think it’s a real shame that an artificial premium has been added to borrowing from the PWLB; it’s just increased the cost of capital to the council tax payer. However, in the world we live in, that’s happened and because the cost of capital has been artificially inflated from PWLB lending then other lending forces, i.e. bonds, may become more attractive.

R151: What do you hope to achieve in your tenure as President of ALATS

SN: Well, I want to bring together all the societies because ALATS represents counties, London, districts, urban, northern – everyone – and there’s a lot of powerful intellects there and a lot of powerful experience and I’m really looking forward to drawing on that experience so that we can present a common front and a common argument to government around things that are common to all societies. Equally, I want the individual societies to continue to flourish as it’s from the individual societies that ALATS draws its talent.