Has Wales banned money market funds?
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Surely not, I hear you cry. If the devolved government actually prevented local authorities from using one of the most secure and liquid investments available, then it would cause an outcry, wouldn’t it? Well, you’re right, there isn’t actually any regulation banning the use of money market funds in Wales but if you look a little closer, then arguably, they might as well have.
Money market funds (MMFs) are widely used for short-term investment by all sorts of public and private sector organisations, including hundreds of local authorities. They are designed to put security first, then liquidity and finally yield, which means that they exactly meet the objectives of the official “Guidance on Local Government Investments” and the CIPFA Code of Practice. The high security arises because they are diversified pools of short-term investments in highly rated banks, providing investors with access to many additional counterparties; this is reflected in their AAA fund credit ratings and their average constituent credit ratings of AA- or A+. They are highly liquid because investors are able to withdraw their funds on the same or next day. Yields are currently around 0.35% to 0.50%, not great, but a decent reflection of the funds’ low risk nature.
However, because an investment in a MMF is achieved by purchasing shares in the fund, they come within the scope of the Capital Finance Regulations in England, Wales and Northern Ireland. These regulations class the purchase of shares as capital expenditure, and the selling of shares as generating a capital receipt. The English regulations explicitly exclude shares in MMFs from these rules, while Northern Irish regulations do this indirectly. But there is no such exemption in Wales.
This acts as a major disincentive for local authorities in Wales to use MMFs, because they must either set aside capital receipts or other reserves to finance the “expenditure”, or charge their revenue account with Minimum Revenue Provision. Alternatively, they may be tempted just to ignore the regulations, hoping that if they pull all the money out by year-end then the auditor won’t notice.
So, local authorities in Wales are being forced to manage their investments with one hand tied behind their back. In today’s heightened credit risk environment, surely Wales should be allowed access to the same secure, highly diversified and liquid funds as the rest of the UK. I don’t think this is a deliberate policy decision of the Welsh Government, just a regulatory oversight. After all, there was an exemption for MMFs in Wales from 2002-2004, but it wasn’t repeated when the old approved investments regime was abolished. With the tenth anniversary of the Prudential era nearly upon us, it would be a good time for Welsh Ministers to amend their regulations along the lines of the rest of the UK.
David Green is Client Director at Arlingclose Limited. This is the writer’s personal opinion and does not constitute investment advice.
