Olwen Dutton: The governance of treasury investment strategy under the new guidance

With local authorities building commercial and corporate strategies on a wide range of investments, the issue of governance prompted by new statutory guidance has take center stage. Olwen Dutton outlines the approach one council took to decision making and explaining its investment strategy. 

A monitoring officer was asked a little while ago about investment. “Investment strategy?”  she said. “Well, we might have one. I’ll have to check with the treasurer”.

Investment strategies tended to be fairly dry and dusty things, required to be approved on an annual basis but largely ignored outside the treasury management team in many councils.

Now with the changes to local authority funding and the importance that investments can play in financial viability, a council’s investment strategy is vitally important. Councils are now actively looking — some with more excitement than others — at investments as a critical part of what they do, integral to their core strategy.

New statutory guidance on local authority investments came into effect from 1st April 2018. This, together with the emerging climate I refer to above, has changed the way in which councils are approaching investments.

The guidance need not be followed, but as with all statutory guidance, if not, the reasons need to be clearly identified and set out in the strategy; and show what the council’s policies are.

The strategy has to be approved by full council, but other than that, councils are able to decide what form it takes, whether it is a standalone document, or part of something else, such as the treasury management strategy, for example.

There are some principles in the guidance that it would be difficult to avoid. For example, the need to disclose how the investments contribute towards “service delivery objectives and the place making role” — in effect the council’s corporate objectives.

Councils will have to find a way to include sufficient information to enable both councillors and the public to assess what investments the authority has and the risks that these present.

Sufficient knowledge is also needed. Those involved in decision making about investments must have “the appropriate capacity, skills and information” to be able to take informed decisions and understand risk.  They must also consider “corporate governance arrangements” and whether measures are in place to ensure “accountability, responsibility and authority for decision making.”

Form and function

When devising your strategy, what needs to be considered? It’s the classic thing, form follows function. We suggest you think about your corporate strategy first: What are you trying to achieve across your area, how can the investments you make contribute both to those aims and also produce a return?  What sort of return are you looking for? What is realistic? What is the council’s approach to risk going to be and how are you going to measure and assess the returns?

Who do you need to involve?  And how can you ensure that those involved are fully aware of their responsibilities and understand the key issues they are making and the considerations they should take into account.

Scarborough Borough Council provides a good example of a well-defined approach.

The council found that facilitating member briefings around the development of the strategy was key.  Enabling members — both executive and non-executive — to recognise that the overriding drivers behind the investment strategy are the continued and improved delivery of services to the community, resulted in the strategy being adopted at full council with cross party support.

Deliberately linking the strategy to, (amongst others), the council’s corporate plan, medium term financial plan and the wider commercial strategy, gave a clear contextual framework in which the investment strategy sits, and has allowed the council to articulate its appetite for risk across the board; that it is risk-aware, as opposed to risk-averse.

Incorporating risk/rate of return and industry approved investment matrices within the strategy’s processes allows for a detailed assessment of the relative risks and projected yield of each potential investment opportunity, which, combined with the raft of prudential indicators also included within the strategy, gave the council a very clear picture of its overall risk position at any given time.

One challenge has been to integrate the agile decision making necessary to operate effectively in the property investment market with the fundamental requirement for robust governance around local government decision making.  Scarborough achieved this through broad officer delegation, backed by an advisory investment governance board and a team of technical professional officers across various disciplines, who are responsible for the completion of significant due diligence measures.

It has been important to Scarborough to acknowledge that its commercial property investment strategy heralds something of a new direction for the authority.

Mindful of the requirements of the statutory guidance around capacity and skills, the council committed to working collaboratively with private sector industry specialists to assist in providing appropriate skills development opportunities both for elected members and officers across the disciplines of property, legal and finance, adding an exciting strand to officers continuing professional development plans throughout the lifetime of the strategy.     

Olwen Dutton is a partner at law firm Anthony Collins