Committee report on local authority investment practices

Launching the report, Dr Phyllis Starkey MP, Chair of the Communities and Local Government Select Committee, said:

"While few predicted the events that shook the financial system last year, their exceptional nature provides no excuse for the substantial failures that occurred in local authority financial arrangements.

"Our inquiry has exposed a significant level of misunderstanding, misinformation and complacency - not just within local authorities, but also amongst those who provide them with specialist investment advice.

"These failures put taxpayers’ money at unnecessary risk. Tougher regulation of treasury management advisers and tighter scrutiny around local authority investment decision making are needed to ensure that the emphasis is on security first, while also providing sufficient liquidity and profit."

In 'Local Authority Investments', the Committee endorses the Audit Commission’s censure of rudimentary mistakes made by seven local authorities. However, the Committee argues that investment practice problems identified in that investigation extend far more widely across many other local authorities. It also criticises the Audit Commission’s failure to issue sufficiently rigorous auditing guidelines for the prevailing financial climate.

Setting out their key findings the cross-party committee:

• rejects any notion of restricting where local authorities may invest taxpayers’ money, but recommends that better information and advice are given to local authorities to help them decide the best place to invest their money;
• criticises the degree to which the effectiveness of treasury management services vary widely across local authorities, in some cases because these organisations do not follow the guidance provided by the government but also because many local authorities do not retain sufficient expertise;
• criticises as ‘misleading’ the claims of some professional treasury management advisers that they give information only, not advice, on investment counterparty creditworthiness to local authorities;
• criticises the Audit Commission for failing to realise that local authority treasury management had become increasingly risky and for issuing inadequate guidance within the increasingly volatile economic context after the Icelandic banking collapse. Had the Commission placed greater emphasis upon the auditing of local authority treasury management within its procedures, the Committee suggests, less public money would now be at risk;
• endorses the government’s approach to helping local authorities with funds in risk in failed Icelandic banks, finding it an appropriate way to protect the council tax payer whilst avoiding the "moral hazard" of an unconditional, open-ended guarantee for local authority investment.

Setting out their key recommendations the cross party committee calls for:

• all local authorities to ensure that financial officers have sufficient training and expertise and to establish an audit committee with specific responsibility to scrutinise the treasury management function and require rigorous reporting of all decisions taken under it by officials;
• Government, Chartered Institute of Public Finance and Accountancy (CIPFA) and the Local Government Association (LGA) to work in partnership to ensure that the treasury management system is kept under review and to identify ways for local authorities, particularly smaller ones, to share expertise or information and pool their treasury management resources;
• the Audit Commission to review the priority it places on treasury management when deciding which areas of local authority activity to audit;
• CIPFA to revise its guidance Codes relating to treasury management to ensure local authorities are better informed about the scope of their annual investment strategy, and how to use professional advisers more effectively while avoiding over-reliance on such services;
• the Audit Commission, CIPFA and the Financial Services Authority (FSA) to re-examine the role and reliability of treasury management advisers and the manner in which they discharge their duty of care to local authorities in their treasury management;
• a full investigation by the FSA of the services and potential conflicts of interests of local authority treasury management advisers;
• the Audit Commission to review the priority it places on treasury management when deciding which areas of local authority activity to audit;
• the Government and CIPFA to revise their guidance on credit ratings, highlighting the risk of over-reliance on them and the need to view them within the context of wider financial economic information and advice.