Toughen FSA oversight of public sector deposits, say MPs

• Report: Local authority investments: the role of the FSA
• Report: Local authority investment (June 2009)
• Report: Local authority investments: Government, CIPFA, FSA and Audit Commission Response
• Communities and Local Government Committee

The report then adds the FSA must then use these powers to scrutinise both the services provided and the professional independence of companies that offer local authorities 'treasury management' advice.

Launching 'Local Authority Investments: the role of the FSA' (a follow up report to their June 2009 report looking at the management of local authority investments), Dr Phyllis Starkey, Chair of the CLG Select Committee, said:

"New legislation is urgently required to tighten the regulatory approach taken to treasury management advice and activity in the public sector.

"As it stands, the FSA is powerless to intervene in the circumstances that led to a great deal of public cash being put at risk by the collapse of the Icelandic banks. Under current rules cash deposits and professional advice relating to such monies remain an 'unregulated' activity outside the FSA’s remit.

"We are therefore now calling on the Government to make the simple legislative change necessary to allow the FSA to regulate the provision of such advice. I welcome the FSA’s commitment, if that change is made, to address the concerns which the Committee has raised about the activities of treasury management advisers, including about potential conflicts of interest.

"Large sums of public money – held not just by local authorities, but also by other public institutions such as the NHS, housing organisations and universities – are affected by these activities."

Calling for a far more robust approach to the regulation of treasury management advice, the Committee also draws particular attention to the way in which treasury management firms seeking professional clients in the public sector (such as local authorities) routinely use the phrase "authorised and regulated by the FSA" on their letterheads and promotional literature.

Dr Starkey adds:

"As the FSA recognises, the reassurance such statements are designed to offer individuals means some local authority treasury management departments have no idea that the advice or information they seek for the management of their cash reserves is not regulated by the FSA.

“We welcome the intention of the professional body for people in public finance, CIPFA, to produce more information to local authorities on the services provided by treasury management advisers and the regulatory framework applying to them.

"We hope that this will be sufficient to ensure that the present regulatory situation is made clear to treasury management officials in the public sector, and that as a consequence they avoid the over-reliance on the advice provided by such firms which we criticised in our original report."