Supplementary memorandum by the Local
Goverenment Association (LAI 23A)
1. The LGA welcomes the opportunity to provide
evidence on local authority treasury management practices. Following
the oral evidence session, the LGA undertook to provide a supplementary
memorandum responding to the Committee's questions.
BACKGROUND
2. The Committee discussed the numbers of
authorities affected by the collapse and the relative impact.
Authorities in England had deposits with Icelandic banks or their
UK subsidiaries made up as follows:
| Number of
councils
| Number with Icelandic
deposits at risk
|
| District Councils | 238 |
61 |
| County Councils | 34 | 15
|
| Unitary/Metropolitan Councils and London Boroughs
| 116 | 28 |
| Other (eg police, transport etc) | 80
| 20 |
| |
|
ADVICE OR
INFORMATION—WHAT
SERVICE AUTHORITIES
THOUGHT THEY
WERE RECEIVING
3. The committee asked the LGA what authorities thought
they had been receiving in terms of advice from different Treasury
Advice agencies. The LGA undertook to research this area.
4. Local authorities periodically review their treasury
management contracts with details of the services provided summarised
in a contract between the council and their treasury advisor.
5. The LGA wrote to 13 local authorities, who provided
extracts of their contracts with treasury firms. Contracts are
individual to the authorities and the LGA undertook not to quote
individual authorities by name. Information provided by local
authorities is attached as an appendix.
6. None of the authorities that responded reported having
a contract with Arlingclose and so the LGA contacted that company
direct. Arlingclose explained that they had already provided a
copy of their standard contract to the committee.
7. The LGA found a variety of contracts in use. In part
this can be explained by authorities having different circumstances,
for example some councils have significant levels of loan debt.
Those councils may specify treasury services include assistance
on loan rescheduling, whilst debt-free authorities will not require
this service.
8. The contracts typically refer to "advice",
indeed the contract for one District Council is titled a: "Mandate
for Treasury Consultancy and Investment Advisory Services".
The contracts then specify what areas that "advice"
will cover. A metropolitan council contract with Butlers stated:
"… advice will be provided with respect to the "in-house"
management of investments, giving due regard to our economic analysis
and near and medium-term interest rate forecasts. Suggestions
with respect to investment instruments, periods and amounts of
investment will be provided."
9. A district council contract (also with Butlers) stated:
10. Contracts described how counterparty lists are constructed
(the lists of banks that authorities will use to place deposits)
are and maintained. A district council contract with Butlers stated:
"Monthly summaries of credit ratings will be supplied.
Advice will also be provided immediately of any changes to these
ratings."
Outsourced treasury management arrangements
11. The Committee asked about the extent to which authorities
outsource their treasury activities. At 31 March 2007, some
£4.2 billion of local authority funds were managed externally
as against £23.7 billion managed internally (Source: CIPFA
Capital Expenditure and Treasury Management Statistics 2006-07,
Table 9). Treasury management comprises:
— Managing short term cash for the authority.
— Managing longer-term local authority funds.
12. The LGA understands that there are four fund management
groups that offer external management of local authority funds.
These are:
— Morley Fund Services (Part of the Aviva Group).
— Investec Asset Management.
13. LGA approached local authorities and spoke with an
external fund manager to establish current practice. The key messages
are.
— Short-term funds were typically managed in-house,
using credit referencing information collated and provided by
Treasury Management Firms.
— Few authorities use external fund managers. These
companies would typically be contracted to manage a block of the
council's cash holdings.
— Those authorities that did use fund managers typically
used them to manage longer term sums.
14. One possible reason for the decline in external fund
managers has been the rise of Money Market Funds. These are externally
managed funds, typically placing deposits with highly rated banks.
They may also be rated by the different credit rating companies.
15. The distinct features of such funds are that:
— Authorities can pool their deposits and gain access
to the highest rated banks that don't typically accept smaller
deposits (under £10 million).
— Authorities do not have to tie up funds for longer
periods, and the deposits can normally be accessed quickly.
18 February 2009
APPENDIX
METROPOLITAN AUTHORITY—WITH
BUTLERS
"(j) Investment policy
(1) funds managed internally—advice will be provided
with respect to the "in-house" management of investments,
giving due regard to our economic analysis and near and medium-term
interest rate forecasts. Suggestions with respect to investment
instruments, periods and amounts of investment will be provided.
A weekly newsletter dealing specifically with this subject will
be delivered electronically. Butlers will arrange investments
for the Council if so desired.
(2) Credit ratings—Butlers will maintain a constant
review of the Council's investment counterparties devoting particular
attention to the ratings assigned to them by the major credit
rating agencies. Summaries of credit ratings will be supplied
and updated when changed. The Council will be advised immediately
of any changes to these ratings and the implications of these
for its list of investment counterparties."
DISTRICT COUNCIL—
WITH BUTLERS
"Investment Advisory Service
Advice will be given with regards to the internal management
of funds. In conjunction with our interest rate forecasts we will
provide advice on the period of investment. Advice will also be
given on the use of both Specified and Non Specified investments.
In addition we will give specialist advice on specific investment
instruments that comply with the Councils' attitude to risk. The
investment service will include performance monitoring of all
products and an agreed exit strategy for existing instruments.
A weekly newsletter with investment advice will be sent electronically.
Credit Ratings
Where funds are invested externally, advice will incorporate
an initial assessment and constant review of the credit rating
of counterparties selected by the Councils. The counterparty list
will be prepared using all three rating agencies Fitch, Moody's
and Standard & Poors.
Monthly summaries of credit ratings will be supplied. Advice
will also be provided immediately of any changes to these ratings."
At end of contract
"This material has been produced or compiled by ICAP
Securities Ltd. This document is not, and should not be construed
as, an offer or solicitation to sell or buy any investment or
product. The information and opinions contained in this document
have been derived from sources believed to be reliable and in
good faith or constitute ICAP's judgement as at the date of this
document but no representation or warranty, express or implied,
is made as to their accuracy, completeness or correctness. Any
information contained in this material is not to be relied upon
as authoritative or taken in substitution for the exercise of
judgement.
Redistribution in whole or in part is prohibited. To the
full extent legally possible, ICAP accepts no liability whatsoever
for any loss arising from any use of the material. This material
is for use by Eligible Counterparties and Professional Customers
only and it is not intended for Retail Clients as defined by the
rules of the FSA."
DISTRICT COUNCIL—SECTOR
The authority reported:
It had a standard contract with Sector. They provided advice
on the strategy and counterparties and sent through a ratings
list monthly with alerts following changes as required.
Sector used Fitch ratings. No specific advice re individual
investments—which were done in accordance with agreed counterparty
listing and made via brokers in most instances, although some
done direct.
District Council—Butlers
"Butlers will maintain a constant review of the Council's
investment counterparties devoting particular attention to the
ratings assigned to them by the major credit rating agencies.
Summaries of credit ratings will be supplied and updated where
changed.
The Council will be advised of any changes to these ratings and
the implications of these for its list of investment counterparties".
Urban Authority—Treasury Agency not Stated
Credit Ratings
Our advisors will maintain a constant review of the Council's
investment counterparties devoting particular attention to the
ratings assigned to them by the major credit rating agencies.
Summaries of credit ratings will be supplied and updated
where changed. The Council will be advised immediately of any
changes to these ratings and the implications of these for its
list of investment counterparties."
District Council—Sector
Contract is called a "Mandate for Treasury Consultancy
and Investment Advisory Services".
"Advice on investment counterparty credit worthiness,
including the provision of prudent parameters established in the
light of information from the UK's leading credit rating agency,
various other analysts as appropriate and associations. Reports
and analyses to be provided monthly or when practicable."
The contract includes the further statement:
"It should be noted however that the firm is not a professional
credit rating agency and the credit worthiness of investment counterparties
should be verified at the time of dealing".
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