Examination of Witness (Questions 1-19)
MR HOWARD
KNIGHT
19 JANUARY 2009
Q1 Chair: This is the first evidence
session of our inquiry on local authority investments. I would
like to start by asking you, Mr Knight, from the survey that I
believe you have done of local authorities, how many local authorities
and of what type have you surveyed on their approach to treasury
management?
Mr Knight: I have
been trying to get responses from about 50 authorities which are
representative of all authorities. Unfortunately, returns are
still coming back in and I was taking them off the emails this
morning. I would not claim to have a representative sample by
any means, what I have got are indications and statements from
leading members. I have not been surveying the authorities themselves,
I have been talking to those elected members who have particular
responsibility for treasury management: the leaders, the cabinet
member for resources, the chair of the audit committee and the
chair of the relevant overview and scrutiny committee to get their
views and opinions.
Q2 Chair: Presumably, as the information
comes in you would be prepared to collate them and provide them
in written form to the Committee?
Mr Knight: Absolutely.
Q3 Chair: Excellent. Insofar as you
have got information already, what is it indicating?
Mr Knight: I would divide that
into a number of issues. The first I would say is mention about
the skills and experience of those elected members who have responsibility
for treasury management. The majority do not have any academic
or professional training in finance or economics, about 50% have
indicated that they have been on some basic local government finance
courses but only a minority have done work on treasury management
or specialist training on treasury management. I have asked them
about whether they think they ought to have increased skills and
training development in those areas and the vast majority have
said yes. I do not think they would want legislation to do that
but they would certainly want an encouragement for them to be
given the opportunity to do that and for that to be monitored
locally.
Q4 Chair: Have they not thought of
asking for it already?
Mr Knight: Some have, but I think
you just need to understand the wider context within which member
training and development operates. It varies enormously between
authorities up and down the country but there is a media climate,
if I can put it that way, which suggests that member training
and development is one of those unnecessary things that councils
sometimes do.
Q5 Chair: However, there is quite
a media climate about councillors who do not seem to know what
they are doing and who thereby may lose their authorities large
sums of money, one would think?
Mr Knight: That may be the case.
Q6 Sir Paul Beresford: Presumably,
they are therefore relying on advice from officers?
Mr Knight: Correct.
Q7 Sir Paul Beresford: Have you any
indication of whether the officers have had any training in this
area?
Mr Knight: It is clear that in
some authorities they do have specialist treasury management officers.
Certainly when I was chair of finance of a metropolitan authority
we did have specialist staff. If you read the PricewaterhouseCoopers
report on Kent, for instance, at the moment, it actually says
that authority, which has one of the largest investment portfolios,
does not have any of its own specialist treasury management staff.
I have to say I was pretty astonished by that.
Q8 Sir Paul Beresford: What about
the small authorities?
Mr Knight: It varies enormously.
Again, I do not think there is a simple pattern which is based
on either size or political control. I think you would expect
that those large authorities, or authorities with the largest
investment portfolios, would have their own specialist officers.
Q9 Sir Paul Beresford: Is there any
indication that smaller authorities pool their resources to obtain
this information?
Mr Knight: I do not know that,
I have been trying to talk to members rather than the officer
side of this.
Q10 Anne Main: Is there any correlation
though, from the information you have been able to glean, that
authorities which do not have any particularly trained members
and are relying on officers are doing any worse than those who
do have trained elected members?
Mr Knight: No, and certainly the
level of information I have got would not provide me with a statistical
correlation so far on that, no.
Q11 Anne Main: It begs the question
is there any point training the members, it might be better training
the officers if they are not sufficiently well trained?
Mr Knight: I would hope these
officers would be sufficiently well trained. The training of members
cannot be about detailed understanding of what securitisation
measures or other financial instruments are being used, it is
about giving people enough information to be able to ask informed
questions into informed follow-through. After all, if the banks
did not understand the level of risk they were taking with some
of the things they were doing it would be a bit of a surprise
if elected lay members could understand the detail of some of
that risk. It is about giving people confidence and enough information
to ask basic questions.
Q12 Sir Paul Beresford: With the
speed of change we have seen recently it would be rather an onerous
task, presumably, to have a committee to meet and look at the
issues?
Mr Knight: Absolutely. What we
have is a situation where every local authority is required to
produce an annual strategy and policy paper by law and to report
on its performance. Some authorities certainly do that twice a
year rather than once a year. It is also clear that a number of
authorities in the light of market information have taken to changing
their policies, either formally and having recorded that, or that
the chief financial officer, Section 151 officer, has probably
in consultation with the relevant cabinet member decided to make
further restrictions on the sorts of investments that would be
made, even if those were not officially reported and recorded.
That is based on market information. I think those authorities
which have probably got into some difficulty are those which have
treated treasury management as either routine or mundane, have
set a policy, have said, "We have not had any problems with
this, we can carry on year to year". If you read the audit
report on the Audit Commission's own failures in this matter,
I think it describes their policy towards it as routine and mundane.
Q13 Mr Hands: Can I ask you, one
of the most important things in all this is actually the reporting
lines from council officers to members. One of the problems of
the annual Treasury Management Strategy, as rubber stamped by
the annual council meeting, is that is pretty much the only time
when treasury management comes before councillors. How much work
have you done on looking at what reporting line there is, what
needs to be reported to either cabinet members or to the council
as a whole? Let us say, for example, if the council were to radically
or even marginally change its debt or investment portfolio, because
with my local authority I discovered that with the annual report
filed and then the annual council meeting to approve it you could
have a lag of anything up to 18 months before substantial changes
in the debt or investment portfolio came before elected members,
and I do not think that is unusual. How much work have you done
seeing what needs to be reported to elected members?
Mr Knight: The strategy and policy
should be reasonably comprehensive and set down the set of investment
parameters and criteria that are going to be used. What I have
found both by internet search as well as the survey is that there
is very little evidence of the scrutiny or challenge of those
officer recommendations going beyond a debate in the committee
and asking officers. I have not been able to find a single authority,
for instance, where the treasury management advisers were brought
before the committee to give advice and to be challenged. Even
in those authorities which said, "We had quite a lot of challenge
in our committee on those issues", whether it be the audit
committee or the cabinet, they actually had not gone beyond the
officer report and the questioning of officers and that is why
Ian Fifield and I for the Centre for Public Scrutiny wrote "Treasure
your assets", the report published last December, which
is basically a guide to how treasury management is and how you
can set about an overview.
Q14 Mr Hands: This is not a criticism
because I am not sure anybody has done it, but it sounds like
nobody has looked at the specific side of the reporting lines
and how quickly things have to be reported if the officers decide
to change essentially within the guidelines, within the remit
of the annually agreed policy, but nevertheless they can make
a substantial change to the portfolio without needing to report
it. It sounds like there has not been any work done on that.
Mr Knight: I do not have any evidence
on how often that was done. I do know in a number of authorities,
in the light of changing market information, officers decided
to make more restrictive criteria for the decisions they were
going to make for the future than was officially laid down in
the council's policy, and usually had discussed that with the
cabinet member.
Q15 Chair: Can I intervene on the
question you were asking for clarity. Is it within an individual
council's remit to decide on the frequency with which these matters
should be reported and what is delegated to officers to do without
reporting or is it laid down somewhere in central guidance?
Mr Knight: The statutory requirement
is that every council needs to formally approve its strategy and
policy and performance on an annual basis, but it is entirely
within an authority's discretion to review that as often as it
likes.
Q16 Mr Hands: If I can interject
there, Chair, in my authority—this is going back a few years
so it may have changed—basically the authority could switch,
in this case the debt portfolio, anything up to a third of the
debt portfolio between fixed and variable, without needing to
report it for a period of up to 18 months to members, and I do
not think that was unusual. Can I ask a further question about
the recruitment of external advisers. How, in your experience,
do councils go about (a) the decision to have an external adviser
and (b) the decision as to which one to go for?
Mr Knight: I think the use of
the word "adviser" is an interesting one at the moment
because all of them have historically called themselves treasury
management advisers but if you look on their websites at the moment
you will find the words "advice" and "adviser"
are rapidly disappearing as they describe their role as providers
of specialist information, and that is something you may wish
to take up with those who describe themselves as treasury management
advisers in due course. The second thing is I think most local
authorities would routinely—and how often they would do
this would be a matter for them—put their treasury management
advice role and responsibility out to tender, either formal tender
process or negotiated tendering processes. The exact relationship
between each council and its treasury management adviser, of course,
will be down to what is specified in the contract and that is
going to be a fairly big issue on the agenda between local authorities
and advisers in due course if some of the funds at risk are not
returned.
Q17 Mr Hands: But is it essentially
a senior officer decision to (a) go for an adviser and (b) which
one to choose subject to final approval by a cabinet member?
Mr Knight: I think in most authorities
that decision will have been delegated to the Section 151 officer
in consultation with the cabinet member responsible.
Q18 Mr Betts: On the issue of scrutiny
and the previous question, you are describing the budget process
and I think probably local authorities have not changed that much
in the last few years since I was on one with you, but the reality
surely is that councillors will tend to focus on the level of
council tax and the effect on some front-line services, quite
reasonably, and if there is a report about treasury management
it may be in some annex to budget papers and may or may not attract
a bit of discussion and probably very little real, detailed scrutiny.
I was wondering whether, in the light of the document you have
provided to us on treasury assets and the advice here about how
to go about scrutinising these matters, it might be appropriate
in the CIPFA guidance, which authorities work to, to have a requirement
that every year there should be a scrutiny hearing by the council
into the treasury management report so it gets proper, detailed
consideration by elected members and not the maybe very vague
few comments which pass at budget time?
Mr Knight: Could I say a couple
of things? I have only found one authority where they have admitted
that members initially pressured officers to take a more risky
investment strategy in the light of the performance which other
local authorities were approving, but interestingly that was one
which resiled from the position quite early in 2007 because market
intelligence suggested things were getting difficult. Similarly,
I have only found one authority where an elected member has actually
led a narrowing of the investment strategy. I will name it, it
is St Albans, where the cabinet member happens to be a retired
banker and religiously reads the financial press every day and
was concerned the authority's strategy was then too risky, and
pulled back from that. I would be nervous about simply saying,
"Every year you have to do a significant over-view and scrutiny
of your treasury management function" because I think there
is a danger of it becoming routine and mundane. What I do think
you have to say to authorities is, "On a not infrequent basis
you should do a more detailed scrutiny of the treasury management
policy and performance than is simply entailed in the normal officer
type of report which is required at the moment". I think
the other difficulty is that in rapidly changing market situations—and
I think all the indications have been that we have been in that
climate for the last two years—you need to be alive to what
is happening in the market and to be adjusting and up-dating your
performance criteria more frequently certainly than yearly or
even twice a year.
Q19 Sir Paul Beresford: The advantage
of the executive member system is that you can have a member officer
report quite simply and quite quickly, the disadvantage of it
in the committee system is that you would not have the normal
audit panel which most local authorities used to have which looked
at it. Am I right?
Mr Knight: I think authorities
have far more flexibility than they think and choose to use and
which they pretend often to members and the outside world they
have. I think they could be a lot quicker on the ground than is
suggested.
| 
