Examination of Witness (Questions 40-59)
MR STEVE
FREER AND
MR CHRIS
BILSLAND
19 JANUARY 2009
Q40 Anne Main: The public out there
are going to want to know, if all those ratings were available
to councils, how did this happen.
Mr Bilsland: Because those credit
ratings were at all times showing those Icelandic banks to be
of investment grade.
Mr Hands: I am still disturbed by the
reporting line and the decision making process, but that is for
later in our inquiry.
Q41 Sir Paul Beresford: Does CIPFA
or anybody run courses for members in this area?
Mr Freer: Yes, we do. A number
of members attend our courses. I said in my first answer that
we try to put an emphasis on good governance in the style of the
Treasury Management Code. We do recognise this is an area of ongoing
challenge and this is something that we will come back to when
we do our substantive review in a few months' time. For me, the
challenge is about working out a good procedure, to give assurance
on how frequently a departure from the strategy or a significant
move within the strategy will be reported and so on, the point
that Mr Hands has raised. Also, there is the challenge about how
we get confident engagement from members in this area. Inevitably,
most members start from a pretty low base. Training courses may
well be part of the solution to that. CIPFA provides some and
I think some of the treasury advisers provide them as part of
their service to clients as well. Also, we have to encourage members
to role their sleeves up and pitch in. Even if they do not feel
they are competent to carry out a five star scrutiny exercise
in this area at the moment, let us start with a two star attempt.
Let us recognise that we are working on a learning curve here,
building member knowledge and confidence.
Q42 Chair: I do not think people
generally do get elected to a council in order to become a huge
financial expert. If it is not reasonable to expect them to have
the knowledge to be able to challenge the professional staff who
should be properly qualified to do it, is there any scope in the
CIPFA advice for the suggestion of bringing in an external expert
to a scrutiny committee? The FE college where I am on the audit
committee has people who are not on the board on the audit committee
in order to bring in the additional expertise.
Mr Freer: There is the facility
for authorities to do that and I think some authorities do bring
that kind of expertise in.
Q43 Chair: It would be helpful to
know of any authorities which do. If you cannot tell me now, perhaps
you could tell the Committee later. That would be very useful.
Mr Freer: Whether they have done
that specifically in the treasury management area I do not know
but certainly as a general approach to good scrutiny that approach
is taken.
Q44 Mr Betts: Authorities can do
that. Is there any way in which you ought to be revising your
guidance to encourage them to do that, to give a bit more guidance
about how to do scrutiny properly on what, I accept, is a very
technical and quite complicated area, where most members are probably
saying, "We would rather not be involved in that; let us
go on to something more interesting"?
Mr Freer: That is a good point
and certainly one we should consider.
Q45 Mr Betts: If we were briefly
characterising what the guidance says, it says to local authorities,
"Rely on credit rating agencies, even though we know they
are only going to tell you the bad news once it happens".
Mr Bilsland: The ODPM guidance
is specifically to use credit ratings but not to rely on them
entirely. That is why we are where we are. If all you did was
rely on credit ratings, you would be at real risk because credit
ratings are historical.
Q46 Mr Betts: Many councils might
say, "We are told in the public guidance credit ratings are
everything. We are not really told we have to do anything else".
An authority can have no specialist officers, rely on external
advisers and those advisers might simply give information about
credit ratings. How is that of any real help? They are complying
with the guidance but the guidance is not really any use in that
sense, is it?
Mr Bilsland: The guidance first
of all says look at credit ratings but do not rely entirely on
credit ratings. For years that has been good enough.
Q47 Chair: BCCI was not exactly good
enough, was it?
Mr Bilsland: BCCI is interesting
because BCCI was on a Bank of England list of approved banks to
place deposits with. Those authorities who put money in BCCI claimed
that one of the reasons they put it there was simply because it
was on that list. The list has disappeared and we have a whole
new system in place for localised decision making and instead
we use credit ratings.
Q48 Chair: What that demonstrates
is that councils were looking at the credit ratings and not doing
the other bit which is, "Do not rely on them entirely".
Mr Bilsland: Until this year the
chance of an investment grade bank defaulting was not on anybody's
radar screen at all. I do not think the Committee should be surprised
if it finds out that, in a lot of local authorities, once they
were comfortable that a bank's credit rating put it at investment
grade, as long as there was not anything that they picked up from
the newspapers or which came to their attention, it was probably
safe to deposit money there. With the Icelandic banks, it was
not in the public domain that there were serious problems to do
with their position. It was not well known right until the very
end.
Q49 Sir Paul Beresford: Would you
not say that BCCI proves the point you have just been making?
Very few local authorities took heed of the fact that BCCI was
on that list. They did their own assessment and got out or did
not get in. Very few got caught with BCCI.
Mr Freer: The important point
to emphasise is the whole structure and framework that we are
now operating, post-BCCI, in many ways has its origins in the
difficulties of BCCI. Those were the days of approved lists. BCCI
was on the list and therefore people put money into it. The other
great lesson of BCCI was that some authorities were not dispersing
their risk across a number of institutions. One or two organisations
were famously caught out having all of their money in that one
pot. I hope the Committee will see copies of the code. Even though
it may sound like less than interesting weekend reading, the code
is very brief and I think very distinctive in its approach and
its emphasis on all of the risks that are associated with this
area and its prioritisation of the risks on security and liquidity.
If you read the code, you will see that speaks risk very loudly.
The position on ratings agencies comes from the 2004 guidance
from what was then ODPM and is now DCLG. It does not encourage
people only to look at the ratings and place complete reliance
on them. On the contrary, it emphasises the need to take the information
into account but also have regard to any other information. The
challenges for authorities are what can be done in that second
space. What other information can they gain access to? Obviously
there is the information that comes from their advisers. Another
important source is the information that comes from brokers who
are out there, on the front line every day, doing deals and therefore
often well informed about what is happening and what is being
said in the market; as well as the press too. The best authorities
are having regard to all of those sources. I am sure not all authorities
are as well positioned in those respects.
Q50 Mr Betts: The problem for authorities
surely is that the guidance does encourage them to use credit
rating agencies even though you have just told us now that all
they do is effectively give an historic view of what has happened
rather than a prediction about the future. That is worthless,
is it not? It does not take a great financial arrangement and
all these agencies being paid lots of money to produce these figures
to say that the bank has gone bust when it has gone bust.
Mr Freer: I would say it is not
useless.
Q51 Mr Betts: It has not been very
useful.
Mr Freer: It sometimes does not
tell you the right answer. That is evident. Perhaps the other
important thing here is that all of this is clearly the province
of the FSA and the FSA is already on public record—
Q52 Mr Betts: Let us look at what
local authorities have been advised. They are told, "Use
credit rating agencies"—we now have severe doubts about
how much use they are but you say they are of some use—but
then not to rely on them completely. There is not any clear advice
in the guidance, is there, about what other advice local authorities
should be taking on board?
Mr Bilsland: That is a fair point.
The advice does not then go on to say, "This is the kind
of thing you ought to be doing". That is absolutely right
and that is something we have picked up as we have been looking
back into why it was a surprise that people found that they even
had money with Icelandic banks, let alone that they had lost money
there.
Q53 Mr Betts: Is this an area that
you want to look at?
Mr Bilsland: Yes.
Q54 Mr Betts: Is looking at what
Howard Knight said previously about authorities commissioning
their own particular research into institutions and maybe doing
it on a collective basis something you are going to do as well?
Mr Freer: I think potentially
that is worth looking at, yes.
Q55 Mr Betts: When you are having
a look at the role of advisers or providers of information as
we might call them, sometimes passing on no more than the recommendations
from the credit rating agency, would you want to give any guidance
to authorities or think about including in your guidance whether
an authority ought to be careful about taking on board advice
from an organisation when another part of the same organisation
is being paid commission to invest in some of the institutions
it is giving advice about?
Mr Freer: One of the areas where
potentially we could make a contribution is looking at the relationship
between the client and its adviser and what the contract between
those two parties stipulates. Clearly, if you have thought about
that deeply—and it is not an area that CIPFA has been active
in previously—one of the things that we would be looking
to ensure is that the advice that you were receiving from an independent
adviser was suitably independent. I do not want to give the impression
that there is an easy goal for us to score in that area or that
we start exploring that area on the basis that we think treasury
advisers are giving anything other than their best information
to their clients.
Q56 Mr Betts: You would not have
any concerns as a professional accountant about a conflict of
interest of one part of an organisation giving advice and another
part of the same organisation taking commissions for potentially
an authority acting on that advice?
Mr Freer: If it was as clear as
that, I would have some concerns. Therefore, this is an area worth
approaching but my instinct would be to approach it on a more
general basis, looking at that point but trying to test out if
we have the right agreement there and the right conditions to
ensure that the advice given to the authority is suitably independent.
Q57 Chair: Could I ask about CIPFA
being ahead of the game as well? It was exactly an organisation
which had this apparent conflict of interest that was advising
well over 50 local authorities. Should CIPFA not have been aware
of this potential conflict and ought you not to have been advising
authorities that this was maybe slightly dodgy?
Mr Freer: We are not the market
regulator.
Q58 Chair: I understand that.
Mr Freer: I think that is an issue
for the regulator of the market. That would be my first instinct.
Chair: You are a body that tries to provide
advice and guidance to local authority finance people.
Sir Paul Beresford: And you are providing
courses.
Q59 Chair: Indeed. This would seem
to be an area that you might have been providing authority and
guidance on. I accept you are not the regulator.
Mr Freer: I stress that if we
saw something in our view that was glaringly wrong, then I am
sure we would find a way of expressing it, but it is not our responsibility
to regulate the market and oversee the market in that way. Frankly,
if there was something as glaring as you are suggesting, I would
expect the regulator to know about it and take action on it ahead
of merely an interested party like CIPFA.
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