Examination of Witnesses (Questions 80-99)
MR MIKE
WEAVER, MR
PETER ANTILL
AND MR
ALAN CROSS
26 JANUARY 2009
Q80 Anne Main: Yes, that is every
year, but there is within the guidance the ability for people
to make alterations as the year goes by and the thought is that
a year seems a long time in today's economic climate and it may
be other councils—I do not know about your own—are
not updating councillors and people who have not got the necessary
expertise themselves but who are involved in making decisions
as quickly as they can and with the latest up-to-date information.
I know there is that annual obligation, but what we are saying
is, should something be put in place which makes that happen more
frequently?
Mr Antill: In Tewkesbury we have
an investment panel of members who meet more regularly as well.
They would perhaps refine policy but they would not be making
individual investment decisions looking at counterparties. I think
that would be a local authority officer function.
Q81 Anne Main: Mr Weaver and Mr Cross,
do you have any comments on that?
Mr Weaver: I think this is an
example where CIPFA's Prudential Code and its Codes of Practice
do need some further reflection. Clearly, from a county perspective
the scale of operations are more significant to the in-house expertise.
Simply by the scale of the organisation and the importance of
the sums involved it does mean that counterparty lists need to
be regularly reviewed, but that is not to say that credit rating
agencies or advice from consultants should be slavishly followed.
I think you have got to look at the wider economic circumstances
which are prevailing—
Chair: We are going to move on credit
rating agencies in a second. What Anne is pursuing at the moment
is the level of control members have over this, could be expected
to have over this and the frequency with which changes in policy
ought to be reported to members. If we could leave the credit
rating agencies to one side for the moment.
Q82 Anne Main: How do they keep abreast
of changes officers may be making? There is only annual reporting,
so are councils kept enough in the loop on this?
Mr Weaver: It is difficult for
any of us, I think, to generalise. From the experience of our
own councils, opportunities are taken to report progress on how
the strategy is coming along. That covers the financial performance
and the operating climate in which we are working, so certainly
as we have come through the last six to nine months, as the operating
environment has been very abnormal—these are not normal
times—it has been necessary to ensure that members are briefed
and appraised on the measures which are being taken to protect
the funds that we are responsible for.
Mr Antill: Can I just mention
an issue about members, because I think fundamentally as well
we need to make sure members are properly briefed and trained
because some of these transactions are very complex and I think
it is our responsibility as finance people to make sure that our
members get adequate training as well.
Q83 Anne Main: Is that feasible?
I do not want to labour this point, but no member that I have
ever seen a c.v. for has ever stood on a local council election
mandate saying, you know, "Trust me, I'm an accountant."
How reasonable do you think that is, the training? What level
of training are you talking about?
Mr Antill: A fundamental basic
understanding.
Q84 Chair: Are you talking about
all councillors or a small subset of councillors?
Mr Antill: I think the small subset
of councillors, the ones who would sit, for instance, on my investment
panel, and I think we should look for this.
Q85 Anne Main: Does that happen in
Tewkesbury?
Mr Antill: It does, yes.
Q86 Anne Main: Does that happen,
Mr Weaver?
Mr Weaver: Yes.
Q87 Chair: And in Reading?
Mr Cross: We do not have a local
investment panel. Going back to your original question, I would
say the fact is that some authority members do not receive particularly
frequent reports on the actions they take. The lead councillor
may receive some briefings about progress. I think my reflection
back to you is that I am not sure, if we were briefing members
more frequently, we would necessarily not be in the bath and having
a lot of money with Icelandic banks.
Chair: Right. Can we move on then to
the credit rating agencies?
Q88 Jim Dobbin: We are talking about
the value of credit rating agencies really. Do you think that
local authorities when they are looking at the financial institutions
could do without advice from credit rating agencies?
Mr Weaver: The information they
provide is part of the whole picture. It is not the whole picture.
Credit rating agencies are not regulators, they are not auditors.
They are fallible. Their pronouncements need to be studied and
understood but not slavishly followed and it is important that
the treasury management team in a council is taking a wider view
than simply relying on a single set of businesses, frankly, not
agencies. They are not agencies of government, they are businesses
selling information and they are fallible; they are not infallible.
Mr Cross: Local authorities did
not use credit agencies substantially before the BCCI affair of
some years ago. They substantially used them afterwards.
Q89 Jim Dobbin: I remember the BCCI
affair. I was a candidate in the town where that happened, where
they lost £6 million.
Mr Cross: Yes. They are important,
but they are part of the consideration.
Q90 Jim Dobbin: Just to make sure
that local authorities have access to the money markets—and
that is essentially really important—do you think anything
further could be done to ensure that local authorities have access
to the best information possible?
Mr Antill: I think Mr Weaver said
it all. Credit agencies are part of it, advisers are part of it,
the general look at the economy and being aware is part of it.
The point I made is that it is much more difficult for that in
a small district with a very small team, but I agree with Mr Weaver's
comments.
Q91 Jim Dobbin: Do you think that
an executive body could actually provide that kind of information,
or would you like to see at least a City body do that, information
on the financial markets to local authorities? Do you think it
needs something else other than the credit rating agencies?
Mr Cross: My own experience is
relying on advisers and informed by credit rating agencies, taking
our own view of that advice, thinking about the issues. So there
are probably different reputational risks, for example, in lending
money to Icelandic banks, to Irish banks, to UK banks, to European-based
banks if it goes wrong.
Q92 Andrew George: I just want to
take you back to the period late September, early October, a period
of high anxiety in the money markets, Fannie Mae, Freddie Mac,
Lehman Brothers, and so on, had just recently happened. No doubt
local authorities will have been looking for advice from all sources
on a daily basis, I would guess, at that stage, including presumably
from the credit rating agencies at that stage. Would you expect
to be contacted by the rating agencies on a daily basis if they
had identified an issue of concern, and would you expect some
kind of communication to be coming out on a daily basis to warn
local authorities of something they had identified?
Mr Cross: Not from the agencies
because we were more or less on a daily basis receiving communications
from our advisers in the market which sort of led to advisers
bluntly saying, "Don't lend any money to any bank, place
it with the DMO," which I can understand in the context of
the need for capital protection.
Q93 Chair: Can I just clarify, you
were getting advice from your advisers?
Mr Cross: Yes.
Q94 Chair: May I ask who your adviser
was?
Mr Cross: Our adviser at that
time was Arlingclose.
Mr Antill: Our adviser was Sterling.
Mr Weaver: We were with Sector.
If I could add a comment—and again this may be more of a
county perspective or metropolitan council or London council,
but during the late summer and early October, when the markets
began to become very, very fragile, of course we could see market
rates, relationships between LIBOR and base rate, were signifying
that the banks actually did not trust each other. Now, in those
circumstances the question I posed in the office was, "If
the banks don't trust each other, then I don't think I'm going
to either." So it is not just a question of what intelligence
is there but how will we use the market signals, market indicators,
to be interpreting what is going on in the financial world.
Q95 Mr Betts: If I could come on
to external advice. I think you understand that many authorities,
particularly small authorities, will want to buy in that expertise
because they simply cannot afford to have it in-house, though
often quite large councils have it as well. Could you say typically
what is the nature of the contract you have with external advisers,
because there has been a bit of discussion around this, which
we certainly had at our last hearing, about whether what was being
offered was advice or information?
Mr Antill: What I get is advice.
I believe I get and pay for advice and with it they give advice
on counterparties and they also help us frame our strategy and
policy as well.
Q96 Mr Betts: Do they say, "That's
a good place to invest and this isn't"?
Mr Antill: They will not say specifically,
"That place is not a good place to invest," but they
will say, "That doesn't meet your policy." It's for
individual authorities to carry out that risk assessment, I think.
Mr Cross: In the course of the
last year we have certainly had advice that certain institutions
were not good places to invest.
Q97 Mr Betts: Including Icelandic
banks?
Mr Cross: Including Icelandic
banks.
Q98 Mr Betts: So your advice was
that Icelandic banks were not a good place to invest, but other
councils had advice from people, reputable advisers, that it was
all okay, "Your money's safe with them"?
Mr Cross: I cannot speak for what
advice other councils had.
Mr Antill: We had an Icelandic
investment in January of last year and we had no advice at that
time that there was a concern. Their ratings were good and we
made an investment of about 3% of our portfolio.
Q99 Mr Betts: And at no time until
the bank failed did you have any advice -
Mr Antill: We had advice through
the year to not invest in Icelandic banks, later in the year,
but we had a fixed term investment.
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