Examination of Witnesses (Questions 125-139)
MR MARK
HORSFIELD, MR
CHRIS ANTHONY
AND MR
DAVID WHELAN
26 JANUARY 2009
Q125 Chair: Could I start with the first
question, and I guess each of you will want to answer, so if we
could try and keep it brief. The question essentially is, do you
offer advice to local authorities or specialist information?
Mr Anthony: Shall I start off?
We do offer advice in a number of areas, for example in accountancy,
capital finance issues, economic analysis, interest rate forecasting,
and in addition we do run training courses, but it is quite clear
on the counterparty issue that we act as a passer through of information.
We do not provide advice on counterparties.
Q126 Chair: Just before I move on
to the other two, who do you pass information from on the counterparty
issue?
Mr Anthony: We subscribe to the
service of all three operating agencies, that is Fitch, Moody's,
and Standard & Poor's, and we have set up a system where clients
are automatically informed of any changes to the ratings which
the credit rating agency has assigned to those particular counterparties
and they are passed on automatically to clients.
Q127 Chair: You pass all three individually,
or you do a composite?
Mr Anthony: No, we pass all information
individually. Each client has their own individual list, which
is drawn up after consultation with us with regard to the ratings
they would regard as their minimum accepted rating. We receive
advice from all three rating agencies electronically. This generates
an email, which is sent on to clients. The clients are informed
of any rating changes and any consequences that has for their
lending list. So they are fully informed of anything relevant
in that respect.
Q128 Chair: Okay. Mr Horsfield, back
to the original question advice or specialist information?
Mr Horsfield: We can give both.
In terms of investment advice, which I suppose is the key area
the Committee is interested in, we do believe we give investment
advice. That is what we are mandated to do and our clients tell
us that they want access to information that they do not have
access to themselves. We gather that information, consider it
and form a view from a wide range of sources, not simply the credit
rating agencies.
Q129 Chair: So you do not simply
pass on information which they could have got themselves?
Mr Horsfield: No, we do not. We
know that they want our interpretation on what is happening in
the financial markets.
Q130 Chair: Mr Whelan?
Mr Whelan: For the purpose of
the Committee and in the interest of full clarity, I want to spend
a short period of time, literally a couple of minutes, just to
explain exactly what we do because it does seem to me there is
a misunderstanding about exactly the role we play in the marketplace.
Sector provides a financial consultancy service to a range of
organisations including local authorities. These areas are business
advice, strategic advice, capital financing, borrowing, leasing,
options appraisal and housing subsidy for housing authorities
as well. We also provide input into their investment strategies
so they can create their strategies within the industry guidelines,
which are set originally by the Office of the Deputy Prime Minister,
and that then looks at the balance they would like to strike to
achieve allocations of cash and objectives and it looks at different
investment instruments like gilts, et cetera, they want
to pull together in that strategy to achieve their objectives
and address their risk appetite. I would like to make it quite
clear that we do not provide advice to local authorities on which
specific financial institutions or sovereign states to place their
funds. We provide rating information from the major international
rating agencies through to the local authorities. We try to help
and standardise information because quite often the rating agencies
use different terminology to describe the same outcome. This information
then becomes part of a broader authority decision-making process
into which our input is one part of that process, but we have
no further part in that process. I want to come back to that,
if I may, just shortly after I finish this submission.
Q131 Chair: Very briefly, Mr Whelan,
because I may be misinterpreting you but I feel this might have
been cleared with your lawyers beforehand and actually we would
like the answers to our questions, not a great long spiel which
you have cleared with your people before you come here, if I may
put it bluntly. The issue we are trying to grasp is what is the
added value that each of you gives to councils that they could
not do just by diligently looking through rating agencies and
reading the FT. I think Mr Anthony has been quite clear that on
the question of rating agencies you simply compile the information
and pass it on. On that narrow bit you are not providing any added
value. Would that be an accurate representation, just on the issue
of the rating agencies?
Mr Anthony: Yes.
Q132 Chair: Mr Horsfield appeared
to be saying that you do not simply pass on the rating agencies,
you give a bit of a gloss?
Mr Horsfield: Yes. Our advice
is not to blindly follow the credit rating agencies.
Q133 Chair: So just very narrowly,
Mr Whelan, I accept your agency does other things as well, but
on the rating agencies does it just pass on to the councils information
they could find themselves if they had the inclination to do it?
Mr Whelan: It does, precisely,
and it just distils the information to a common platform for them
to interpret.
Q134 Chair: So then it focuses down
on what else do you give to councils apart from the rating agency
bit, and I am not clear from what you have just said what it is
your agency actually gives that is extra.
Mr Whelan: Sector is a service.
Sector provides a range of financial consultancy services to local
authorities. It gives high level strategic advice on capital financing,
borrowing, leasing, options appraisal and housing subsidy where
appropriate for the local authorities.
Q135 Chair: This strategic advice
in relation to investments, how strategic is "strategic"?
Might it say something like, "Iceland as a whole looks mildly
dodgy, don't touch it," or is it even more strategic than
that, "Invest in Asia, not in Europe," or something
like that?
Mr Whelan: We do not provide advice
on investing in any financial institution or any sovereign state.
Our strategic advice on the investment process is input into their
investment strategy formulation, so they as an authority can gauge
what the objectives are and the risk appetite and bring that together.
Chair: So not on specific investments
at all?
Q136 Mr Betts: I think I am more
confused than I was before we started. What is strategic advice?
Councils are there with the responsibility ultimately to oversee
the treasury micro functions of their authority and you are giving
them this advice which you are saying then does not tell them,
does not direct them or lead them, or does not offer any guidance
to them even about where they may put their investments and where
they should not?
Mr Whelan: As regards financial
institutions or sovereign states, we do not provide that advice.
Mr Horsfield: Just to provide
some clarity from our side, ratings provide us with some information
but, as I said, our advice is not based on blindly following up
the rating but to say, "What might we add to that in terms
of the information added?" which I think is the crux of your
question. It is taking what we would say is a subjective overlay
or an informed overlay, looking at a whole range of other factors—be
it press reports, economic research on particular countries, share
price movements, currency changes—and interpreting those
moves gives us a flavour of risk which may not be captured within
ratings information. That is where we see our role, bringing it
all together and then advising our local authority clients on
the implications of that informed view.
Q137 Anne Main: My colleagues and
I find it so incredibly vague and I am just wondering whether
the local authorities you dealt with felt it was specific advice,
because there has been a concern that there has been over-reliance
on the advice or information, depending on how it is, and it sounds
to me somewhat as if there is a back-pedalling from how much advice
was being given to local authorities I do not want to say that
is the case but, Mr Whelan, listening to what you have just said
I would be hard pressed to know exactly what it was you were giving
to a local authority from what you said. Do you think that any
local authority dealing with you would have been fully informed
as to the extent of the advice or otherwise they were getting
and how much reliance to put on it?
Mr Whelan: Yes.
Q138 Anne Main: I think one of my
colleagues said that you could get that from reading the Financial
Times over a coffee break, some of the things people have
picked up on. Would you say then that many local authorities actually
do not need your services if you are not going to give specific
investment advice to them?
Mr Whelan: The subject matter
we are talking about at the moment is one part of a range of services
we provide as part of our contract. In this one part we do not
give advice on which institution to place funds with or which
sovereign state to invest with.
Q139 Andrew George: Can I be clear
on this, because in your blurb you are saying, "We are market
leading in providing treasury management advisory services to
public service organisations." You go on to say later on
that you are helping your clients achieve their financial objectives.
"Our services are enabling our clients to reach those goals."
Surely one of the key goals of a public sector organisation is
to ensure that their investments are safe and that they seek the
best possible advice from an organisation like yours? There is
no equivocation there. It is not "with the exception of investments,"
it is, "to achieve their financial objectives," "those
goals," so I cannot see that there is anything you have said
which has indicated that you in fact are stepping back from actually
offering advice on investments?
Mr Whelan: If I may, just to help
the Committee get some clarity on this, if you go back to exactly
what it is Sector provides to local authorities and what we categorically
do not provide, we provide strategic advice on capital financing,
borrowing, options appraisal, leasing and where appropriate housing
subsidy for a housing authority. So there is an overall package
of services within this one contract with local authorities. In
that contract we do not provide advice on the credit quality of
any financial institution and we do not provide advice to local
authorities as to where to put their funds in terms of organisations
or in sovereign states, just so that we are clear on that. That
is useful.
| 
