Examination of Witnesses (Questions 320-339)
RT HON
JOHN HEALEY
MP, MR GRAHAM
DUNCAN AND
MR GRAHAM
FLETCHER
9 FEBRUARY 2009
Q320 Dr Pugh: We had a debate about
district councils' high exposure and lack of spread with regard
to their investments. Do you yourself consider the Audit Commission
has a role in advising small councils like district councils as
to their Treasury Management Strategy?
John Healey: No.
Q321 Dr Pugh: They advise councils
about pretty well everything else.
John Healey: The Audit Commission
and the auditors, particularly the auditors, have a role, as they
do, in essentially checking whether the guidance is being followed
by local authorities. Unless you feel that CIPFA as the profession
experts are not capable of doing that guidance job, and you asked
me about guidance, then it seems to me there is not a case for
saying the Audit Commission should be doing it.
Q322 Dr Pugh: I asked specifically
about whether they had a role in advising local councils about
their treasury management.
John Healey: No, that is a job
for CIPFA.
Q323 Dr Pugh: I put it on record
that if you go to the Audit Commission's website they are advising
councils on a whole range of things but they are not advising
them on treasury management and I found that plain peculiar. Will
the Government consider the capitalisation of local authorities'
investments in Icelandic banks?
John Healey: No, not as a matter
of course because essentially we would breach the principle of
the approach that I have described to the Committee.
Q324 Dr Pugh: In other words, they
have made an error and they have to live with it.
John Healey: They operate within,
in my view, a generally sound system of guidance. They have certain
clear duties. It is reasonable to treat them as informed investors.
It is part of the principle of the framework that we have that
local authorities should take responsibility for the decisions
they take. In circumstances which may or may not be related to
financial difficulties connected to Icelandic bank deposits, were
local authorities in severe financial difficulties I have made
clear we would be prepared to consider offering additional help,
not just funding the financial experts that can work with them,
and that may, in such circumstances, include looking at the case
for some capitalisation but that has not been the case yet.
Q325 Dr Pugh: I am thinking of the
burden on individual taxpayers, particularly in these small district
councils, and where councils have made mistakes in the past. For
example, some are rather slow to implement equal opportunities
legislation. The government has allowed capitalisation to take
place not in order to bail the authorities out but in order to
minimise the grief for the council tax payer and avoid reduction
in service. You are not going to allow that.
John Healey: We have quite a clear
programme for capitalisation of certain costs within local government.
You are asking me would we capitalise not losses but clearly deposits
and investments that may be at risk and the short answer is no.
Q326 Dr Pugh: What about Heritable
Bank? The London Councils estimate about 90% of its liabilities
are held with public bodies. Given that the Government do take
over banks, would you consider that or would the Government consider
transferring the banks assets and liabilities to a UK bank?
John Healey: There does not seem
to be a clear case for doing so that I have heard today.
Q327 Anne Main: On several occasions
you have mentioned about local authorities being informed investors.
Would it surprise you that we have just heard from the Audit Commission
that actually post-BCCI they had somewhat taken their eye off
the ball—which was the phrase I used which was not disagreed
with—in terms of auditing treasury management function within
local authorities?
John Healey: I am also aware of
the Audit Commission's study which is going to be very useful
certainly to Government and potentially to the Committee as well.
They are pointing to some areas in which the guidance or the Treasury
Management Code that CIPFA produce might be tightened up. They
are also pointing to some areas in which perhaps training and
information could be improved. They are also looking at some areas
in which accountability arrangements could be improved. In all
those areas I think their report is likely to highlight the fact
that there is good practice and high standards in some councils
but not good enough practice or high enough standards in others.
Q328 Anne Main: In which case would
you accept that in some councils the members are not necessarily
informed investors because of that?
John Healey: I do not think the
conclusions that the Audit Commission may draw, or the experience
in cases of some individual councils, undermines the essential
approach and the principle on which we should be basing our guidance
and framework within which we expect local authorities to be able
to manage their treasury function in making investments in the
future. I do not want to go back to the system we had before.
It seems to me that it strips local government of a responsibility
that they should properly be able to exercise. It makes the system
of investment and the returns, and therefore the savings, ultimately
to the local council and to the taxpayer less effective. It was
not a system that proved to be either proof against the sort of
problems that we saw with BCCI or sensible for central government
to prescribe in that way.
Q329 Mr Hands: How does DCLG liaise
with other bodies about the oversight of local authority investment
decisions? How many times a year are there meetings to discuss
the issue?
John Healey: What do you have
in mind when you refer to oversight?
Q330 Mr Hands: This might be with
bodies like the Audit Commission or bodies like the FSA. How often
in the discussions that DCLG have does treasury management come
up?
John Healey: I am not sure if
we are talking slightly at cross-purposes here. The approach that
I have tried to explain to the Committee we take as the central
department responsible ultimately is not one of oversight of the
particular investment that local authorities choose to make. We
are clearly responsible for legislation. We are clearly responsible
for the guidance which we introduced in 2004. The professional
accountancy body, CIPFA, are responsible for the more practical,
more detailed and more day-to-day advice standards and training.
In terms of our dealings with CIPFA, this sort of issue may arise
from time to time. Clearly the experience of the Icelandic banks
has concentrated minds. It means that we have certain aspects
that we need to review on the guidance. CIPFA are reviewing their
treasury code.
Q331 Mr Hands: Which aspects are
those?
John Healey: In terms of the guidance,
I think there are some questions about whether or not it is clear
enough that the first imperative and the priority should be accessibility
of funds and security of funds. I only say that because a lot
of media comment has been rather ill informed. Personally I think
that section 15 of the guidance is perfectly clear. Security and
liquidity should be considered and only then the question of yield.
There are some points there that we might look at and there are
some other aspects that this Committee may raise and others might
raise that we will certainly be prepared to consider and review
and revise the guidance if that seems to be warranted.
Q332 Mr Hands: What about the way
local authorities are able to exercise their treasury management
function? Do you think anything needs to change there? Could I
specifically ask about member involvement? How often and how big
a decision do you think should be shown to members in terms of
an investment decision or should it not be shown at all?
John Healey: It has to be shown
to members at present. The investment strategies have to be approved
by members either through the audit committee or through the full
council. The question below that is: is the scrutiny sufficient
and is the capacity of members, and actually the capacity of some
senior officers, sufficient to scrutinise these decisions? There
may well be a case for a couple of things in this area and these
are matters that we are considering at the moment. There may well
be a case for better support and training for certain members
in relation to this sort of function. There may well be a case
for encouraging all local authorities to have audit committees,
an arrangement that some do, that the system of the Audit Commission's
comprehensive performance assessment and use of resources judgments
tends to encourage but it is by no means uniform and universal.
Q333 Mr Hands: You mention the annual
strategy. Most authorities have an annual review of that strategy
that was set the previous year. Do you think there is any argument
that above a certain point—so above a certain size of investment
or a percentage of the investment pool being invested, in the
same way that any major council decision involving a major piece
of expenditure would have a level of approval—I cannot remember
what the threshold is in the 2000 Act—there is not a case
for saying anything above a certain level with a particular counterparty
should be subject to member approval?
John Healey: I hesitate only because
at first blush that sounds like a degree of prescription and rigidity
which I am not sure may be helpful in the future. I would rather
see, perhaps in the guidance, stronger emphasis on some of the
safeguards so diversification of investments, more effective and
more continuous monitoring, better scrutiny, perhaps more explicit
arrangements within local authorities such as audit committees
for doing some of this work and perhaps clearer guidance on appropriate
use of expertise whether that is internal or external. I think
that is perhaps a better approach than saying here we have a formula
which requires you to take decisions or get decisions approved
or counter-approved in a particular way rather than another. If
you think there is a strong case for it, I would certainly consider
it but at first blush it sounds like a level that might not be
appropriate.
Q334 Mr Hands: I certainly think
there is a strong case for making the frequency of reporting far
more frequent. At the moment you get a position where the council
will take an investment decision at the beginning of a financial
year which will not then ultimately be reported to members, and
there is nothing in the rules it has to be reported to members
until perhaps as much as 14 months afterwards when it comes before
the annual council meeting which is reviewing the investment strategy
of the previous year. I think there are all kinds of room there:
anything from rogue officers who are making unauthorised investments,
in terms of local authority officers taking a position on an Icelandic
bank, or whatever it might be, in a huge size without anybody
knowing about it. I think there is scope for more frequent reporting
to members than an annual review which will typically be lagging
by over three months anyway.
John Healey: In terms of more
frequent monitoring and reporting, perhaps systematic end of year
scrutiny, probably you have a strong point there.
Q335 John Cummings: Has your Department's
policy on local authority investment strategies changed since
the Icelandic banking failure?
John Healey: No. The general policy
and approach has not changed as I have tried to explain to the
Committee. It has not changed because nothing that I have seen
in the light of the Icelandic bank experience suggests that we
are wrong in principle to approach it like this. What the experience
does suggest, and the work that CIPFA are now doing and that we
are now doing and the Audit Commission study is throwing up, is
there are some areas where we could tighten up the system and
make sure the best standards that are apparent are more widely
spread.
Q336 Chair: Are there any additional
changes over and above the ones you have already mentioned?
John Healey: That we may be considering?
Those are the principle ones. CIPFA are doing their own work as
the Committee will have heard.
Q337 Mr Betts: The guidance we explored
through a hearing last week. One of the things we also explored
was the extent to which some authorities who had bought in external
assistance were getting little more than credit ratings passed
on to them which they could probably have got off the internet
without paying for a firm to do it. Authorities who actually bought
in proper advice by and large completely avoided the problems
of losing money in the Icelandic banks. Is that an issue that
ought to be looked at in terms of future guidance?
John Healey: Yes. That is what
I had in mind when I suggested there may be a case for clearer
guidance and possibly a reflection of the CIPFA Treasury Management
Code of the use of expertise both internal and external. I think
the sort of evidence the Committee has taken on that front, which
suggests those authorities who were not over-reliant simply and
singly on credit ratings information have been less likely to
make these investments.
Q338 Mr Betts: Currently it seems
that an authority can not have specialist staff internally, not
sub-contract out the treasury management function but take the
decisions internally relying on external assistance, but that
assistance does not amount to proper advice so there is nowhere
in the system the specialists would expect to help avoid the problems
that authorities have got into.
John Healey: Yes.
Q339 Mr Betts: You would expect any
changes to the Code of Practice to address that issue.
John Healey: That is an area which
you may have heard from CIPFA they are looking at. It is certainly
an area I am interested in and looking at.
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