GUIDANCE ON LOCAL GOVERNMENT INVESTMENTS

Issued by the Secretary of State under section 15(1)(a) of the Local Government Act 2003

DEFINITIONS

1.                  In this guidance, 2003 Act means the Local Government Act 2003.

2.                  Local authority (except in paragraph 12(d) below) has the meaning given in section 23 of the 2003 Act (and in regulations made under that section). To the extent that this guidance applies to parish councils and charter trustees (see paragraph 6 below), a reference to a "local authority" includes those councils and trustees.

3.                  An investment is a transaction which relies upon the power in section 12 of the 2003 Act and is recorded in the balance sheet under the heading of investments within current assets or long-term investments. The term does not include pension fund and trust fund investments, which are subject to separate regulatory regimes and are therefore not covered by this guidance.

4.                  A long-term investment is any investment other than (a) one which is due to be repaid within 12 months of the date on which the investment was made or (b) one which the local authority may require to be repaid within that period.

5.                  A credit rating agency is one of the following three companies: Standard and Poor's; Moody's Investors Service Ltd, Fitch Ratings Ltd.

APPLICATION

6.                  This guidance applies in relation to the financial year 2004-05 and subsequent financial years. It applies only in England.  It applies to all local authorities.  It also applies to parish councils and charter trustees, subject to the following conditions:

(a)               Where the parish council or charter trustee expects its investments at any time during a financial year to exceed £500,000 the guidance should apply in relation to that year.

(b)               Where the parish council or charter trustee expects its investments at any time during a financial year to exceed £10,000 but not £500,000 it should decide on the extent, if any, to which it would be reasonable to have regard to the guidance in relation to that year.

 

(c)               Where the parish council or charter trustee expects its investments at any time during a financial year not to exceed £10,000 no part of this guidance need be treated as applying in relation to that year.

ANNUAL INVESTMENT STRATEGY

7.                  The Secretary of State recommends that a local authority produces an Annual Investment Strategy, approved by the full council, that sets out the local authority's policies for managing its investments and for giving priority to the security and liquidity of those investments, as indicated in this guidance.

 

8.                  The Secretary of State considers that where the local authority is operating executive arrangements, it would be preferable for the local authority (ie the full council), rather than its executive, to approve the Strategy. Under Schedule 4 to the Local Authorities (Functions and Responsibilities) (England) Regulations 2000 (S.l. 2000/2853, as amended), the authority has discretion to determine that the decision should be taken by them on whether the Strategy should be approved. The Secretary of State therefore recommends that they make such a determination.

 

9.                  For authorities without a full council, approval of the Strategy should be at the closest equivalent level.

 

10.             Variations to the Strategy may be made at any time, subject to the same process of approval.

 

11.             The Secretary of State recommends that the Strategy for any financial year should normally be approved before the start of that year. For the year 2004-05 only, it should be approved either before the start of the year or as soon as possible after the start. The Strategy and any variations should be made available to the public.

 

SECURITY OF INVESTMENTS

 

Specified Investments

 

12.             An investment is a specified investment if:

(a)               the investment is denominated in sterling and any payments or repayments in respect of the investment are payable only in sterling;

(b)               the investment is not a long-term investment (as defined in paragraph 4);

(c)               the making of the investment is not defined as capital expenditure by virtue of regulation 25(1)(d) of the Local Authorities (Capital Finance and Accounting) (England) Regulations 2003 BSI 3146 as amended]; and

 

(d)               the investment is made with a body or in an investment scheme which has been awarded a high credit rating (see paragraph 13) by a credit rating agency (as defined in paragraph 5) or is made with any of the following:

 

(i)        the United Kingdom Government

 

(ii)       a local authority in England or Wales (as defined in section 23 of the 2003 Act) or a similar body in Scotland or Northern Ireland

 

(iii)    a parish council or community council.

13.             For the purposes of paragraph 12(d) above, the Secretary of State recommends that the Annual Investment Strategy states:

(a)               how high credit rating is to be defined for the categories of investments which the local authority intends to use in the financial year

(b)               how and how frequently credit ratings are to be monitored and what action is to be taken when ratings change.

Non-specified Investments

14.             With regard to non-specified investments (ie those not meeting the definition in paragraph 12), the Secretary of State recommends that the Annual Investment Strategy:

(a)               sets out procedures for determining which categories of such investments may prudently be used;

(b)               identifies which categories of such investments have so far been identified as prudent for use during the financial year; and

(c)               states the upper limits for the amounts which, at any time during the financial year, may be held in each identified category and for the overall amount which may be held in non-specified investments (the limits being defined by reference to a sum of money or a percentage of the local authority's overall investments).

 

LIQUIDITY OF INVESTMENTS

 

15.             The Secretary of State recommends that the Annual Investment Strategy sets out procedures for determining the maximum periods for which funds may prudently be committed.