GUIDANCE ON APPENDIX
A
LOCAL GOVERNMENT INVESTMENTS
Office of the Deputy
Prime Minister
Contents
Part 1 - Background and Commentary
Part 2 - Guidance on Local Government Investments
Part
1 of this document gives informal advice only and is not part of the guidance
itself, which is contained in Part 2.
PART 1 - BACKGROUND AND COMMENTARY
(1) INVESTMENT POLICY
1. Since 1990, local government investments have
been subject to the Local Authorities
(Capital Finance) (Approved Investments) Regulations 1990 [SI 1990/426 as
amended], made under Part 4 of the Local
Government and Housing Act 1989 ("the 1989 Act").
2. The repeal of Part 4 on 1
April 2004 by the Local Government Act
2003 ("the 2003 Act") and the parallel revocation of the
"approved investments" regulations brings this regime to an end, as
part of the introduction of the new prudential capital finance system. Under
the new system, the Government still wishes to encourage authorities to invest
prudently, but without burdening authorities with the detailed prescriptive
regulation characteristic of the 1989 Act system. The issue of guidance under
section 15 of the 2003 Act implements that policy.
(2) INVESTMENT POWER
3. Section 12 of the 2003 Act removes the doubts
which persisted under the 1989 Act regime and gives a local authority power to
invest for "any purpose relevant to its functions under any enactment, or
for the purposes of the prudent management of its financial affairs". The
reference to the "prudent management of its financial affairs" is
included to cover investments which are not directly linked to identifiable
statutory functions but are simply made in the course of treasury management.
This would also allow the temporary investment of funds borrowed for the
purpose of expenditure in the reasonably near future; however, the speculative
procedure of borrowing purely in order to invest remains unlawful.
(3) INVESTMENT GUIDANCE BY
CIPFA
4. Section 15(1) of the 2003
Act requires an authority "...to have regard (a) to such guidance as the
Secretary of State may issue, and (b) to such other guidance as the Secretary
of State may by regulations specify...".
5. The Local Authorities (Capital
Finance and Accounting) (England) Regulations 2003 [Sl 3146] (made under
the Local Government Act 2003) contain
a regulation [regulation 24] relying on the power in section 15(1)(b). It
requires authorities to have regard to the Chartered
Institute of Public Finance and Accountancy (CIPFA) publication Treasury Management in the Public Services: Code of Practice and Cross-Sectoral
Guidance Notes. This Code covers the whole range of treasury management
issues, including the fundamental principles for making and managing
investments. It should be noted that the Code prepared by CIPFA for the new
capital finance system, The Prudential Code for Capital Finance in
Local Authorities, also includes guidance on treasury management.
6. The guidance
in Part 2 of this document is issued under the power in section 15(1)(a). This
does not duplicate the material covered in the CIPFA Codes but builds upon it
and supplements it as necessary to implement the Government's policy. A
detailed commentary on the guidance is given below (paragraphs 12 to 25).
(4) INVESTMENT REGULATIONS
7.
The Local Authorities (Capital Finance and Accounting) (England) Regulations
2003, which come into force on 1 April 2004, include provisions relevant to
investments.
8. Regulation
25(1)(d), made under section 16(2) of the 2003 Act, defines as capital
expenditure the acquisition of share
capital or loan capital in any body corporate. This continues the effect of
the provision in section 40(4)(b) of the 1989 Act. Such investments will therefore need to be funded out of capital or
revenue resources (as well as being subject to the guidance on
"non-specified investments"). The intention here is to discourage the
use of speculative investments, such as equities.
9. In the
consultation on this guidance, representations were made to ODPM that the definition
in regulation 25(1)(d) would apply to investments in money market funds (as defined in regulation 1 of the Approved Investments Regulations 1990). Accordingly,
amendments have now been made in the Local
Authorities (Capital Finance and Accounting) (Amendment) (England) Regulations
2004 BSI No. 534], which also come into force on 1 April 2004, to exclude
such investments from the definition of capital expenditure. Similar concern
was expressed in relation to bonds issued by the kinds of bodies listed in Part
1 of the Schedule to the 1990 regulations.
Again, this is dealt with in the amending regulations, which exclude from the
definition of capital expenditure investments with a multilateral development bank (defined as an international
financial institution having as one of its objects economic development, either
generally or in any region of the world). These amendments to regulation
25(1)(d) are relevant to the interpretation of paragraph 12(c) in the guidance.
The effect is that investments in money market funds or with multilateral
development banks are not capital
expenditure and may be "specified investments" (subject to the other
conditions in paragraph 12 of the guidance also being met).
10. Investments
not defined as capital expenditure by regulation 25(1)(d) will not score as
expenditure at all and will not be charged to revenue or capital. However, if
any existing investment ever appeared at risk of loss, normal accounting
practice would as now require the authority at that time to make revenue
provision of an appropriate amount.
11. It should also be noted
that regulation 25(1)(b) defines as capital expenditure a loan (or grant or other financial assistance) by an authority to
another body for capital expenditure by that body.
Specified Investments
12. Under the
power in section 15(1)(a) in the 2003 Act, the Secretary of State has issued
the guidance on investments in Part 2 of this document. Local authorities are
required by section 15 of the 2003 Act to have regard to this guidance. It may
also apply to parishes (see paragraph 25). The guidance applies only in
England.
13. The guidance does not
apply to pension and trust funds which are covered by a completely separate
regulatory regime.
14. The general policy
objective is that local authorities should invest prudently the surplus funds
held on behalf of their communities.
15. The guidance
recommends that priority should be given to security and liquidity. However,
that does not mean that authorities should ignore yield. It will be appropriate
to seek the highest rate of return consistent with the proper levels of
security and liquidity.
Annual Investment Strategy
16. The Annual
Investment Strategy is central to the guidance. As noted above, authorities
will also need to have regard to the CIPFA Treasury Management Code, which
requires the preparation of an annual treasury management strategy and plan in
advance of the year and an annual report after the year end. There is no
intention to require authorities to duplicate any of the tasks specified in the
CIPFA Code. It may be convenient to produce a single strategy document,
covering both the requirements of the CIPFA code and the Secretary of State's
guidance. However, the document should state explicitly where it is dealing
with the guidance by the Secretary of State.
17. The Secretary
of State recommends (paragraphs 7 to 9 of the guidance) that the Strategy
should be approved by the full Council (or at equivalent level in authorities
without a Council). The Local Authorities
(Functions and Responsibilities) (England) Regulations 2000 (S.l. 2000/2853, as
amended) empower a Council to determine that it should be responsible for
such matters as approving the Strategy and that is what the guidance
recommends. It is intended that an amendment will shortly be made to the
regulations specifying that the function of approving such strategies is always
for the full Council.
18. Normally, the
Strategy should be approved before the start of the financial year. Because
this guidance is being issued shortly before the start of 2004/05, it may not
be feasible to have the Strategy for that year endorsed by the Council before 1
April 2004. In that case, approval should be obtained as soon as possible after
that date.
19. The Strategy may be
varied at any time during the year, again with the approval of the full
Council. It should be possible to incorporate in the Strategy sufficient
flexibilities and delegations to avoid the need for a formal variation, other,
than in the most exceptional circumstances. Where external investment managers
are used, they should be contractually required to comply with the Strategy.
20. The idea of
specified investments is to identify investments offering high security and
high liquidity. Authorities will be free to rely on these with minimal
procedural formalities. All such investments should be in sterling and with a
maturity of no more than a year. Such short-term investments made with the UK
Government or a local authority or parish council will automatically count as
specified investments.
21. In addition,
short-term sterling investments with bodies or investment schemes with
"high credit ratings" will count as specified investments. However,
the Annual Investment Strategy should define this term for broad categories of
investment. The Strategy should also say how frequently ratings are to be
monitored and what is to happen if they change.
Non-specified Investments
22. The Annual
Investment Strategy should deal in more detail with non-specified investments,
given the greater potential risk. It should identify the types of investments
that may be used during the course of the year and should set a limit to the
amounts that may be held in such investments at any time in the year. The limit
may be a sum of money or a percentage of total investments. The Strategy should
also lay down guidelines for making decisions on such investments, for example,
on the circumstances in which professional advice is to be sought.
23. There is no
intention of discouraging authorities from using non-specified investments. The
aim is simply to ensure that proper procedures are in place for undertaking
risk assessments of investments made for longer periods or with bodies which
are not highly credit-rated. It is not implied that credit ratings are the only
means of assessing creditworthiness; but where an alternative or additional
method is considered appropriate, it should be summarised and explained in the
Strategy.
Liquidity of investments
24. The Annual
Investment Strategy should set out procedures for determining the maximum
periods for which funds may prudently be committed. This is to ensure that the
authority has properly assessed the risk of committing funds to longer term
investments. An investment should be regarded as commencing on the date the commitment
to invest is entered into, rather than the date on which the funds are paid
over to the counterparty.
Application to Parish
Councils
25. The guidance will in
certain cases apply to parish councils (and charter trustees), depending upon
the level of investments they expect to have in a particular financial year. If
that level is expected to exceed £500,000 during the year, the guidance should
be treated as applying in full in relation to the whole year. Where investments
are expected to exceed £10,000 but not £500,000, the council should simply make
a formal decision on the extent to which it would be reasonable to adopt this
guidance, either wholly or in part. For councils not expecting their
investments to exceed £10,000, no action is necessary. However, such councils
will of course be free to adopt the guidance if they wish.
(5) INFORMAL COMMENTARY ON
THE ODPM GUIDANCE
[PART 2]
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.
Office of the Deputy Prime Minister 12
March 2004
Eland House Bressenden Place London SWIE 5DU
