19 March 2004
The maze of regulations governing how local authorities manage their investments will be swept away when a simplified 'prudential' framework comes into effect on April 1.
The detailed rules currently in force, introduced in 1990, are being replaced with guidance placing the onus on individual authorities to draw up a 'prudent' annual investment strategy that prioritises 'security and liquidity'.
Under the new guidance, which was sent to all local authorities on March 12, councils will have greater freedom to decide which investment instruments to use. It is underpinned by CIPFA's treasury management professional code.
Those categorised as 'specified investments' – short-term, denominated in sterling and with a high credit rating – will be available for authorities to use with the minimum of bureaucracy.
If a council wants to use instruments not meeting these criteria – 'non-specified investments' – it will have to set out the measures it will take to safeguard its funds in its annual strategy.
But the guidance still imposes limits on the investments that authorities can make. It classifies as capital expenditure the acquisition of share or loan capital in companies 'to discourage the use of speculative instruments, such as equities'.
Local government minister Nick Raynsford said the changes were significant. 'We are giving authorities wide-ranging freedoms to invest their funds. Our new guidelines will simply ensure they have prudent strategies for making investment decisions. This fits in perfectly with the freedom for prudential borrowing, which also starts on April 1.'
Maureen Wellen, CIPFA's assistant director for local government policy and finance, said: 'CIPFA welcomes the move away from detailed prescription and towards reliance on professional codes and the department's own guidance.'