With MPs calling for treasury management advice to be regulated, CIPFA is releasing a bulletin on the rules
The public debate continues about the role of the Financial Services Authority in regulating the services given to local authorities by treasury management advisers. It began with the initial communities and local government select committee report into council investments, which was critical of the FSA. The report even went as far as questioning whether the FSA’s responses were deliberate ‘obfuscation’. The FSA then published a formal response to the initial report.
On January 26, the committee published a further report, accepting the FSA’s defence that it could regulate only when it had the specific powers to do so. The report called on the government to legislate to include within the FSA’s remit the provision of advice or information relating to deposit taking. This would mean that treasury management advisers’ provision of deposit advice/information to local authorities would be regulated.
The report also raised concerns about the FSA’s approach to assessing risk. This takes into consideration the sizes of the firm providing the advice, but not the value of money involved. For councils, this is up to £30bn at any one time and almost £1bn was put at risk during the Icelandic crises. The FSA’s response hinged on the fact that these monies were deposited rather than invested under the Financial Services Act and hence were not regulated services so could not be taken into account.
In addition, the report considered the use of the phrase ‘authorised and regulated by the FSA’, which could lead local authorities to believe that the services provided to them are regulated. The FSA confirmed that this disclosure is a requirement for regulated firms when providing services. The committee did acknowledge the practical difficulties of different disclosures to clients and welcomed the forthcoming CIPFA Bulletin.
The next Treasury Management Bulletin, due to be published shortly, will provide information for councils, including elected members, on the current system of regulation of treasury management services. It notes that certain activities are not regulated, such as advising on deposits. It also explains that, where such non-regulated advice is given alongside regulated advice, such as advice on a specific investment, certain FSA rules might apply to both elements. An example is the suitability rules, which require a firm to take reasonable steps to ensure that the advice it is giving is suitable for that client.
The bulletin considers the Markets in Financial Instruments Directive, which is a cornerstone of the European Union’s Financial Services Action Plan. It looks at the directive’s classification of clients and its impact on the regulatory regime. Councils are classed as ‘professional’ clients, meaning that they are considered more experienced, knowledgeable and sophisticated than ‘retail’ clients and hence should understand the risks involved in the transaction and be financially able to bear any related investment risks.
The revised CIPFA Treasury Management Code also emphasises the requirement for staff to have the relevant skills to undertake the duties and responsibilities assigned to them, and this is again reinforced in the bulletin. Responsibility for treasury management must remain within the local authority. Hence, even though the services of treasury management advisers might be sought for specific services, local authorities need to be in a position to appropriately question the services provided and ensure that they are gaining value from them.
The bulletin has been written in collaboration with both the FSA and treasury management advisers. It includes details of the typical services that might be requested from treasury management advisers by local authorities.
It makes clear that, unless the areas that the FSA is allowed to regulate are expanded, councils must operate in a world where most treasury management services are not regulated. They therefore will need to ensure that they are fully aware of the implications of this and that they are using the services of the advisers appropriately.
Mandy Bretherton is technical manager at CIPFA
