Agenda item

Report FSD17075

The report summarised treasury management activity during the first quarter of 2017/18, and ensured that the Council was implementing best practice in accordance with the CIPFA Code of Practice for Treasury Management. Investments as at 30^th June 2017 totalled £292.3m and there was no external borrowing. The balance of investments stood at £269.9m as at 31^st March 2017, £285.2m as at 30^th June 2016, and at £329.6m on 22^nd August 2017.

The Committee noted that the Markets in Financial Instruments Directive II (MiFID II), which was due to come into force on 3^rd January 2018 required investment firms to assess the categorisation of their clients for investment purposes, except for ‘simple’ investments such as term deposits with banks and building societies, directly owned properties and a few other types of investments that were outside the scope of MiFID II.  Following the release of a new Policy Statement by the Financial Conduct Authority (FCA) on 3rd July 2017, Local Authorities would be classed as ‘Retail’ investors by default. This would result in the authority being limited to investments in instruments defined by the FCA as ‘non-complex’. Retail investors may also have to pay higher fees for an equivalent investment than professional investors. It was therefore likely that being classed as a Retail investor would result in an overall reduction to the investment return achieved by the Council.  However, under the Directive, retail clients were provided more protection than professional clients, such as a suitability report, assessment of appropriateness, level of information provided, services of the Financial Ombudsman Service, and the Financial Services Compensation Scheme (although this would not apply to the Council). Members noted that the Council was currently classed as a per-se professional client, and therefore did not currently have these protections.  To be classed as a professional client for the purposes of treasury management activities, the Council was required to satisfy both a quantitative test and a qualitative test, the criteria for which were set out in detail within the report.  In order to opt-up to elective professional status, an assessment questionnaire/application had to be submitted to all counterparties it currently invested with or may wish to invest with, including investment advisers. The Resources Portfolio Holder was requested to delegate authority to the Director of Finance to submit the relevant requests to opt-up to elective professional status.

Members were advised that the MiFID II arose from EU legislation and under the Directive local authorities were automatically categorised as ‘Retail’ investors and this limited the scope of investment.  The report proposed that the Council elect to opt-up to ‘Professional’ client status .  It was felt that being classed as a Retail investor would result in an overall reduction to the investment return achieved by the Council.  The only potential advantage of remaining as a Retail investor was the benefit of additional protections  such as level of information provided and the services of the Financial Ombudsman Service, although as the Council was currently classed as a per-se professional client it did not currently have these protections. The changes did not affect the current Regulatory Framework which limits the level of risk associated with the Council’s treasury management activities. 

The Committee were advised that the requirement for a suitable level of experience to satisfy the qualitative criteria for categorisation as a ‘Professional’ investor would be reflected in relevant job descriptions (i.e. the posts of Principal Accountant, Chief Accountant and Director of Finance),.

In relation to presentation of information within the report, the Committee requested that in future, where possible, simple line graphs were used as these were visually  clearer than bar charts.

The Committee noted that where the report referred to a potential risk arising from a rise in interest rates, this risk only related to borrowing authorities.  As Bromley Council was not a borrowing authority any rise in interest rates would be an opportunity.

In relation to Appendix 3 of the report, the Committee were advised that the total investments  held by the Council  had increased to £330m as at 22^nd August 2017.

RESOLVED: That the Portfolio Holder be recommended to:

1.  note the Treasury Management performance for the first quarter of 2017/18; and

2.   delegate authority to the Director of Finance to apply to opt-up to elective professional status under MiFID II as detailed in the report.