Agenda item
Presentation from SECTOR
- Meeting of Audit Committee, Tuesday, 26th March, 2013 7.00 p.m. (Item 4.1)
- View the background to item 4.1
Minutes:
Dan Wilson and Tim Hughes of Sector introduced themselves. Mr Wilson, Head of Credit and Investments, advised the Committee his role was to study markets and their activity. Mr Hughes, Client Manager, advised his role was cash management for clients and customer management, providing support as required. He advised that he worked daily with the Chief Financial Strategy Officer managing the cash requirements of the Council to ensure optimum return for minimum risk as stipulated in the Council's current investment strategy.
Mr Hughes advised that part of the reason for the observed decrease in returns over the past year was the conservative nature of the Council’s investment strategy. He noted that most of the investment was in liquid short-term investments which delivered the lowest market yield available. On this matter, the Chief Financial Strategy Officer advised that he had recently been given a mandate to broaden the scope to access better returns. Mr Hughes advised that extending the counterparty list would give access to better returns and this could be undertaken on a short-term basis.
Concerning the Council’s investment with OCBC in preference to Santander UK, Mr Hughes advised that Sector had not recommended investment in Santander UK because it does not meet the Council’s minimum credit criteria OCBC on the other hand meet the criteria. The Chief Financial Strategy Officer advised that the Council had previously invested with Santander UK; however, since the credit crisis and subsequent downgrade of a number of UK financial institutions, it has not been possible to continue investing with Santander and some other UK banks.. However it was intended that flexibility was increased during the next financial year. Additionally he noted that whilst the Council may wish to invest with a financial institution they may not necessarily require funding. , For example HSBC are not looking to accept deposits despite meeting the Council’s minimum credit criteria.
Concerning financial ratings, Mr Wilson advised that many ratings had been reduced by agencies such as Moody's and Fitch, not because the investments were less safe than they had been previously but because these organisations had changed their ratings criteria, hence there was a smaller investment pool.
Concerning Managers’ fees, the Chief Financial Strategy Officer confirmed that Sector was paid by results. Payment comprised a fixed fee plus a performance element. Members enquired whether the Chief Financial Strategy Officer could be pressured to obtain maximum investment returns and Mr Shonola advised that he was not authorised to act in this way; hence Sector was not able to apply pressure to get maximum returns.
Concerning whether the Council should consider being less risk averse and allocate a larger percentage (e.g. 10%) to larger risk investments, Mr Hughes advised that such a decision would lie with the Council but a proposal could be considered if the authority wished. On this matter, the Chief Financial Strategy Officer advised that the strategy was presently well-balanced in accordance with the agreed strategy and contained some low and medium rated risks. He added that the 2013/14 Investment Strategy will provide further flexibility that will allow the Council to invest in some A+ and A rated banks and he recommended that investments with banks lower than A rated should not be undertaken. The Acting Director of Resources further advised that the situation was kept under review because it was necessary ensure that risks were balanced. Mr Wilson advised it was also necessary to quantify risks to confirm whether or not there was value-added in taking them. He noted that issues became clouded where liquidity risk occurred and this made looking at how to invest more difficult. He noted that the Council could, if it wished, invest in small building societies which would support local economies and support the Council's ethical stance and advised doing so would bring greater risks. Therefore the Council needed to consider how far down the liquidity-or-risks scale it wanted to travel to benefit from better returns.
Concerning whether Sector took account of the non-financial benefits of certain investments (e.g. the social benefits of investing with small building societies who would promote local economies by lending to individual borrowers), Mr Wilson advised that Sector worked within the parameters and policy decisions set by their clients who, if they wished, were able to step outside their chosen security - liquidity yield. The Chief Financial Strategy Officer advised that the Council's guidance stated that it must look at security first but if the Council wished to permit this type of investment he was able to explore what options were available. He added that any schemes to lend to local businesses/entities will have to be agreed outside of the Investment Strategy.
Councillor Ullah noted that options for ethical investing had been considered previously; however the Council was required to be a good steward of its public money and therefore the strategy needed to consider safety and due diligence in investing the Council’s money.
Councillor Gibbs enquired whether the Council might directly invest with UK-based small/medium enterprises (SME) to support local business. Mr Wilson advised that there were organisations with whom the Council could invest, but the Council needed to be aware that a percentage of such businesses would inevitably become bankrupt and therefore it needed to consider what loss it would be prepared to bear. Additionally a bigger quantity of investments would be made and therefore a bigger range of investments would need to be monitored by the Council.. He noted that banks were not presently lending to SMEs therefore any such proposal would need to be considered outside of the Council's investment strategy. The Chief Financial Strategy Officer advised that a form of investment of this kind was possible through the proposals around the Council’s Housing Revenue Account; The Acting Director of Resources noted Members would need to consider if they wished to pursue this as the issue of balancing risk against the need for stability remained. Additionally it was noted that investing in local HRA's would mean that money was tied up for a long term and would not provide quick returns.
Councillor Eaton enquired whether those on apprenticeship training might also receive training in treasury management and Mr Shonola advised that this would be investigated.
RESOLVED:
That the presentation be noted