Agenda item

The Assistant Head of Finance presented the report, outlining the treasury activities undertaken during the period to 30 September 2017, and providing details of the proposal to change the Minimum Revenue Provision (MRP) policy for supported borrowing. 

Professional Client Status

The report included details of the recommendation that the Council should ‘opt-up’ to professional status in relation to the introduction of the ‘Second Markets in Financial Instruments Directive (MiFID II) when it becomes applicable to the UK in January 2018.  It was explained that previously local authorities had automatically been deemed as having professional status.  Under the new regulations, firms would be obliged to treat all local authorities as retail clients unless they ‘opt-up’ to professional client status and meet certain criteria, including holding a minimum of £10m investment balance and employing knowledgeable and experienced staff to carry out investment transactions.  Opting into professional status would maintain the current status quo; conversely, not opting-in would likely limit the range of financial services the Council could access. 

In response to Member questions, officers advised that:

·         This directive was very likely to continue after the UK leaves the EU. 

·         The financial cost of opting in would be maintaining investments at £10m, however this was a relatively low figure in the overall budget context, and was outweighed by the benefits of opting in with regard to access to services, and having a higher borrowing status.

·         MiFID II would need to be reflected in the Council’s new short and long term borrowing strategy.  Officers confirmed that the current strategy of internal borrowing would continue, with the exception of the £10m required to maintain professional status. 

Minimum Revenue Provision (MRP) – Change of Method

The Committee were asked to note the proposed change to the MRP policy for supported borrowing.  The Council currently charged MRP for supported borrowing at 4% reducing balance; the report proposed changing to a 2.5% straight line charge, which would reduce the revenue charge for the provision by circa £2.5m.

The Committee asked for further explanation of why this change was deemed prudent.  The following points were noted:

·         The proposed change was within the Welsh Government guidelines for prudency. 

·         A number of other authorities have made similar changes, some going further than the proposed 2.5% here.

·         Options and assets had been assessed on a weighted averaged against the balance sheet, and an average outstanding life of 40 years was thought to be reasonable for the purpose of calculating MRP.

·         The straight line method was recommended over the annuity method, which would cause pressure in future and affect forward planning. 

The Committee questioned why a change of policy was needed if the current policy had been deemed prudent, particularly as the change would benefit revenue now but cause a swing back later.  The Head of Finance explained that there has to be a minimum level of MRP, and this was part of the overall strategy which had started by changing unsupported borrowing.  Taking this and all factors into account, officers had taken the view that, from a capital finance perspective, and balancing pressure on revenue, it would be prudent to set the level at 2.5%.

The Committee questioned whether the case to change the policy had been made fully in the report, and asked that further information be included on:

·         Why the change was necessary

·         What would happen in 10 years time when the charge goes the other way

·         What was the minimum MRP level

·         Would future Heads of Finance be under pressure to change this strategy

·         The guidance for English authorities from the Department for Communities and Local Government

·         Clarification from WAO on their view of a prudent level

Agreed

Officers were asked to update the report in light of the Committee’s comments, and re-submit the report to the Audit Committee’s next meeting. 

Members agreed to move the next meeting forward to allow the Committee’s comments to be fed back to Council when it considers the report on 30 January.