Public Sector - Councils could rejoin markets

Banks and the Audit Commission are willing to accept local councils back into the financial markets if the Treasury legislates to make them accountable for their transactions.

CIPFA has presented a detailed paper to the Treasury outlining the case for allowing councils to use the derivatives market to hedge against interest-rate changes. The Treasury is likely to give its response in January.

The argument against council involvement with derivatives refers to 1990 and 1991 when several councils, notably Hammersmith & Fulham, gambled away #500m of bank money. The banks could not recover their investment because the House of Lords ruled that local authorities had no power to enter the transactions.

But CIPFA technical manager Maureen Wellen pointed out that UK local authorities have to manage around #40bn of outstanding debt, and that ‘derivatives are a basic tool of treasury management which are available to other bodies such as the housing authorities.’

Even if the Treasury favours the councils’ re-entry into these markets, the banks will have to be persuaded to work with them. Wellen said that she understood they would be perfectly happy provided that the transactions were regulated.

A spokesman for the British Bankers’ Association refused to comment on the derivatives question, but said that there was a ‘huge appetite’ among banks to work with local authorities, as long as transactions were ‘properly contracted and not just in good faith’.

The Audit Commission has been set against councils being allowed to dabble in stock markets, but a spokesman for the commission said: ‘We are prepared to look at it again. Our position has always been in line with the legal view.’