Agenda item

(Representative from Price Waterhouse Coopers will attend at 10.30am).

The Chairman explained that a list of questions had been produced in advance of the meeting and submitted to Price Waterhouse Coopers (PWC) and he was grateful to Mr Simmonds for producing the bulk of the questions.

Mr Williams, the representative from PWC explained that the scope of the work undertaken by PWC covered three areas; there was a need to check the compliance of all the outstanding investments – to ensure that there was nothing else at risk, the sequence of events leading to the appointment of Butlers, and any observations on the way the treasury management framework was operated. 

PWC looked at 423 deposits dating back to October 2006, £50 million was trapped in Icelandic deposits, £3 million of which was deposited after advice from Butlers.  PWC noticed that the counterparty lists were generally updated in a timely manner but there were some examples where the lists had not been updated immediately.  Some deposits were made to two building societies, Cheshire and Derbyshire, after advice had been given to remove them from the list and one investment was made where the counterparty limit was breached by £5million for four days.  Mr Williams stated that he had found a general lack of evidence of review, or of documented evidence, however generally there had been improvements in the standards of documentation since 2006.  Mr Williams stated that regarding the appointment of Butlers, the procurement procedures were not fully followed, in his opinion a risk assessment of what was being procured rather than the value of what was being procured would have been more beneficial.   Mr Williams described his experience of some authorities using a zero budget for returns on investments to ensure that security was a priority – he explained that that was something that the Treasury Policy Group (TPG) considered and he recommended that the TPG should meet more regularly and that procedures could be more comprehensively documented.

Mr Simmonds asked about the role that Members should play in the treasury management process; he also added that there was nothing in PWC’s evidence that showed that the desire for return had outweighed the core principles of prudence with regard to the weighting of the authorities invested in.  Mr Simmonds referred back to the PWC report stating that there were indications in March 2008 about the status of the Icelandic banks, he asked about the status and the source of that information.  Mr Simmonds also asked about country exposure and whether, in the opinion of Mr Williams, Butlers or the Treasury Policy Group considered this.

Mr Williams gave three examples of sources of information about the status of the Icelandic banks, The Economist on 17 May 2008, The Daily Telegraph in April 2008 and the Sunday Telegraph in March 2008 in which there was an article ‘Iceland shows cracks’.  In terms of country exposure and whether more than 25% of the portfolio is invested in one country, no evidence was found during that period where that limit had been breached.  Mr Williams queried whether Members might look at the level of 25% and whether it was too high?  In his opinion a concentration rate of 25% in one institution was too high.

Mr Simmonds asked about the Fitch downgrading, and whether, if the lowest common denominator theory was applied, KCC would have looked at Iceland with the level of downgrading in the Fitch report.  Mr Williams explained that the lowest common denominator theory was that if one of the three moves down then action should be taken and if it was below a particular level no more deposits would be made.  Mr Williams added that one of the issues was regarding long term deposits and the penalties applied to extract money before the end of the term.

Mr Gough referred to pages 5 and 9 of the PWC report; institutions being caught unprepared and credit risk generally being considered to be low.  Mr Gough stated that rating agencies tended to give a ‘snapshot’ based approach, PWC recommended to KCC that it should look more widely than just credit rating agencies and Mr Gough asked whether Mr Williams had  any thoughts about the way in which he envisaged KCC doing this?  Mr Williams stated that a lot of thought would have to be put into what could be improved in terms of monitoring and scanning future events, he recommended some new thinking about how things could be done across all sectors.

Mr Northey stated that it was important to look at the future and asked about the role of Members in treasury management, he asked Mr Williams whether he had any advice about how Members might keep themselves better informed on a monthly basis?  Mr Northey also asked about the balance between return and safety, KCC had previously benefitted from an additional £6million a year from its prudent investments and there was a balance of risk, he asked whether Mr Williams had any advice on the best balance between risk and safety?  Mr Williams referred to an article in The Times about banking which summarised how things could be improved; experience, good data, good debate and challenge, good governance and monitoring.  He stated that PWC had, in the report, made some recommendations about the treasury policy groups and that it should meet more regularly, it should have a clear role, based upon a clearly articulated risk appetite.  Mr Williams stated that it was also important to look at the risks and benefits of using treasury advisers, to ensure that accountability and responsibility of the various third parties were clearly understood and documented.  Also suggested was a broader set of key performance indicators which also covered activities such as all emails referring to changes in ratings are processed immediately.  Mr Williams stated that many of PWCs corporate clients focussed on security above return, and some did not budget for a return.

Mr Northey asked if there was any more specific advice Mr Williams could give the Committee regarding the role of Members?  Mr Williams stated that Members needed to debate the level of risk the Council was prepared to take before considering the return and whether there was enough emphasis on security. 

Mr Smyth followed up Mr Northey’s point about risk against benefit and acknowledged that the Council had been very successful up until now; he asked Mr Williams whether, as discussed earlier, it was be best practice to make the budget zero?  Mr Williams said he was unable to comment on whether it was best practice, his advice was to consider the appetite of the Council and let the return follow on from that.  He stated that there were obligations to budget for a return, but it was important to consider the ‘drivers’.

Mr Smyth asked about credit agencies, and them providing a ‘snapshot’, he asked Mr Williams whether he took the view that Butlers should have given advice to the Council of a more predictive nature?  Mr Williams confirmed that the ‘snapshot’ could be either the current situation or the outlook element of what the situation was predicted to be.  Mr Williams stated that PWC had not looked at how Butlers were running their operation, PWC’s scope was to look at how the Council responded to the input received from Butlers.  Mr Williams stated that there did appear to be a misunderstanding about what constituted ‘advice’. 

Mrs Dean referred to Mr William’s comments on the process used by KCC to procure the service of the consultant, that a paper trail was lacking regarding why Butlers were chosen, and that perhaps ‘we got what we paid for’.  The contract for Butlers was £20k for most that was a minimal amount of money for services which were delivering returns and the responsibility mentioned previously.  Mr Williams was asked whether he felt that the choice of Butlers may have been determined by price rather than quality, was there evidence that KCC drew up the specification too tightly.   Mr Williams confirmed that he wasn’t saying that it was just driven by money or even primarily driven by money; to many people £20k was a lot of money, but in this context it was not.  Mr Williams stated that the procurement started off in a thorough and detailed way with districts being involved in the process, he referred to the tender document which contained a list of 11 requirements and principle responsibilities, not all of which ended up in the final contract.  The final contract was, as far as Mr Williams could tell, a standard Butlers’ document tailored to the individual authority. 

Mrs Dean asked Mr Williams whether it was his view that Butlers could have given the Council a more comprehensive service.  Mr Williams stated that the Committee should discuss that with Butlers. 

Mrs Dean also asked about the ‘email’ that was not read; she asked whether the method that Butlers used to pass on their advice to the County Council was the one that they normally employed?  Mr Williams confirmed that his understanding was that it was the normal way; however some authorities had an email inbox that a number of staff could access rather than being reliant on one individual.  Mrs Dean referred to page 7 of the PWC report which stated that ‘if the necessary reviews took place there is no evidence of it’; it then went on to say, ‘we understand from management that an informal review occurs for all investments over 365 days before investments are placed’.  Mrs Dean asked whether that implied that there wasn’t an evidence trail for that either?  Mr Williams confirmed that that was what he had been told.  Mrs Dean referred to the internal audit report of 2006, several of the recommendations of the audit had not been implemented and the internal audit follow up report had not been finalised, she asked Mr Williams whether it was his view that any of those recommendations were sufficiently important to have been followed up immediately or whether he agreed with the management response which referred to them as technical issues?  Mr Williams’ colleague confirmed that at the time the issues were seen as relatively minor controls and the report was given a substantial assurance – which was not seen as worrying.  At the time the work was undertaken these were not seen as particularly high risk failings, the controls were in place and they were not seen as sufficiently severe to increase the strength of the audit finding.  Mrs Dean referred to the investments made despite the fact that the credit rating agencies had changed, specifically Derbyshire and Cheshire building societies, and asked whether it was Mr Williams’ view that what the County Council did in any way endangered the return due on those investments by not updating the counterparty list.  Mr Williams stated that the point he was making was that it was vital to respond to the information in a timely manner.  Referring to the newspaper articles mentioned earlier, Mrs Dean asked whether there was any authoritative financial institution that was giving that advice, Mr Williams stated that he was not aware of any but there may well have been some.  Regarding outsourcing and having an external service provider, Mrs Dean stated that the response from KCC’s management was that this was not proposed at the moment but instead to put in place a new specialist post, Mrs Dean asked Mr Williams whether he had a view about having an external service provider, in particular in relation to the standard of individuals concerned and the training needs.  If those training needs were met would it still be the view of PWC that KCC should have an external adviser?  Mr Williams confirmed that the point was about considering the prospect of an external adviser, PWC think that it would be beneficial for the current members of the team to have some treasury training, recruitment of a highly specialised treasury expert might be difficult.

Mr Scholes stated that since September 2007 the superannuation fund had been stockpiling cash because it was better than investing it, he was concerned that the superannuation committee had received glowing reports with minor amendments, but PWC had discovered problems in their recent review.  Mr Scholes asked whether the Council had not been specifying enough with PWC or have things been missed?  Mr Williams stated that PWC were asked to do a piece or work according to the instructions, he was unable to comment on previous audits.  Mr Scholes wanted more assurance for the superannuation fund to minimise future problems.  Mr Williams stated that the superannuation fund should have its own view regarding the assurance it wants. 

Mr Simmonds clarified that his understanding of the credit rating agencies was that it was their job to evaluate major investments on a full time basis, there was something wrong if they were not monitoring what was going on on a continual basis.  Mr Simmonds stated that he did not think it was a misunderstanding about the ‘advice’ received from Butlers, previous agenda for the Treasury Group and Butlers included an evaluation of counterparties.  Mr Williams confirmed that he had seen an example agenda which did have counterparties on; he couldn’t confirm that it stated an evaluation; the notes of those meeting were just action points rather than notes of discussion.  The contract stated that they gave advice but in respect of counterparties selected by the Council.   Mr Simmonds stated that as a responsible authority KCC had got to have some objectives for an expected return from investments, putting in an expected level of income was not unreasonable, Mr Williams responded by saying that it should be in accordance with the returns you would expect to get and in line with current circumstances and not personal gain.

Mr Truelove asked about the role of Members, and questioned whether, with £3million at risk an email to a member of staff was ‘the norm’.  He considered it extraordinary that the relationship between the Council and Butlers was such that these issues were not raised in the meeting earlier that week.  Mr Williams said that with the benefit of hindsight the process of emailing staff could be improved and this would be picked up by the Finance Department.  Mr Williams also referred to the speed at which ratings could change and the resulting lack of trust between institutions. 

Mr Smyth raised the issue of in-house or external treasury advice, he asked Mr Williams whether he was saying that if KCC employed someone to do this function they wouldn’t have the knowledge that an external agency would have.  Would it be preferable to be external, or was there scope to have an internal employee who would have access to external agencies.  Mr Williams responded by saying the Council had to consider how it wanted to provide the service, he suggested the Council determined what it was it was trying to do in terms of risk vs return, revisit the tender document and update it, and consider whether the actions would be best performed in-house or externally.

The Chairman clarified that the Council had procured £20k worth of services, with potential £2billion at risk.  He asked whether it would be sensible for the Council to look at a combination of the cost of the contract and the amount of money at risk when monitoring or scrutinising the contract.  Mr Williams agreed with the Chairman, procurement should factor in risks and what contingencies were in place should suppliers fail.

RESOLVED that:

(1)   The Committee thanked the PWC representatives for their attendance at the meeting and for answering Members’ questions;

(2)   The Committee thanked PWC for their report on the review of treasury management procedures within KCC and the Committee looks forward to receiving details of KCC’s action plan that has been put in place to address the recommendations in the report.