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Earlier in January LGC reported on the potential impact of the Markets in Financial Instruments Directive II (Mifid) on council pension funds. Admittedly new regulations, particularly those stemming from EU directives, do not on the face of it make for the most compelling of news. But the consequences of these changes are far-reaching and significant, and not just for the Local Government Pension Scheme.
The updated directive has prompted the Financial Conduct Authority to rejig its own rules, throwing into jeopardy council pension funds’ ability to invest in ‘complex’ assets, including the infrastructure projects the Treasury has ordered them to fund.
But guess what? It gets worse.
The FCA’s proposed move to classify certain organisations as ‘retail’ (ie unsophisticated) investors will affect councils’ treasury investments as well as those held in their pension funds. That means every council, in every tier, will find itself suddenly unable to invest its treasury portfolio in much but the most vanilla of assets without jumping through a number of regulatory hoops. There are also fears it will end short-term lending between neighbouring authorities.
Retail investors will, under the proposed rules, be able to ask the asset managers to which they outsource their investments to treat them as professional clients. But investment management firms may pass on the cost of the additional due diligence this would involve to their customers – or they may decide to cut their losses and refuse to work with local authorities altogether.
To make matters worse, only councils with £15m or more in the kitty will be able to ‘opt up’ to become professional investors. This threshold is part of a new set of criteria for assessing professional investors, the rest of which relate to the frequency of an investor’s transactions in relevant markets or the qualifications held by its staff. The £15m limit would prevent a number of district councils from investing in complex assets, regardless of their experience, skill or previous investment successes.
The impact of the proposed rules is particularly significant in a context where council budgets are endlessly squeezed, independence from central government funding is around the corner, and pension fund liabilities are on the rise. Treasurers and pension fund directors argue that they must be able to continue earn what they can by investing their treasury cash and pension fund wisely.
The Treasury and the Department for Communities & Local Government, LGC is told, are aware of the issue – but whether they can influence the independent FCA is another matter.
The watchdog is currently considering responses to its consultation and will respond with its final rules in the spring – meanwhile, local government investors are holding their breath.