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FCA revises new investment rules but district treasury functions could still struggle

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New rules on how councils can invest will not be as stringent as feared for pension funds but will affect small authorities’ treasury functions.

The Financial Conduct Authority published a policy statement on how it will update its rules to mirror regulations set in the EU’s Markets in Financial Instruments Directive II on Monday evening.

Finance directors and treasurers previously warned that without revision the proposed rules, which come into force in January 2018, would have reduced councils’ abilities to invest pension fund and treasury money in complex assets and complicate their relationships with investment management firms.

MiFID II sets out different categories of investors. The FCA will class councils as ‘retail’ investors, which are considered less sophisticated than ‘professional’ investors and are prohibited from buying into complex investments such as derivatives or some illiquid assets such as infrastructure.

It is investment management firms’ responsibility to assess whether their clients are professional or retail. The FCA will allow councils to ask their investment managers to treat them as professional investors via an ‘opt up’ process.

Originally the FCA proposed investors would have to meet two of three criteria for asset management firms to consider them professional. Under these proposals, investors would have needed to have at least £15m assets under management, and then met one of two more criteria relating to the skills or experience of the funds’ decision-makers or the frequency of trading in particular asset classes.

In its final rules, the FCA has made some changes following a consultation and discussions with the Local Government Pension Scheme Advisory Board.

It has lowered the asset threshold to £10m, and added an extra criterion, whereby if the investor is a local authority pension fund that complies with LGPS regulations, it need not satisfy the other two criteria.

However, that extra criterion will not help councils that do not administer pension funds and have less than £10m in their treasuries, such as districts and parishes.

The FCA has also changed its skills and experience criteria so that investment management firms can assess the collective knowledge and experience present in an LGPS fund, taking into account that council funds are run by committees supported by officers and not a single investor.

In a statement, the LGPS Advisory Board said it was “never convinced of the benefits of a move to retail client status” and was “concerned about the potential costs” it would cause. However, it said the FCA’s latest policy was “a significant step in the right direction”. 

Nigel Cook (pictured), head of pensions and treasury at Croydon LBC, said that although opting up pension funds will present councils with “a lot of extra work”, the revised rules were sensible.

“We’ve got a dozen fund managers and we’ve got good relations with each of them and that will facilitate a fairly easy passage through this process,” said Mr Cook.

Mr Cook added the rule change will hasten discussions about whether district councils have the scale or capacity to run their own treasury investments.

“There have been conversations about districts and whether they should have their neighbouring county or unitary run their treasury for them; I probably had that conversation 20 years ago,” said Mr Cook.

“When you earn so little on any investments it makes sense to pool resources, otherwise you have a raft of transaction fees and management fees for returns of half a percent or less.”

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