The potential pitfalls of mandatory principal advice for town halls and local authorities
In recent discussions, town halls and local authorities in England and Wales have expressed significant concerns about the government’s proposal to require them to take principal advice on investment strategies from predefined pools. This mandate has sparked debate, with many arguing it could lead to conflicts of interest and undermine the effectiveness of local financial management.
Understanding the proposal
The proposal suggests that local authorities must seek investment advice exclusively from these pooled entities, rather than having the flexibility to choose advisors based on their specific needs and preferences. Many see this as problematic, as it restricts the ability of local funds to procure advice from a variety of sources, including those that might provide better value for money or more tailored solutions.
Conflicts of interest
A primary concern is the potential for conflicts of interest. When a single entity serves as both the principal advisor and a potential service provider, it can create situations where the advice given is not entirely impartial. For instance, if the pool is also the fund’s only source of investment advice, there is a risk that the advice will be biased towards the pool’s own offerings rather than what is best for the fund. This could lead to inefficiencies and poor financial outcomes, especially if the pool does not have the same level of resources or expertise as independent investment consultants.
Governance and independence
From a governance perspective, the mandatory use of principal advice from pools raises significant concerns. Scheme advisory boards have noted the potential for perceived or actual conflicts of interest arising when the pool serves as both advisor and service provider. This arrangement can compromise the independence vital for making sound financial decisions. Local authorities need the freedom to change advisors if they are dissatisfied with the performance or advice, yet the current proposal appears to restrict this flexibility.
Alternative solutions
To mitigate these issues, alternative approaches have been proposed. These include allowing local authorities to continue procuring their own investment strategy advice on a competitive basis. Such an approach would enable them to select the best value-for-money provider, whether from the pools or independent advisors. Additionally, advice could be limited to solutions that the pool can reasonably offer, or even extend to allow investment in solutions from other pools if necessary. This would help manage the risk of biased advice while fostering innovation and diversification in investment strategies.
Best practices in consultation and decision-making
Effective consultation and decision-making processes are essential. For town halls and community centres, which often face unique challenges in meeting community needs, proactive consultation plays a critical role. This means engaging with the local community to understand preferences and requirements, rather than imposing predetermined solutions. The Charity Commission’s guidance on managing village halls and community centres highlights the importance of straightforward yet effective consultation methods to ensure that a charity’s activities align with the community’s needs. Similarly, in financial decision-making, involving diverse stakeholders can help mitigate conflicts of interest and ensure more robust, informed decisions.
Conclusion
The requirement for town halls and local authorities to take principal advice from predefined pools is a nuanced issue that demands careful thought. While the proposal aims to streamline and standardise investment advice, the potential risks of conflicts of interest, reduced independence, and inefficiencies must not be overlooked.
Allowing local authorities the flexibility to choose their advisors, ensuring any advice is impartial and tailored, is essential to safeguarding the financial health and effectiveness of local communities.
At Cutts & Co Accountancy, we understand the importance of transparent, conflict-free financial management. We are committed to providing advice tailored to each client’s unique circumstances, and we believe local authorities should have the same freedom to make well-informed financial decisions.
