Councils Required to Review Investment Policies

Amicus reviews and develops bespoke Investment Policies and Strategies specific to each client’s needs, risk profile and regulatory environment for local government and many other industry groups including managed funds, churches and charities, community groups, universities and schools and corporates.

Within NSW local government, it is a legislative requirement under the Local Government Act 1993 that Councils formulate and adhere to an investment policy. The Office of Local Government issued Guidelines in May 2010 to help Councils and their advisors draft an investment policy, but there is no legislative requirement for Councils to follow these guidelines. However, there is a legislative requirement for Councils to follow whatever is written in their investment policy once it is adopted by Councillors.

In practice, most Councils follow the OLG Guidelines when preparing their policies and incorporate many, if not all, the OLG’s recommended principles and wording. The two most common requirements included in policies, but then not followed by Councils are the necessity for an annual review of the investment policy and a separation of duties between any independent investment advisor employed and those parties from which or through the Council purchases investments. To adopt these terms within the investment policy and then not to stick to them is a breach of the Act.

In most cases, the annual review of the investment policy is usually simply delayed and the policy is reviewed less frequently than every twelve months. To prevent this occurring it is a good idea for Finance Managers to diarise when the policy is due for review and to start the process three months in advance to consider any changes necessary and prepare the proposed changes for review by the Audit and Risk Committee and full Council within the twelve month time frame. Amicus regularly reviews the investment policies of all its retained clients and has frequently been commissioned to review the policies of other investors on a project basis. As Amicus has many clients across a variety of industries, Amicus is able to bring together the best practices across a number of fields for the benefit of all of its clients.

Breaches caused by employing a single firm to both advise and transact investments on behalf of Councils is a more complex issue and generally occurs when the Council uses an online trading platform for both trading and reporting purposes. If the platform provider is also providing advice this nearly always contravenes the investment policy as the platform provider either receives direct brokerage from the banks offering products on the platform (platform fees based on volumes transacted) or indirect benefits. There is clearly a conflict of interest in this case as the platform provider has an incentive to advise Councils to trade with ADI’s through their platform rather than any ADI’s the platform provider has not as yet signed up.

The typical wording adopted by Councils in their investment policies is “The advisor must be an independent person who has no actual or potential conflict of interest in relation to investment products being recommended and is free to choose the most appropriate product within the terms and conditions of the investment policy. The independent advisor is required to provide written confirmation that they do not have any actual or potential conflicts of interest in relation to the investments they are recommending or reviewing, including that they are not receiving any commissions or other benefits in relation to the investments being recommended or reviewed.” which is the OLG’s recommended phraseology.

In a practical sense most Councils are now grouping the provision of an online reporting system and an online trading platform together rather than grouping reporting and independent advice together. When they go out to tender or EOI Councils are now typically separating the provision of advice from the provision of an online reporting system and are running separate tenders for each service. This appears to be working well for both Councils and service providers and causing less issues for platform providers in terms of their disclosures to ASIC and the terms of their Financial Services Licenses.

While many other industry groups do not have the same “black and white” legislation as local government in terms of not mixing investment advice and the broking of investments, it appears local government was ahead of its time as the separations implemented following the GFC are almost exactly the same ones recommended by the recent Hayne royal commission to combat “conflicted remuneration”. Many other industry groups could learn from the best practices of local government.

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