The Prudential and Treasury Management codes

February 2022

CIPFA has issued two new codes – the Prudential and Treasury Management codes. So what does it all mean?

CIPFA has released the new Prudential Code for Capital Finance in Local Authorities (Prudential Code) and Treasury Management in the Public Services Code of Practice and Cross-Sectoral Guidance Notes (the Treasury Management Code) following a consultation period.

These two statutory and professional codes are important regulatory elements of the capital finance framework within which local authorities operate. Local authorities are required by regulation to ‘have regard to’ their provisions.

The updated Prudential Code includes the following as the focus of the substantive changes:

• The provisions in the code, which present the approach to borrowing in advance of need in order to profit from additional sums borrowed, have been strengthened. The relevant parts of the code have augmented to be clear that borrowing for debt-for-yield investment is not permissible under the Prudential Code.

This recognises that commercial activity is part of regeneration but underlines that such transactions do not include debt-for yield as the primary purpose of the investment or represent an unnecessary risk to public funds.

• Proportionality has been included as an objective in the Prudential Code. New provisions have been added so that an authority incorporates an assessment of risk to levels of resources used for capital purposes.

• A new requirement has been added so that capital strategies are required to report investments under the following headings: service, treasury management and commercial investments.

The main changes to the updated Treasury Management Code and the accompanying guidance for local authorities are as follows:

• Investment management practices and other recommendations relating to non-treasury investments are included within the Treasury Management Practices (TMPs) alongside existing TMPs.

• The guidance will recommend the introduction of the Liability Benchmark as a treasury management indicator for local government bodies (note that CIPFA has issued a toolkit to assist local authorities with the production of this indicator).

• Environmental, Social and Governance (ESG) risks are incorporated into TMP1 (Risk Management) rather than a separate TMP 13.

• The purpose and objective of each category of investments should be described within the Treasury Management Strategy.

Richard Lloyd-Bithell, Senior Policy and Technical Manager at CIPFA, said: “Both codes have been subject to a full and extensive consultation process and received significant response rates with more than 100 responses for each respective consultation.

“We welcome the thoughtful challenges and contributions of the sector and are pleased that the majority of respondents were supportive of the proposed changes, summarised above, with very few expressing direct opposition. CIPFA looks forward to publishing an analysis of the consultation questions this week.”