Strengthened local government Prudential Code to be published by end 2021: CIPFA

A strengthened Prudential Code, which aims to ensure local authorities’ financial plans are affordable, prudent and sustainable, will be published by the end of 2021, CIPFA has announced.

More than 100 participants responded to a consultation earlier this year which set out CIPFA’s proposals for a revised Code.

Since the Prudential Code’s last review in 2017, over three years (2016/17 – 2018/19), £6.6bn was spent by councils on commercial property, with £2.3bn of that on retail acquisitions. This represents 14.4 times more spend on commercial property acquisitions when compared with the preceding three years.

The key changes being brought forward are to paragraph 45 of the Prudential Framework, which currently states that ‘authorities must not borrow more than or in advance of their needs purely in order to profit from the investment of the extra sums borrowed.'

The revised Code will include clarification and examples of what is and is not classified as prudent borrowing activity. These added principles are intended to protect the public purse and avoid misinterpretation of the Code’s provisions.

Other key changes that will be implemented following consultation include:

• The inclusion of proportionality as an objective, so that an authority incorporates an assessment of risk against levels of resources.
• Clarifications to better define commercial activity and investment.
• The introduction of the Liability Benchmark as a Treasury Management indicator for local government bodies

In addition, CIPFA has also this week published its response to its Treasury Management Code consultation. The revised Code will integrate Environmental, Social and Governance risks into the policy framework, setting out guidance on development, retention of knowledge, skills, and training.

CIPFA intends to publish the revised Prudential and Treasury Management Codes in December 2021.

CIPFA CEO Rob Whiteman said: “We are tremendously grateful to everyone who took the time to share their thoughts with us throughout this consultation process.

“CIPFA is committed to maintaining a principles-based system that gives local authorities the freedom and protection to invest in their communities. It is the actions of a minority of outlying authorities that are putting those freedoms at risk of further government intervention into the Prudential Framework.

“We are confident that the proposals we will be implementing will put an end to actions that either push the boundaries of the Prudential Code or intentionally misinterpret its provisions.”

CIPFA’s full response to the Prudential Code consultation can be found here.

CIPFA’s full response to the Treasury Management Code consultation can be found here.

Local authorities are required by regulation to have regard to the Prudential Code when carrying out their duties in England and Wales under Part 1 of the Local Government Act 2003, in Scotland under Part 7 of the Local Government in Scotland Act 2003, and in Northern Ireland under Part 1 of the Local Government Finance Act (Northern Ireland) 2011.