Government announces new intervention powers to tackle risky council investments

In a consultation launched on Thursday (28 May), the Ministry of Housing, Communities and Local Government (MHCLG) said it plans to take forward the statutory capital risk powers introduced by the Levelling-up and Regeneration Act 2023, which will amend the Local Government Act 2003 Act.

This would enable the Secretary of State to issue directions to individual authorities where such risk is identified.

The Government said the reforms are needed in light of a “marked increase” in borrowing across the sector with total borrowing by English principal authorities rising from £60.4 billion to £83 billion by the end of 2019/20.

It added that a “small but significant” number of authorities had experienced severe financial failure because of historic decisions “that left those authorities with unsustainable debt, far in excess of the value of the assets it was used to finance”.

It also said that the MHCLG wanted to preserve the flexibility that responsible authorities need to invest in their areas, while ensuring that the system is sufficiently robust to detect, mitigate and, where necessary, intervene in relation to excessive risk.

The consultation document said that the legislation requires any direction issued by the Secretary of State to be appropriate and proportionate to the level of financial risk - and that, while the powers enable intervention, their use would be discretionary and targeted.

According to the document, the proposed powers can only be exercised where a trigger event occurs.

It added: "A trigger event arises where an authority is financially unsustainable, indicated by the issuance of a report under section 114(3) of the Local Government Finance Act 1988 (‘section 114 notice’), or the need for government support to avoid such a report, or where an authority breaches a risk threshold in relation to one of the 4 capital risk metrics specified in section 12B of the 2003 Act.

"For example, the first metric relates to whether an authority is excessively leveraged."

According to the document, the risk metrics are already set out in primary legislation. But the method for calculating the relevant numerical thresholds must be specified in secondary legislation.

The consultation asks for views on the method for calculating and applying the relevant numerical thresholds. It closes on 6 August.

Adam Carey