Welsh Local Authorities to Get the General Power of Competence Laura Fallon lfallon@arlingclose.com

The Local Government and Elections (Wales) Act 2021 will mean that Welsh local authorities will gain the general power of competence in November of this year. There is currently a consultation open seeking some further views on the issue. So, what exactly is the general power of competence and what will it mean for these local authorities?

As an individual the way the law works is that you are allowed to do what you want to unless there is a specific law telling you not to. For local authorities across the UK until 2012 this construct was the other way around: they were not allowed to do things unless there was a specific law telling them they could do something. Doing anything they were not specially allowed to do would be deemed ‘ultra vires’ and illegal. Murmurings have been made about changing this system since at least 1967 when the Maud Committee on Management in Local Government stated that it: “has a deleterious effect on local government… discourages enterprise, handicaps development, robs the community of services… and encourages too rigorous oversight by central government.”

Acts of parliament in 1972 and 2000 (and 2003 in Scotland) did try to go some way towards giving local authorities a bit more free reign. However, the system was bogged down by a quite narrow definition of what was allowable, a lack of case law and risk aversion by local authorities. The specific case that brought things to a head was in 2008 when the London Borough of Brent and nine other London boroughs clubbed together to form a mutual insurance company to provide insurance services to each other at a saving of at least 15% compared to paying commercial premiums. The London Borough of Brent was taken to court by the commercial insurance company ‘Risk Management Partners Limited’ where the creation of the council insurance company was deemed illegal. Finally, and following a high court judgement that Bideford Town Council allowing prayers before council meetings was also an ultra vires activity, the Localism Act 2011 came into force in England. The act stated that “a local authority has the power to do anything that individuals generally may do” including setting up an insurance company and saying prayers. Northern Ireland followed suit in 2014.

This ‘general power of competence’ has a number of built in restrictions. These include sensibly that anything that local authorities were specifically not allowed to do before (or after) the 2011 Act they are still not allowed to do. Local authorities cannot expand their tax raising powers or ability to pass byelaws and must set up a company when undertaking commercial activities. The act does not currently apply to police and fire authorities in England. Scottish authorities continue to have no general power of competence and no immediate plan for one.

The general power of competence has been widely felt to be a success, which is probably why it is now due to come into force in Wales. The main purpose of the act was to enable and encourage local authorities to be more innovative in how they did things without the constant fear of legal action. Setting up shared services or undertaking more commercial activities are prime examples of this.  The act was also part of a wider agenda of ‘localism’ or devolving greater powers from central government allowing local authorities to make more of their own decisions. As an example, many local authorities have been able to use the act to set up housing companies to help alleviate housing shortages in their local area. From a treasury management perspective, we believe that this power now allows local authorities to use standalone derivative products to reduce their treasury management risks and costs (although this issue continues to attract some controversy).

Being more commercial can of course have its downsides in that commercial enterprises can sometimes lose money as well as making it. Recent high profile cases include the failure of ‘Brick by Brick’ a house building company owned by Croydon Council and ‘Robin Hood Energy’ an energy company owned by Nottingham City Council. The recent restriction of access to PWLB (Public Works Loans Board) funding for ‘primarily for yield’ investing local authorities and expectations of more restrictions in this area do indicate some turning the tide on the philosophy of less central government control. As with our own personal general power of competence, whilst having more freedoms is generally a good thing just because you can do something does not always mean that you should.

Related Insights

Local Authority Derivatives – Regulatory Framework

Treasury Management Practices

Interest Rate Risk Management Using Swaps