Why municipal lending is low risk
Investing in local government is low risk, due to the way it is regulated. Councils operate under strict controls to ensure their budgets and balanced and, importantly for investors, they cannot go bankrupt to avoid paying debts.
Councils have to repay loans ahead of other obligations
When you lend money to an organisation or an individual, you are taking a risk that they won’t be able to pay you back, or the interest owed.
Lending to local government is totally different. Local government organisations such as councils can’t be declared bankrupt and they are required to repay their loans ahead of other spending obligations, so you are at the front of the queue. This means that there is no record of a UK council ever defaulting on repaying its debts. Past performance is not a guide to future performance.
Strict processes and controls to manage spending
Local government is the bedrock of our communities. It provides essential social services - such as adult and child social care and support for the homeless - which it is legally required to do. Because of this critical role, councils and individual council officers are subject to strict regulations and legal responsibilities to carefully manage their spending and ensure their financial plans are sustainable.
Of course, that doesn’t mean that councils don’t get into financial difficulties, and are sometimes reported as ‘going bankrupt’ in the media, but the reality is that councils in financial difficulties can trigger special measures (by issuing what’s called a Section 114 notice) which allow them to take additional steps to balance their budgets. Only a small proportion of councils have ever used this mechanism, and a Section 114 notice cannot be used by councils as a way to avoid paying its debts, or interest owed on loans.
They borrow money to invest in the future, not fund core services
Local government organisations borrow to invest in the future of their communities. Much of this lending comes from central government through the Public Works Loan Board - which lent £7.8 billion to UK councils in 2022/23. All council borrowing is secured against their revenues, including council tax.
Councils are not legally allowed to borrow money to cover shortfalls in the funding for core services. So any money they borrow using our municipal loans must go to fund long term green projects to improve infrastructure.
Low risk of capital loss, but there are other risks to consider
When lending money to a council, there is a very low risk of not being repaid for the reasons given above.
But, as with any savings or investment product, there are a range of other risks to consider. Our municipal investments are fixed term loans, which means your money is tied up for a number of years and you may not be able to get your money back earlier. There is no protection from the Financial Services Compensation Scheme for our council investments and if Abundance was to go out of business this could disrupt the administration of your investments.
There are two levels of protection for investors in this situation. We maintain a level of capital, as we are required to by the Financial Conduct Authority, to support an orderly wind down of our company in the event it’s required (in simple terms, this means we can continue to administer existing investments even if we decide to not to offer new ones). In addition, we have an alternative service provider which is contracted to step in in the event that we are no longer able to offer our own investment platform.