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Whitehall should supervise soaring number of financial institutions – NAO

The government should take a “portfolio” view of the significantly higher number of financial institutions it now controls in order to oversee risks and assurances, the National Audit Office (NAO) has recommended.

A portfolio approach would allow the government to provide oversight, identify and manage potential risk exposure, and benchmark performance across these institutions and within sectors – beyond its departmental boundaries.

According to a NAO report released today (10 September), the number of government-controlled financial institutions has doubled to 54 since 2007.

This includes bodies created specifically to address market failures in sectors such as housing, student loans, green energy and small business lending – as well as taking stakes in four large banks during the financial crisis.

Total asset value for the wholly-owned government institutions is at £222bn, while exposure to debt was over £2tn between late 2009 and early 2014.

Amyas Morse, head of the NAO, said: “Financial institutions are becoming significant elements in the government balance sheet, creating a range of opportunities and risks, but no one part of government is taking an overview.

“The government should adopt a portfolio management approach alongside the traditional departmental oversight model to provide a heightened assurance over the portfolio.”

Although it plans to reduce exposure to some sectors, NAO claims this may be offset by a growth in policy-related activities, such as the Help to Buy schemes, the value of which has escalated to £3bn.

Student loans are also an increasingly prominent feature of the government balance sheet, with the Office of Budget Responsibility (OBR) predicting that £84.4bn of new student loans will be issued in the next five years – with only £12bn being repaid during the same period.

The OBR also estimates that the government will receive around £94.6bn in the next five years from a combination of repayments and selling assets, including shares and loan books.

But its net cash proceeds will dip into the negatives as it loses £2bn due to issuing new loans and other initiatives over this parliament.

Morse said: “The government’s plan to accelerate its asset sale programme is unprecedented in scale and aims to reduce its exposure to the financial sector. We expect the government to demonstrate good practice when it disposes of these investments.”

He noted that while some of these institutions survived the market conditions they were created to alleviate, their continued existence in the public sector is “questionable”.

The NAO report added that if Whitehall decides to reduce its financial services portfolio, an “orderly exit” from the sector should take many years.

(Top image c. Danny Lawson, PA images)


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