1. This section gives guidance on matters relating to the entering into contingent liabilities by the Scottish Government (SG), including SG Executive Agencies. The guidance should be considered equally applicable to all other bodies specified in the annual Budget Act, including non-ministerial departments. SG sponsored bodies should, where appropriate, adopt procedures consistent with the guidance and comply with any relevant requirements.
2. A most careful appraisal of the risks, including the legal aspects, should be carried out before accepting any contingent liabilities. In all cases steps should be taken to restrict the total contingent liability to a minimum.
3. The prior approval of the Parliament (via the Finance Committee) must be secured before entering into any specific guarantee, indemnity, or letter or statement of comfort unless:
- there is specific statutory authority; or
- it arises in the normal course of business; or
- the sum at risk is £1m or less.
4. If a liability matures the relevant business area should consider, in consultation with the relevant SG Finance Business Partner (or equivalent), whether an immediate report should be made to the Parliament.
5. SG sponsor units should be satisfied that there are adequate arrangements in force to ensure that acceptance of contingent liabilities by bodies sponsored by the SG can, in the event of the contingent liabilities maturing, be met from within the bodies' own resources. Any contingent liabilities which the bodies might not be able to meet from within their own resources should be treated in the same way as the SG's own contingent liabilities.
6. Any prospective contingent liability in the form of a guarantee, indemnity or letter of comfort must be cleared by the relevant SG Finance Business Partner (or equivalent) who will advise on any budgetary implications if the contingent liability gives rise to a financial guarantee contract.
What is a contingent liability?
7. The accounting standard definition of a contingent liability is as follows:
- a possible obligation that arises from past events and whose existence will be confirmed only by the occurrence of one or more uncertain future events not wholly within the entity's control; or
- a present obligation that arises from past events but is not recognised because it is not probable that a transfer of economic benefits will be required to settle the obligation; or the amount of the obligation cannot be measured with sufficient reliability.
8. However, the particular contingent liabilities addressed in this section are essentially legally enforceable undertakings given in the form of a guarantee or indemnity which would bind the SG into providing the resources in the event of the guarantee or indemnity maturing; or a letter or general statement of comfort which could be considered to impose a moral financial obligation on the SG. In this section the term also covers undertakings to meet costs resulting from a guarantee or indemnity which will inevitably arise in the future even though the amount and timing may be unknown.
9. A most careful appraisal of the risks, including the legal aspects, should be carried out before accepting any contingent liabilities. In all cases steps should be taken to restrict the total contingent liability to a minimum e.g. by carefully specifying the duration, the extent and the conditions attached to guarantees. Guarantees and indemnities should normally exclude any liabilities arising from negligence on the part of the indemnified body or of its contractors, agents or employees.
Prior approval of the Scottish Parliament
10. Under the terms of a Written Agreement between the SG and the Finance Committee of the Scottish Parliament the Scottish Ministers, before granting any non statutory guarantees or indemnities in excess of £1m (including those without limit), should present their proposals to the Finance Committee of the Scottish Parliament as soon as practicably possible. This should take the form of a letter from the responsible Cabinet Secretary or Minister to the Convener of the Finance Committee. The letter should give particulars of the contingent liability and explain the circumstances including a full appraisal of the risk analysis process and any other options that have been considered. The letter should be prepared by the relevant business area in consultation with the relevant SG Finance Business Partner (or equivalent) and the submission to the responsible Cabinet Secretary or Minister should be copied to the Cabinet Secretary for Finance, Employment and Sustainable Growth and the SG liaison officer for the Finance Committee.
11. The Finance Committee will in turn consider the proposal at the earliest opportunity taking evidence from the appropriate Minister. The Committee will either approve the proposal or propose an amendment. The Scottish Ministers will either accept the amendment or notify the Committee that they disagree. It will then be for the Committee to decide to either allow the Scottish Ministers to proceed or to refer the matter to the Parliamentary Bureau for debate.
12. Contingent liabilities of a standard type which arise in the normal course of business, including standard contractual undertakings, or as an unavoidable feature of an activity authorised by statute (e.g. guarantees covering the admission of staff of statutory bodies to pension schemes) are not covered by the need for prior parliamentary approval unless expenditure at a later date may be of such a nature or size that the Parliament should be given notice.
13. It should be noted that the test is what the Parliament can be expected to regard as normal course of business in the light of the activities which it has authorised. It follows that this category does not include any contingent liability resulting from a new service for which parliamentary authority does not exist.
14. Examples of contingent liabilities arising in the normal course of business are:
- contingent liabilities resulting from non-insurance. As a general rule the SG only purchases commercial insurance where this would be more cost effective than non-insurance. Contingent liabilities resulting from non-insurance do not need to be reported where they arise in connection with activities for which parliamentary authority exists.
- contingent liabilities arising in the course of the purchase or supply of goods and services in the discharge of the SG's business as authorised by the Parliament.
Record of contingent liabilities
15. SG Finance Business Partners (or equivalents) should be notified of all SG contingent liabilities to enable them to maintain a record of contingent liabilities and to assist with the compilation of notes to the accounts.
Notification and accounting
16. Disclosure of contingent liabilities should be made in annual accounts in accordance with the Government Financial Reporting Manual. No separate report should therefore normally be necessary on the granting of contingent liabilities which do not require the prior approval of the Parliament. Where, however, a statute granting power to give guarantees or indemnities itself contains a requirement to report the using of the power, the statute must be complied with.
17. If a liability matures the relevant business area should consider, in consultation with the relevant SG Finance Business Partner (or equivalent), whether an immediate report should be made to the Parliament. The report should explain the circumstances in which the liability has matured and the amount of money involved. Appropriate Budget Act authority should normally be secured before any associated expenditure is incurred but in cases of extreme urgency the SG may seek the use of Ministers' contingency powers as set out in the section on Expenditure without Parliamentary Authority.
Financial guarantee contracts
18. With the adoption of Financial Reporting Standards 25 & 26 from 1 April 2008 and the conversion to International Financial Reporting Standards (IFRS) from 1 April 2009 it is possible that some guarantees or letters of comfort could be deemed to constitute a "financial guarantee" which will mean that they will have an accounting and budgetary impact.
19. A financial guarantee contract is a contract that requires the issuer (e.g. the SG) to make a specified payment to reimburse the holder (e.g. a bank) for a loss it incurs because a specified debtor (e.g. public body) fails to make payment when due in accordance with the original or modified terms of a debt instrument. These contracts can take various legal forms, including a guarantee, some type of letters of credit, letters of comfort or a credit insurance contract.
20. It is therefore essential that where the provision of a guarantee, indemnity, letter of comfort etc is being considered the relevant SG Finance Business Partner (or equivalent) is engaged to advise on whether the arrangement constitutes a financial guarantee contract and if so the accounting and budgetary implications.
New statutory powers
21. Any proposal to seek new statutory powers to give guarantees or indemnities (or otherwise to enter into contingent liabilities) must be cleared by the relevant SG Finance Business Partner (or equivalent).
22. Given the disclosure requirements of resource accounts, it will not normally be necessary to include with such powers any requirement to report, specifically, the use of the power to the Parliament.
23. The contingent liabilities of bodies sponsored by the SG are not normally under the direct control of the SG. However, any contingent liabilities which the bodies concerned might not be able to meet from within their own resources could fall to the SG. Sponsor units within the SG should therefore be satisfied that there are adequate arrangements in force to ensure that the acceptance of contingent liabilities by the bodies concerned is consistent with the bodies' defined powers and that, in the event of the contingent liabilities maturing, the bodies would have the ability to meet the costs from within their own resources. Any contingent liabilities which the bodies might not be able to meet from within their own resources should be treated in the same way as the SG's own contingent liabilities.
Updated: October 2011