Ladies and gentlemen – it is an honour to be asked to be here in Prague to speak at the Fifth Treasury Management Forum of the Czech Treasury Association (the CAT). I was particularly pleased to be invited to talk about the scope for treasury associations to benefit from collaboration with other organisations – it gives me the chance to reflect a little on what I have observed and learnt during the last five years. Maybe I should give you a brief bit of background on myself. I have been chief executive of the UK treasury association, the ACT, since May 2002. Before that I had worked for 20 years in industry, for several multinational UK, Australian and American owned companies; I also spent nine years as the partner leading the treasury consulting business at KPMG. Since 1981 I have been a member of the ACT – so I certainly knew the organisation reasonably well before I actually became involved as the executive running it. The ACT was established in 1979. There were a number of factors behind this and I think it is worth describing them, because it helps underline how far the world of treasury associations has developed since then. Looking back now I would stress four key elements that led to the start of the ACT in the UK. Firstly, we had the background of the strength of the London financial markets – markets that were growing and becoming rapidly more sophisticated, in large part as a consequence of the pool of what was called then ‘euro dollars’ – not a surprising new hybrid currency, but liquidity available for lending in the international markets as a result of the persistent current account balance of payments deficit run by the US. From an historical perspective it is interesting to recall that these ‘offshore’ dollar balances were there in part because of the extent of mistrust of the US – on the part of communist bloc countries and others – over the risk that the US could unilaterally impose restrictions on access to dollars lent back to US institutions. Another driver was of course the very poor deposit rates on offer to foreign investors in the US. Secondly, we had in the UK seen exchange controls removed from one day to another – and I recall this happened overnight without any forewarning. This change meant that treasurers were suddenly offered much greater potential to use currency markets for risk and funding management – a key part of what treasurers are concerned with. Thirdly, there was considerable interest in facilitating the sharing of knowledge and experience amongst treasurers – not the least so that the strength of the banks was matched at least in part by a well-informed group of customers. And fourthly, it is greatly to the credit of those who drove the creation of the ACT that there was an early recognition of the advantages of education – leading to formal qualification – for those working in the young, new profession of treasury management. For such a profession to be able to lead in educating its practitioners there was a clear need to establish a formal organisation. And for those early treasurers who led the creation of the ACT.
there was a wish to ensure that professionally trained staff were going to be available to succeed them in their jobs, allowing their own careers to progress. Having given you a little of the background in terms of where we in the UK have come from I would like now to share with you my views on where treasury associations in Europe and indeed globally find themselves today; describe what we have achieved so far through cooperation – and where I believe we have been less than successful in making the most of the opportunity; and then give you my thoughts on how such cooperation can develop in the future. The opportunity for cooperation can be seen in two forms. We can look to capitalise on the strengths of individual associations and work together – this would be through ‘bilateral’ or ‘multilateral’ arrangements. I am much less concerned here about the formality of such deals – I do not think it greatly matters whether we have signed memoranda of understanding or even more formal legal documentation to record the cooperation. For me what matters much more is the motivation and the substance that lies behind the good intentions. If there are clear objectives in common and a cultural ‘fit’ between two or more associations then we can achieve a lot together. An excellent example for me of the bilateral approach working well is the talkingtreasury thought leadership forum that we arranged jointly between the CAT and ourselves in March 2006. Together we created a one day event to discuss key issues facing the treasury profession across Europe. We discussed three areas: best practice in treasury management; how companies in Europe are handling IFRS implementation; and the challenges posed by the Payments Directive and SEPA – the Single Euro Payments Area – implementation. We attracted a genuinely pan-European audience with of course very strong involvement by the members of the CAT. Since the Prague event we have held the second talkingtreasury in Amsterdam and the third is due to take place in Dusseldorf in just three weeks from now. In the ACT we will continue to be enthusiastic about such individual cooperation with one or more other treasury associations. The basis will not always be running a conference or similar event. The benefits of cooperation are substantial where we can bring together an understanding of issues – an understanding that is detailed enough to allow us to identify where we have a common concern and what it might be appropriate for us as treasury associations to do about it. So in addition to conferences and events we can cooperate in debate on technical issues and certainly also on treasury education. The second approach to cooperation is of course through the two international organisations that bring together the leaders of the national treasury associations. There are two such bodies – and in both of them the CAT is an active participant. I apologise for the use of acronyms but I have to refer to two: IGTA, which is the global organisation; and EACT, which is the grouping of associations based in the European Union.
IGTA is the older of the two – it was launched in 1996 and was followed by the EACT in 1998. The CAT has been a member of IGTA since 2002 and joined the EACT in 2004 at the same time as my own association. To prepare for this speech I looked back at the minutes of IGTA meetings since its foundation. It was fascinating to see how widely the topics on the agenda ranged – the impact of European Monetary Union was not surprisingly an early agenda item but the meetings over the years have also covered shared service centres, payment systems, the legal responsibilities of treasurers, use of treasury centres in tax-advantaged locations and the evolution of risk management. The list is lengthy. With one exception, to which I’ll return in a moment, the hard reality is that the main benefit of IGTA – in my view – is that it has provided a forum in which we can get to know each other. This may sound a little feeble; but I suspect those of you in the room today who work for large organisations can relate to the benefits you see when there are periodic meetings bringing together colleagues from around the world or around the country. What we’re talking about is networking within a group sharing common interests; not perhaps the fashionable ‘social networking’ of the new world of Facebook and other internet sites but valuable people contact. IGTA meets once a year for a day and a half. Whilst country representatives change over time, there is sufficient ‘glue’ in this limited contact to allow us to work well together if required during the intervening time between meetings – and we of course do so by voice and by email. I said there was one exception to the view that IGTA’s value lies in the networking I have just described. That exception is – significantly – an example where three associations were asked by IGTA to undertake work that would carry IGTA’s name and represent a common position supported by treasury associations globally. The three associations were ourselves in the UK together with the French and the Americans. We were aware that the power of the rating agencies was under scrutiny by various authorities. Through our cooperation we were in fact well ahead of the authorities: we published our proposals for a code of conduct for the rating agencies in draft form in April 2004. This became a year later the “Code of Standard Practices for Participants in the Credit Rating Process”. The Code was issued by the three associations with the clear support of IGTA and also of the EACT. We jointly took the stance that there was no need for regulation of credit rating agencies, since that might create barriers to new entrants and worst of all might in some way lead to a standardisation of rating methodologies. We believe that the market really values the rating agencies’ independence and diversity of approaches used to reach their opinions. We did however recommend a code of conduct to ensure good practice in areas like conflicts of interest, maintaining confidentiality and so on. The International Organisation of Security Commissions (IOSCO), which is the umbrella organisation for securities regulators like your own Czech National Bank, picked up on the subject with its own consultation (in October 2004) which resulted in the IOSCO “Code of Conduct Fundamentals for Credit Rating Agencies” in December 2004.
At much the same time in Europe the Committee of European Securities Regulators (CESR) began to look into the possibility of regulating credit rating agencies and for this one the ACT and the French AFTE submitted joint evidence in August 2004 – and again early the following year with a response to the formal CESR consultation. We jointly attended the public hearing held by CESR and were definitely recognised by the Chairman as the only voice in the room for issuers. We were pleased that this process concluded with advice to the European Commission that regulation was not required. My comment about being seen as the voice of the issuer is an important one. In a world of financial regulation – and where there is pressure for this to increase – the banks and other financial institutions are the ones immediately the subject of regulation. But the framework of regulation of the financial institutions directly impacts their customers – that is you, the corporate treasurers in this room. We find that time after time we have to put our hand up and remind regulators and legislators to think about the impact on customers. Just making this obvious point can be hugely important and often is something that the authorities easily overlook. Making the point on a united and international basis significantly helps to redress what frequently appears to us to be a fundamental imbalance in the system, with regulators and legislators failing to talk to the users of financial services. I would like to turn now to the European treasury organisation, the EACT. It should not be a surprise that given the rather different background to the EACT, its effectiveness has in some respects clearly surpassed that of IGTA. The origins of the EACT lie in the preparation for the introduction of the Euro. The EACT’s membership was until 2004 limited to Euro area participants. With that process completed for the original group of Euro-countries – and clear paths established for those that intend to follow them into the currency union – the EACT has had plenty of other challenging areas to consider. These include all the issues arising from the EU’s Financial Services Action Plan and the Lamfalussy process – which creates new law through a tiered process, starting with high level aims and working down to the detailed rules and local implementation guidance. In addition we have had to deal with the introduction of international accounting standards and the EU’s commitment to require compliance with these standards by listed companies. In connection with both the FSAP (Financial Services Action Plan) and IFRS an enormous amount of work has been led by individuals with the support of the EACT. It is interesting to note here the contrasting enthusiasm for such issues in the global body, IGTA, and in the EACT. The reasons are self-evident: with the FSAP and IFRS the members of treasury associations in Europe have recognised that the way we can do business – and report on it – was being reshaped for us by the legislators, regulators and standard-setters. So it has been relatively easy to achieve a degree of cooperation. The EACT – and advisers working with us – have done considerable work on the issues around the drafting of IAS 32 and 39.
Treasurers generally viewed the introduction of fair value principles into accounting for financial instruments as challenging to the profession. This was far more than the predictable and legitimate concern over the sheer complexity of the approach. We were worried that the IASB’s drafting was too influenced by the rules-based approach in the equivalent US standards. We also feared that some aspects of the proposed new standards could have the unwelcome effect of allowing risk management decisions to be driven by accounting treatment rather than economic reality. We do not claim to have persuaded the IASB to take all our concerns on board. We did however get that vital ‘seat at the table’ on working groups making input to the IASB – and had notable success in getting an amendment to IAS 39 to cater for cash flow hedge accounting of forecast intra-group transactions. Although the implementation of the FSAP through a series of Directives has raised numerous issues for treasurers, it is in the area of payments that the EACT has concentrated its activity – and rightly so, in my view. Making and receiving payments is a core part of what all treasurers are responsible for. At a European level the vision from the Commission has been to make payments between countries as easy as payments within a single country. The Payment Services Directive was created to introduce a harmonised legal framework for payments across Europe. Given the commitment to a single market and the reality of a single currency for much of the EU, this vision seems inherently sensible and indeed necessary. The initial document from the Commission was called the NLF – or New Legal Framework – and to respond to this an EACT committee was set up; this involved representatives from as many treasury associations as were able to participate. Through the drafts and redrafts of the NLF and then the Directive itself, the EACT was able to submit extensive comments to the Commission, and in the later stages to members of the European Parliament. The EACT achieved recognition by the Commission as the representative of the business customers. The feedback the EACT provided came from a group that that was knowledgeable on banking and payments in the different countries and on the features, service standards and responsibilities that it would be sensible to build in. The expertise within the EACT meant that the Commission officials at a senior level were willing to meet us and hear our concerns, and the EACT developed a good reputation in their eyes. Last year with some influence from the Irish Association the EACT was even able to meet Commissioner McCreevy. When it came to turning the Directive ideas into a practical reality a grouping of banks came together as the European Payments Council and their brief was to design SEPA, the Single Euro Payments Area. The Council’s initial approach allowed for little liaison with the corporates. As the SEPA rulebooks evolved the EACT was trying to influence their shape in very practical ways, so that the end product would be of good quality and deliver what the corporate wanted and needed. This was not easy and we were not always given a hearing.
At this stage the EACT’s reputation with the European Commission and with the European Central Bank came into play; our complaints that the banks were not listening properly to the EACT provoked the Commission into putting pressure on the EPC to involve the users far more. The Commission even published a so called ‘Incentives Paper’, which in effect was a warning to the EPC to get on with the SEPA project and to involve customers or face compulsion. Specific mention was made of the need to involve the EACT. This involvement has now been happening and although there was not enough time to incorporate some of the ideas from the EACT into the initial rulebooks, good progress is being made. Version 3 will for example include the EACT ideas for an alternative form of direct debit – one that cannot be reversed at the whim of the payer – and a new optional mechanism for setting up a direct debit by routing it through the debtor bank (payer’s bank) rather the standard creditor mandate flow through the payee’s bank. Discussions on the exact procedures are still continuing. I have run through this background in some detail to make the point that a combined attempt at influencing at the European level can work – and that organisations that are themselves pan European feel more obliged to react to inputs from pan European bodies. On areas like new Directives the EACT can work with the Commission, which formulates new laws, and on members of the European Parliament that must approve them. At the same time individual NTAs can give feedback to their own governments, since ministers from individual member states come together in the Council of Ministers and this group also has to agree any new Directives under the co-decision process. Indeed I would put the case for cooperation more strongly, and ask how you would react if you were a civil servant in the EU Internal Market Directorate being lobbied by a national treasury association. No matter how reasonable the arguments, you would probably fear and detect some local vested interest and a lack of representation of the wider community. If on the other hand as a European civil servant you dealt with treasury professionals proposing a pan European course of action, it must be inherently easier and more attractive to respond to what may well be a far more convincing case. I want to mention one other area of activity by the EACT, where we can again see the benefits of cooperation between treasury associations and across Europe. This is the CAST project. The acronym CAST is based on the English language name for the project, which is Corporate Action on STandards. The purpose of the project is to review the various standards that exist in the areas of remittance information for e-reconciliation, e-invoicing and digital identity. The intention is not to create yet another standard but to recommend to the market and the European Commission how best to concentrate on a single standard. The stimulus for this project comes from the SEPA programme and the potential that has offered for standardisation. This is an ambitious project for the EACT. The work is being done by consultants employed by the EACT. The EACT has raised money to fund the work, with this coming primarily from financial institutions that do have a strong interest in initiatives that can strengthen the working of the financial value chain. Within the EACT we had lively debates before we committed to CAST; these debates touched on fundamental questions such as the project’s relevance to the treasury associations, the governance of the work and the reputation and other risks for the EACT in supporting the project.
I have always taken the wide view of the role and scope of treasury. I do for instance believe that treasurers, through their responsibility for cash management, should be centrally involved in working capital management. It is after all self-evident that movements in working capital give rise to cash flows either into or out of the business. So I, together with the ACT, have given support to the CAST project. Its output has the potential to improve the efficiency with which information about cash flows is provided by the business and it should therefore lead to better working capital management. What is most important also is that a successful CAST project will both enhance the reputation of the EACT and in practical ways also strengthen the role of the treasurer. There are risks that CAST will fail – risks that are not insubstantial given the scope and ambition of the project and the difficulty for an organisation like the EACT to control the project’s progress. But for the moment I remain optimistic. The EACT’s work on IFRS and the Payments Directive has largely been done by a small number of people who have been able for a variety of reasons to offer their time to the projects. For CAST the approach has been different in that it has settled into a commercial arrangement, in which the EACT is commissioning work by consultants who must deliver according to a set of terms of reference. For the future I am personally a strong believer in the view that the most effective cooperation between treasury associations is based on the willingness of a group of associations to commit to sharing resource and expertise. This is very much the model used for the work on the conduct of credit rating agencies that we undertook jointly with the French and the Americans. When the model works it results in enthusiastic ‘ownership’ of the issue by a group that can work effectively together – without becoming too caught up in the complications of maintaining progress whilst keeping a large number of people and organisations suitably informed of the work being done. For this to succeed we have to have certain key ingredients. We need common agreement that there is an issue of importance to our members, one that affects their professional lives. We need an acceptance that by confirming a position that can then be adopted – in Europe by the EACT and globally by IGTA – we should have more impact than if we acted on our own as a national treasury association. And we need the ability to offer resources as well of course as expertise. This last requirement – for resources and expertise – is critical and touches on the heart of the differences between treasury associations. We are defined by these differences within the EACT, let alone within IGTA. Here in Europe we have ‘treasury clubs’ such as in Finland and Hungary, where there is no overhead of organisation and no wish, at least at present, to build infrastructure and incur all the costs that go with it.
At the other extreme we have my own association, the ACT, although it should be said we began life in effect as a club along the Finnish and Hungarian lines. But I now have 38 full-time staff and a divisionalised business to run – but at the end of the day I should stress that we are a not-for-profit organisation with members and not shareholders. In between the ‘extremes’ of the Finnish club and the UK’s ACT we have associations such as the CAT and the AITI in Italy – associations with the potential to contribute significantly. I take the view that we should be enthusiastic about allowing others to benefit from what you could describe as the ACT’s advantage of maturity. And I am in no doubt that the advantage can be shared by all of us, as we generate more support supra-nationally for the views that we hold. So we as the ACT will continue to encourage cooperation between treasury associations. I believe there are plenty of issues bubbling away, both above and below the surface, on which we can put that cooperation to good effect. Two areas very much on our agenda at present are good examples of this. These are in the field of private equity and private placement. Debate on private equity could occupy us for the rest of this morning, so I will simply say that I believe that treasurers as a whole can learn a lot from the approaches to financing used in private equity. In a wider sense we can all learn from the very disciplined and focused approach the leaders in private equity take to the creation of shareholder value. And finally, treasury professionals need to understand how private equity operates, because there are – at least in the UK – signs that this approach to financial management may actually be squeezing out some of the more attractive senior roles in treasury that have existed until now. In private placement you may be aware that there are moves afoot in the EU to encourage the creation of a standardised European private placement market that might rival the very established market in the US. At the moment if you are doing a bond issue and if it is listed on a regulated exchange then you have to comply with all the rules that flow from the Prospectus Directive. Alternatively you can offer your bonds to a restricted class of professional investors as defined in each country and with differing rules and procedures in each country. Broadly speaking we are happy to support moves to encourage such private placement markets but would be very much against any attempt to overlay a level of regulation, of the type that we might feel added no value and served to reduce the open market in which we believe. The European Commission is holding a public consultation on these private placement regimes in Europe and the ACT will probably make a simple response in favour of dismantling any actual barriers that stop issuers or investors from outside countries participating in any given country, but we will resist any attempt to standardise completely all these markets. In both private equity and private placement we have two developing issues where it may well be the case that action in the name of the EACT, led perhaps by collaboration between ourselves and one or two other treasury associations, will strengthen the treasury profession for the benefit of all of us. Inevitably the timescales for responses to events such as EU consultation can sometimes make obtaining EACT-wide agreement difficult but the principle is one that we should be pursuing.
So I conclude that we already have a good track record in models for cooperation between treasury associations; we have practical examples of this in the output of the work on the code of conduct for rating agencies and the Payments Directive; we have the work-in-progress on the CAST project; and we have the potential to tackle other issues as they are agreed to be worth adoption. I should also pay tribute to the CAT, which through the efforts of Ivan, Vit, Ondrej and Zdenek and other colleagues has always taken an active part in the work of the EACT and indeed IGTA. Our effective cooperation depends on being able to show that it is indeed broadly based in this way across countries. I hope that through the approach I have described we will all see even stronger and more vibrant treasury associations in each of our countries. Thank you very much for inviting me to speak at your conference. It has always been a pleasure for me to work with Ivan and his colleagues and I wish all of you the very best of good fortune in your professional and personal lives. Richard Raeburn Chief Executive, ACT