Mr Peter Moore
Investment Business Policy Department
FSA
10 April 2000
Dear Mr Moore
RESPONSE TO CP 43
We are responding on the questions that are most relevant for our membership, i.e. corporate treasurers and finance directors in medium to large companies.
We support the approach of keeping the criteria objective and simple. However we feel that using as a sole criterion the size of net assets/capital would not work well in practice. Firstly, some major companies have small or negative net assets. Called-up share capital might help in some cases but the growing importance of information- as opposed to asset-rich companies could cause problems here. Perhaps more seriously, increased volatility in balance sheets arising from proposed changes in accounting standards could cause net assets in particular to be extremely volatile, so that companies might shift in and out of intermediate status.
In our response to a previous consultation paper we suggested turnover as one alternative or additional criterion. We now believe that a listing on a recognised exchange might be a better choice, as an additional criterion (i.e. minimum net assets/capital or listing on a recognised exchange). This could result in some very unsophisticated companies being categorised as intermediate but the suggested net assets figure of £5 million would include most of these anyway. Listing has the advantage of being very clear-cut, as long as it is carefully defined. Companies are listed or not, whereas net assets and turnover can oscillate around the cut-off size. Also, listing is an event at the time of which companies take on a number of new responsibilities and intermediate categorisation could conveniently be added to that number.
If the criteria for intermediate status were broadened, as suggested above, this question would be of little concern to our members. If, on the other hand, it was likely that some large companies might not meet the criteria for intermediate status then the proposed mechanism (authorised counterparty decides) might not be popular with companies but would probably work adequately in practice. However some companies would seek to opt up twice i.e. from private customer via intermediate status to full market counterparty. It might be sensible to provide for this situation in any event.
The process for opting up from intermediate to market counterparty status seems sensible but we question whether any size criterion is required. If a company qualifies for intermediate status (either by size or listing or by opt up from private customer status) and wants to opt up to market counterparty, it should be able to do so as long as the proposed safeguards are in place.
The risk is that unsophisticated companies might be pressurised by authorised firms to opt up but in practice there would only be a few companies in the £5 to £10 million net assets/capital band who would be affected by the current proposals. Having a specific criterion for opting up may also cause problems with transition arrangements (see below). If the FSA has particular reasons for suggesting a higher criterion for opting up perhaps the answer is to raise the size criterion for being in the intermediate category to £10 million net assets.
Clearly we would like the transition from the current regulatory regime to the new one to be as smooth as possible. We have stated in the past our wish that the existing arrangements between corporates and their market counterparties should continue as they are as far as possible. We suggest that the new rules contain a provision that where a company has dealt with a firm under the London Code of Conduct rules (i.e. as a market professional) within, say, the twelve months prior to N2, it will be deemed to have opted up to market counterparty status in respect of its relationship with that firm for those products covered by the London Code.
Where a company enters into a new relationship with a different firm the normal process for opting up will have to be undertaken. This may provide "relationship" firms with a minor competitive advantage but we do not believe that this is sufficiently serious to undermine the benefits of the approach suggested. Where it might be a serious problem would be for companies in the intermediate category that do not qualify for opting up i.e. those companies with net assets between £5 and 10 million referred to above. These would only be able to operate as market counterparties in existing relationships but not new ones. This would not be acceptable either to companies or firms.
We have had some concerns about the ability of companies to cope with the increased complexity of conduct of business rules resulting from the new arrangements. Smaller companies will mostly be dealing in non-investment products covered by the NIPs code. The majority of our members, however, will be operating across a wider range of instruments. If the current proposals are put into effect with the transition arrangements suggested above, treasurers will need to be familiar with NIPs, IPC and COBS. Many such treasuries have very low staffing levels and therefore it is very important that NIPs and IPC are as similar to the London Code as possible and are easily compared.
We have a particular concern about the development of IPC on the issue of mandates. These are vital for the control of treasury activity in companies. While we anticipate many of the problems associated with ensuring that individuals dealing on behalf of a company are authorised to do so, will be minimised by developing technology, at present this is a real issue for prevention of fraud. This will (it appears) be adequately provided for by NIPs and COBS but not IPC.
Because of this we are minded to advise members not to opt up to market counterparty status for investment products, so that they only have to pay attention to two sets of business rules rather than three. Our position on this will depend on the final form of IPC, but the new rules should provide that, in the event of transition arrangements as suggested above, companies deemed to have opted up could decide to opt down to the intermediate category.
In the absence of specific provisions on mandates, it should also be made clear that the opting-up or down decision by companies must be properly authorised, possibly by the Board of the company.
Yours sincerely
Philip Gillett
Chairman of the Technical Committee