Ms Brenda Gibson
Investment Business Policy Department
The Financial Services Authority
14 September 2000
Dear Ms Gibson
CP57 - The Conduct of Business Sourcebook Supplement
Thank you for giving us the opportunity to respond to your further consultation on the Conduct of Business Sourcebook. We are pleased to see that some of our suggestions have been adopted particularly with regard to the categorisation of clients. We do, however, have a few additional points we wish to make.
1. We understand that the question of mandates is still not resolved. As you are aware, we believe that the clarification of the nature of the relationship between a customer and a bank that is facilitated by a mandate document is extremely valuable. We are even more of this view having seen the draft regulations on the interception of communications. Under these proposals, it would become particularly important for companies operating as intermediates to notify bank counterparties that they may be taped. Corporates operating as MCPs would be justified in taking the view that their counterparties would expect to be taped but intermediates, which would be less likely to use taping, would have to be more careful to notify counterparties. The mandate is the best vehicle for this information.
2. We have reservations over certain aspects of the categorisation of clients.
3. We welcome the proposal that all listed companies are categorised as intermediate customers. However, we note that non-listed companies and some other bodies can also be included as long as they have net assets of £5 million. We have concerns about this. Firstly, net assets is not a very reliable proxy for a company's size or expertise. Secondly, the definition of net assets is not clear e.g. does it include intangibles? We would much prefer turnover as a benchmark.
4. We do not understand why opt-up to professional (market counterparty) status will only be allowed for those bodies starting out as intermediate customers and not private customers, however expert they may be. It is possible that a private (or public but not listed) trading or commodities company with very large turnover currently operating in the markets as a professional would be categorised as a private customer, able to opt up to intermediate status but not professional. This problem would be reduced if a turnover test were substituted for the net asset test.
5. We note the new test for intermediate customers to opt up to professional status i.e. that companies must meet any two of the following three hurdles:
While this seems unnecessarily bureaucratic it should not cause problems for corporates wanting to opt-up other than the type of company mentioned above. For trading companies the £5 million net asset test for intermediate status seems disproportionate to e.g. the balance sheet test for opting up. Such companies with turnover and balance sheet around the level of the benchmark (and therefore eligible for opt up to professional status) would probably have net assets of rather less than £5million and not make it into the intermediate category to start with.
We hope you find these comments useful. Please do not hesitate to contact us for any clarification. In the first instance please address your queries to our technical officer, Caroline Bradley, at cbradley@treasurers.co.uk or on 020 7213 07381.
Yours sincerely
Philip Gillett, Chairman,
Technical Committee