Supplementary memorandum by Butlers (LAI
18A)
Whilst we appreciate that the Committee has
limited time for each witness, we were concerned that the questions
asked at the hearing on 26 January did not address many of the
issues covered in our written evidence. There also seems to be
a misunderstanding of the role of the Butlers' service.
In this letter we set out further details of
exactly how we provide this service, which we hope will assist
the Committee in its deliberations.
For 18 years Butlers has been providing support
to local authorities building up a client base of some 145 authorities
We have a stable team of twelve professionals with many years
experience (five are also CIPFA qualified), and clients appreciate
the continuity that we provide, particularly when compared with
other consultants. We work continually with the professional bodies
such as CIPFA, the LGA and various Treasury Management forums
around the UK.
As you know, we provide advice in a wide number
of areas, ranging from capital and finance accounting guidance,
assisting in budget forecasting, advising on interest rate trends
and debt management. Particularly in the area of debt management
and restructuring, which we regard as the core component of our
service, we have over the years helped clients to save very considerable
sums of money.
In the first few weeks of 2009 alone we have
assisted our clients in the restructuring of nearly £1 billion
of debt, which has saved them and local tax payers in excess of
£65 million for the revenue account.
There was little time at the Committee to set
the local authority exposure in context: The issues surrounding
the Icelandic banking failures are not solely a local authority
issue—the reason those banks ultimately failed was due to
the bankruptcy of the Icelandic government; a point that I am
sure depositors and investors in the several UK banks which are
now Government owned or controlled may ponder on. We understand
that the local authority exposure is a small proportion of the
overall exposure to Iceland, which suggests that the counterparty
selection and risk mitigation procedures of many other sectors
and institutions were radically less good than that of the majority
of local authorities. Given the near collapse of the global banking
system at the time, and as set out in our submission, we believe
the CLG Guidance and CIPFA Code of Practice to be broadly sound.
The financial markets across the world are undergoing
a period of unprecedented uncertainty. The failure of the Icelandic
banking sector was primarily due to liquidity issues, rather than
solvency. Initial indicators from the receivers and administrators
suggest these banks were solvent at the point of failure. They
also had little or no exposure to the US sub-prime debt which
has caused difficulties with other institutions.
If we may respond in a fraction more detail
to the questions raised and documented in the Uncorrected Transcript
of Oral Evidence (HC 164-ii); in the course of your deliberations
it is important to clarify certain issues to ensure there is no
misunderstanding:
Q80—Training
We have, and continue, to provide training for
trainees, officers and Members and our training courses are recognised
as part of CIPFA 's Continual Professional Development (CPD) programme.
Whilst we provide this facility to clients it is not mandatory
on Councils to attend. It is also often, but not universally the
case, that the Member responsible for Finance in a Council will
be from a financial background (accounting, banking etc), and
so are not wholly uneducated in this area.
Q107—Responsibility for Investing
This question and Mr Weaver's answer does cover
an important area of our service; or more properly what our service
does not cover. Market regulations set out the framework and limitations
of the service we can provide to our clients. Under these market
regulations,[3]
local authorities are categorised as Professional Clients.
Under the FSA's rules local authorities are
considered to be experienced and sophisticated professional investors,
very familiar with cash management that take responsibility for
assessing their own risk. They are also considered "principals"
in the market and as such are directly responsible for assessing
the credit quality of the banks in to which they place deposits.
In addition Councils have their own statutory requirements. Section
151 of the Local Government Act 1972 requires the Authority to
appoint a suitably qualified officer responsible for the proper
administration of its financial affairs. In this context our service
is advisory only within the framework of these regulations.
Butlers does not provide a fund management service,
and therefore does not suggest specific investments. We cannot
and do not take the investment decisions for our clients. The
final choice of counterparty must be made by the client.
This area also impacts on question Q152 as we
understand the role of brokers to be one of introducing deposit
takers and makers, not to comment on the decisions behind making
any deposit. Our clients are aware of this difference.
Q101—Press Coverage
We are aware of the financial press in our role
as treasury advisers and do take into account press information.
However, we have found press articles to be contradictory in many
cases. We have never provided subjective credit related "atmospherics"
to our clients, but as so much of our service is aimed at efficiency
in the utilisation of cash we do provide regular bulletins to
clients suggesting trends in interest rates (a copy of our January
2008 publication is attached for your information).
Q101—Competitive Tendering
Our contracts with clients are usually subject
to competitive tendering whereby the client has a choice of three
or more suppliers. The service required and provided is set out
in the tendering documents provided by the local authorities.
Q109—Consultants fees
The fees quoted at the Committee are for the
full treasury advisory service, which includes areas such as economic,
debt, capital finance and generic cash management and cash investment
advice (as set out in Mr Anthony's question to Q125).
In a standard tender for the rating agency information
service only, we typically quote an annual fee in the area of
£2,500 per annum. We are the only treasury adviser to be
contractually licensed to distribute ratings from all three rating
agencies. There is clearly a limit to the information that can
be provided by any organisation at this level. Local authorities
are under considerable pressure to cut costs, and these fees clearly
cannot represent a requirement for full institutional research
facility. The service does have the advantage that the same rating
agency information is available to authorities without the need
and expense for each to subscribe directly. Our licences to redistribute
this rating agency information costs us tens of thousands each
year. These licenses are expensive but do ensure our service is
in compliance with the CLG Investment Guidance.
Q197—Conflict of Interest
ICAP Group has a written formal Conflict of
Interest Policy (as attached), which controls the potential conflict
of interest between Butlers and the ICAP deposit broking desk.
This is available on our website.
As Mr Anthony stated at the hearing, there are
clear Chinese (and physical) walls in place within ICAP Group.
Indeed we have been told by ICAP that in respect of our clients
in 2008 only 16% of Icelandic investments were placed through
ICAP's deposit broking desk.
I hope this letter provides you with sufficient
information in respect of your concerns but should you require
additional details please contact me.
10 February 2009
ICAP BUSINESS CONFLICTS
OF INTEREST
POLICY
Under FSA's Principles for Businesses, Principle
8 requires a firm to "manage conflicts of interest fairly,
both between itself and its customers and between a customer and
another client". Under the Markets in Financial Instruments
Directive ("MiFID") ICAP is required to maintain
and operate effective organisational and administrative arrangements
with a view to taking all reasonable steps to identify, monitor
and manage such conflicts of interest. The ICAP Group of companies
has put in place a policy to meet this obligation and set out
below is a summary of that policy and the key information that
is needed by clients and counterparties (together "customers")
to understand the measures ICAP is taking to safeguard the interests
of its customers.
ICAP'S CONFLICT
OF INTEREST
POLICY
ICAP seeks to:
— identify circumstances which may give
rise to conflicts of interest entailing a material risk of damage
to customers' interests;
— establish appropriate mechanisms and
systems to manage those conflicts; and
— maintain systems in an effort to prevent
actual damage to customers' interests through the identified conflicts.
WHAT IS
A CONFLICT
OF INTEREST?
A conflict of interest under MiFID is a conflict
that arises in any area of ICAP's business in the course of providing
its customers with a service which may benefit ICAP (or another
customer for whom ICAP is acting) whilst potentially materially
damaging another customer where ICAP owes a duty to the customer.
There may be a conflict where ICAP (or anyone connected to ICAP
including another ICAP affiliate):
— is likely to make a financial gain (or
avoid a loss) at the expense of its customer;
— is interested in the outcome of the service
provided to its customer where the interests of ICAP is distinct
from that of the customer;
— has a financial or other incentive to
favour the interests of one customer over another;
— carries on the same business as a customer;
or
— receives money, goods or services from
a third party in relation to services provided to a customer other
than standard fees or commissions.
ICAP has sought to identify conflicts of interest
that exist in its business and has put in place measures it considers
appropriate to the relevant conflict in an effort to monitor,
manage and control the potential impact of those conflicts on
its customers. The conflicts identified include:
— those between customers with competing
interests;
— those between customers and ICAP where
their respective interests in a particular outcome may be different;
and
— those between the personal interests
of staff of ICAP and the interests of ICAP or its customers where
those interests may be different.
POLICIES AND
PROCEDURES
ICAP has adopted numerous internal policies
and procedures, often set out in its Compliance Manual or in its
procedures manuals, in order to manage recognised conflicts of
interests. These policies and procedures will be subject to our
normal monitoring and review processes and include:
(a) Integrity and Standards of Conduct
ICAP insists that in its dealings with customers
its staff must use the highest standard of integrity in their
actions at all times. The induction programme, Training &
Competency procedures and monitoring programme at ICAP are designed
to ensure that all relevant staff are familiar with and observe,
inter alia, the FSA Principles for Businesses and the Statements
of Principle and Code of Practice for Approved Persons.
(b) Customer Orders
In order to ensure as fair treatment as possible
for customers, the ICAP Execution Policy requires ICAP to take
all reasonable steps to achieve the best overall trading result
for customers; to exercise consistent standards; and operate the
same processes across all markets, clients and financial instruments
in which it operates.
No undue preference should be given to any customer
when trades are aggregated. Re-allocation to any individual customer
may only be made to correct an error or to adjust an uneconomic
initial allocation eg on a partial fill of an order.
There may be occasions when customer orders
may have a material affect on a relevant securities price. In
order to ensure that a broker does not take advantage of the situation
by dealing on his/her own account or encouraging a third party
to deal, ICAP has a strict "no front running" policy.
In order to ensure a fair and orderly dealing
environment within the market, ICAP further ensures that its staff
comply with the revised Code of Market Conduct reflecting the
provisions of the Market Abuse Directive, as well as the relevant
FSA Rules, which aim to prevent insider trading, the misuse of
information and market manipulation.
(c) Personal Account Dealing ("PAD")
ICAP has a policy on Personal Account Dealing
and the rules are signed off as understood by all relevant employees
regardless of their position within the ICAP Group.
Staff may not deal the same way for personal
account as a customer order or potential order before it is executed
or where a customer's interest could be adversely affected.
Relevant employees shall not deal in stock within
five days of a research recommendation being published and in
no circumstances where a client order is pending.
Further, PAD procedures require relevant areas
of the business to obtain pre-approval by the Compliance Department
and all broking staff are required to report any investment activity
to the Compliance Department.
All staff are regularly reminded of the Personal
Account Dealing rules through general all staff emails.
(d) Confidentiality and Information barriers
ICAP has put in place procedures to control
or prevent the flow of information between ICAP business units
and entities where the interests of customers of one business
unit or entity may conflict with the interests of customers of
another ICAP business unit or entity or with ICAP's own interests.
Further ICAP insists on strict customer confidentiality to ensure
that information is disclosed only to those entitled to receive
it or otherwise with the prior approval of the Compliance Department.
(e) Gilt IDB and Gilt Agency Desks
ICAP operates two Gilt desks; one operating
as principal in the Inter-Dealer Broker ("IDB") market
under the rules of the London Stock Exchange amongst a closed
user group comprising Gilt Edged Market Makers ("GEMMS")
and one acting as agent for customers off-exchange wishing to
access the gilt market. GEMMS quote prices with the spread when
trading vie the Gilt IDB desk and these details are not seen by
non-GEMMS. A conflict of interest, potentially giving an unfair
advantage to customers of the agency desk, may arise if the agency
desk becomes aware of the prices and spreads quoted by the IDB
desk.
In order to manage this conflict of interest,
ICAP has ensured that the two desks: (a) operate under different
legal entities; (b) use different systems to broadcast prices
and book tickets, with neither desk having access to the other's
system; and (c) are separated by Chinese walls on different floors
of the building. Further staff are made aware of the potential
conflict and informed of ICAP's policy to ensure fair dealing.
(f) Local Authority Treasury Management
ICAP operates two desks servicing Local Authorities;
one providing a treasury management advisory service in respect
of debt management and one providing a broking service in moneymarket
instruments. A conflict of interest may arise if the customer's
dealing strategy is passed to the broking desk.
In order to manage this conflict the two desks
are located on separate floors of the building and staff are made
aware of the potential conflict and reminded of ICAP's independence
policy to ensure far dealing.
(g) Inducements to Employees from Customers
Staff are not allowed to accept gifts, entertainment
or any other inducement from any person which might benefit one
customer at the expense of other when conducting investment business.
For example, where two customers give similar orders and one customer
agrees to pay more commission, priority or better execution terms
must not be granted to that customer's order when it conflicts
with obligations owed to the other customer.
ICAP staff are not allowed to place undue pressure
upon customers to persuade the customer to trade through the firm
to the extent that this might give rise to a conflict of interest
between that customer and its own underlying customers.
(h) Group Companies
Customers are to be informed of the relationship
where the counterparty to the deal is another ICAP Group Company
or where the services of another ICAP Group Company is recommended.
(i) Remuneration Policy
All relevant staff who are open to a conflict
of interest are paid a basic salary including those in key support
areas such as Compliance, Finance and Operations. This salary
is not dependent on company performance. A bonus structure does
exist which is linked to company performance, team performance
or the individual's performance. It is at the discretion of the
senior management and notified only on payment.
(j) Separate supervision and segregation of
function
Where appropriate, ICAP has arranged for the
separate supervision of those carrying out functions for customers
whose interests may conflict, or where the interests of customers
and ICAP may conflict and has taken steps to prevent the simultaneous
or sequential involvement of a relevant person in separate services
or activities where such involvement may impair the proper management
of conflicts of interest.
(k) Disclosure
As a last resort, where there is no other means
of managing the conflict or where the measures in place do not,
in the view of ICAP, sufficiently protect the interests of customers,
the conflict of interest will be disclosed to customers to enable
an informed decision to be made by the customer as to whether
they wish to continue doing business with ICAP in that particular
situation.
(l) Declining to Act
Finally, where ICAP considers it is not able
to manage the conflict of interest in any other way it may decline
to act for a customer.
Further copies of this Conflicts of Interest
Policy is available on www.ICAP.com If you would like further
detail regarding our policy please contact your ICAP contact advisor
who will be happy to assist. Alternatively details may be obtained
by contacting the Compliance Department on: +44 (0)20 7000 5794.
3 Markets in Financial Instruments Directive {MiFID}
issued under European law and the London Code of Conduct for Non
Investment Products {NIPS} issued by the Bank of England. Back
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