Continuing our series of interviews with senior figures in the world of treasury and finance, this month we talk to John Whorwood, Group Treasurer with Legal & General.

John, I would imagine that collecting cash is a very important part of the Group Treasurer’s activity in a company such as Legal & General.

Yes it is, but as cash collection is so critical in terms of our relationship with our customers, we ensure that our businesses employ the most efficient methods for collecting premiums themselves. For this reason, the collection process is not centralised in Group Treasury. Therefore, unlike retail organisations, such as high street stores, we do not have to worry about issues such as multi-location banking of receipts.

However, we do have to deal with larger than average transaction amounts with some exceptional peaks in volumes. It is important that our bankers can provide our businesses with the most efficient and straightforward means of collecting funds from our customers, so that these funds are available for investment asap. Remember, the majority of our business is the sale of investment and savings products to individuals. Where we do offer risk products we need to minimise the period between the creation of the policy with the customer being on risk and the receipt of the premium.

In that context, what are you looking for from your collections process?

As I have mentioned, the issue is for us to make it as easy as possible for our customers to complete an investment transaction. They need to be able to get their money to us quickly so that it is invested as soon as possible in accordance with their specific savings product requirements. Because investment products are generally sold not bought, the delivery of the customer’s funds to us is integral to each transaction.

In selling savings products, we need to focus on the efficiencies that can be made. We have to do more than just bank the cheque. We also need to be able to capture the customer’s personal information from, for example, their ISA application form. For this reason, we have ruled out a lockbox collection system, as, unless an imaging process is available to capture this information, we could encounter delays in correctly allocating receipts to customers’ accounts.

For most collections the thrust is to use the AUDDIS (automated direct debit) system of payments. We usually collect payments this way for any sale that comes in via the telephone or the Internet as well. We also offer debit card collection on the Internet. However, the response so far has not been particularly great.

Why do you think that is? Is it the customer’s reluctance to trust the net?

I think that is probably one reason. People are still wary of security on the net. We still get a flood of cheques for ISA applications, which does cause some strain for our bankers. We have to ensure that the banks can cope with such peaks of activity – this means that local branches used at our business locations have to gear up their staffing levels accordingly.

Does this work as efficiently as is reasonable or as efficiently as you would like?

It is difficult to see how we could improve it, given the way payments come in. Obviously the way to improve the process is to get more people onto the net and settling via debit cards rather than completing bits of paper and sending in cheques.

The thrust is to get the whole process as efficient as possible, so we don’t have reconciliation problems. We continue to talk to our bankers to see if there is anything that they can do to assist us in improving the process.

We have talked about the retail side. What issues arise on the wholesale side?

On the wholesale side, we do offer group pension policies and bulk purchase annuities. In these cases, we may have a large sum delivered to us in the form of cash, bonds and/or equities. Whilst this is not a collection as such, we do need to have notice that such sums are going to be delivered so that we can invest it correctly.

Do you retain control for activities in the money markets?

There is a distinction between operational liquidity, which is managed by Group Treasury, and the management of the investment portfolio. As part of managing the investment portfolio, liquidity has to be managed, but this shouldn’t be dictated by operational liquidity. That is Group Treasury’s remit – the operational liquidity within the business as well as shareholders funds at the parent company level. If the investment managers choose to go into cash, then that’s their decision and they would also deal in the money markets on behalf of policyholder funds.

For the general insurance business, cash and operational liquidity are pooled with all our other shareholder funds in Group Treasury and we will either invest those as part of shareholder funds in money market instruments or apply them to satisfy other corporate requirements.

Group Treasury also deals with the investments of Legal & General Bank, which are primarily money market instruments – short term FRNs, Commercial Paper and mortgage-backed securities. We also manage the day-to-day cash flow for the bank arising from mortgages and deposits.

To the extent that there are other parts of the business that have working capital requirements, we will provide a loan facility. We provide a market-priced facility for that working capital, which is then simply adjusted in line with operational cash flows on a daily basis.

How do you treat payments going out?

The bulk are settled via BACS although we still also produce cheques for settlements.

How do you plan for these payments?

The businesses produce their own rolling monthly cash flow forecasts, which are used to determine the flows to the Investment portfolio or drawings under the Group Treasury facilities. Group Treasury produce a consolidated cash flow, which is used to determine the group’s overall funding requirement to be satisfied via Commercial paper or MTN issuance and /or an increase/decrease in the investment portfolio of short term-liquid investments.

For the policyholder side, this is a bit more difficult. Again, there are cash flows produced for that and these will include clearly known flows that will have to be factored in by the investment manager.

Will the tie up with Barclays have any impact on what we have been talking about?

As we move towards more streamlined and automated collections such as debit card payments, the process will become more efficient and so we will be able to deal with the larger volumes. The collection bank account arrangements will still be operated basically in the same way. We will continue to review the bank account structure and the providers of the banking service on a regular basis.

I imagine that interest rate risk is the key financial risk that you need to manage. How do you go about it?

Yes it is. Treasury has direct responsibility for:

• The interest rate exposure associated with debt liability management.
• The asset and liability aspect of interest rate risk exposure within the bank.

The debt side, if it is a general core element of funding, will be managed on a floating rate basis. Our belief is that floating offers the lowest real costs. We will tap the market in whatever form to get the lowest floating rate. If we have to finance another part of the business, then we would match that on a basis that was appropriate for that business via internal funding. For example, we might select an element of long dated fixed rate funding if we are putting equity or subordinated debt into the business.

Any surplus shareholders funds managed by Group Treasury will be retained in short dated or liquid investments. Occasionally we might take a limited view on the yield curve and position that portfolio accordingly.

For the bank, we have a low risk appetite, which requires us to match assets and liabilities. So, for example, if we were offering a capped or a fixed rate mortgage we would hedge that with a corresponding swap or cap based on either the retail or the wholesale element of funding. It is easier if we are financing on a three-month floating basis to apply a cap or swap on the back of that. This is more difficult for retail funding, but we have tried to overcome this by creating a Libor deposit product. We would take out the appropriate derivatives to bring the gap between asset and liability as narrow as possible. As a regulated bank, we establish limits that reflect our low risk profile.

The foreign currency risk is limited. We do worry about translation exposure for our overseas assets, but they are relatively small. We don’t really have much in the way of foreign currency transaction exposure. True currency economic exposure isn’t really a risk that we have to worry about because the businesses are local and they are run locally.

Can we talk about the technology side? Where does the Treasury Management System fit?

We operate an integrated Treasury management system, which covers the dealing, settlement, confirmation and accounting for all treasury transactions undertaken on behalf of the finance and parent companies as well as Legal & General Bank. But we have not created any interfaces either with the operational business and product systems for cash flow management. In addition, at this stage, we have left our EFT systems as stand-alone and have not sought to create an interface with our treasury management because of its wider access.

Do you use an online dealing system?

We have noticed a number of developments in this area. Our system providers, Quantum, are developing their own dealing system, which sounds quite attractive to us as something with straight through processing makes sense. There is still uncertainty as to which system will have the largest pool of banks as potential deal counterparties – Quantum are obviously asking us to help them by requesting our bankers to join the Quantum system. There is sense in going down that route, but it is just a matter of waiting to see which route wins.

In what other ways do you use the Internet?

At the moment, we use it for information purposes – we take bank feeds on information, for example – we don’t actually use it for any dealing. We also have concerns over moving funds on the net – we are happy to do the deals, but, for the foreseeable future, all the settlement will be away from the net.

What are the key issues affecting any part of your activity at the moment?

We seem to be encountering more and more difficulties in terms of sufficient resources in the provision of banking services. The banks have moved towards a more coordinated, centralised basis. We have a lot of questions that we have to try to get answers to but it is getting more difficult to find staff in the banks who either are able to or have the time to take ownership of the problem.

Why is that?

I think that the banks are restructuring and generally slimming. I think it is nothing more than a belief that things have become more efficient and that we shouldn’t need their help. Whilst the number of queries has gone down, there are still queries. We do need individuals within our operational banks that can handle our businesses’ banking issues. It is all very well the banks chasing the more profitable derivative and fx business but it is the bank that serves our operational businesses best that is more likely to receive a larger slice of such business than any other bank, providing, of course, they are a player in the relevant fx or derivative market.