FIL Holdings (UK) Limited. Pillar 3 Disclosures As at 30 June 2017

Transcription

1 FIL Holdings (UK) Limited Pillar 3 Disclosures As at 30 June 2017

2 Contents 1. Overview Introduction Disclosure policy: Basis of disclosures Materiality Frequency Verification, media and location 5 2. Risk management framework and key policies Risk management policy Risk management framework Risk management systems and techniques Key risks faced Other risks The governance structure FHL Board Membership (as at 30 June 2017) 8 3. Scope of application basis of consolidation Accounting consolidation Prudential consolidation 9 4. Own funds Capital resources Full reconciliation of own funds items to audited financial statements Disclosure of specific items on own funds during the transitional period Main features of Common Equity Tier 1 capital instruments Capital adequacy Calculation of the FHL Group s capital resources requirement Credit risk Market risk Operational risk Remuneration policy and practices Background to remuneration disclosure Remuneration disclosure Appendices 14 Appendix 1 14 Appendix 2 15 Appendix

3 1. Overview 1.1 Introduction The Capital Requirements Directive ( CRD ) came into effect on 1 January 2007 and is the framework for implementing Basel II in the European Union. Basel II is an international initiative aimed at incorporating a more risk sensitive framework for the calculation of regulatory capital. The CRD consists of three pillars : Pillar 1: sets out minimum capital requirements, by providing rules for the measurement of credit risk, market risk and operational risk. Pillar 2: a process for assessing capital adequacy in relation to actual risk profile and for determining whether additional capital is required to cover these risks. This is achieved through the Internal Capital Adequacy Assessment Process ( ICAAP ) document and the Supervisory Review and Evaluation Process ( SREP ) by the Financial Conduct Authority ( FCA ). Pillar 3: focuses on disclosure requirements, including the key information required to allow external parties to assess the capital adequacy of the organisation. The FCA is responsible for implementing the CRD in the United Kingdom. FIL Holdings (UK) Limited ( FHL ) and certain subsidiaries (known collectively as the FHL Group ) are regulated for both prudential and conduct purposes by the FCA. All regulated firms within the Group are subject to the Interim Prudential sourcebook for Investment Firms ( IFPRU ) or Banks, Building Societies and Investment Firms ( BIPRU ) as Limited Licence firms, with the exception of FIL Investment Services (UK) Limited, which is categorised as a Collective Portfolio Management Firm and subject to Chapter 11 of IFPRU, and FIL Retirement Services Limited, which is a Small Personal Investment Firm. With effect from 1st January 2015, Basel II has been superseded by Basel III. There is a transitional phase-in of arrangements with full implementation to be achieved by 1st January The three pillar approach remains but more detailed information will be required under each pillar. Pillar 3 will require more detailed disclosures and the use of generic templates to allow improved comparability and transparency between institutions covered by the Basel accords. 1.2 Disclosure policy: Basis of disclosures This document sets forth the Pillar 3 disclosures for FHL as of 30 June The FHL Group policy is to meet the Pillar 3 disclosure requirements contained in Articles 431 to 455 of CRR, as well as, FCA requirements set out in BIPRU and IFPRU. The disclosures set out in this document cover both the qualitative and quantitative requirements. The disclosures included in this document relate to the FHL Group on a consolidated basis. FHL is part of the FIL Limited Group ( FIL Group ) and is the highest level UK parent company. FIL Limited ( FIL ), founded in 1969 and domiciled in Bermuda, provides the FIL Group s Head Office and is the ultimate holding company. FIL is regulated by the Bermuda Monetary Authority ( BMA ) and is required to prepare an equivalent to the ICAAP for the consolidated FIL Group. As part of a global investment and retirement savings business, FHL serves a diverse range of clients including pension funds, sovereign wealth funds, financial institutions, insurers, wealth managers and private individuals. The FHL parent company itself does not undertake any regulated investment activity. Mutual funds and segregated institutional mandates managed by FHL have independent custodians appointed by the mutual fund or the beneficial owner of the institutional account as the case may be and are segregated from the FHL Group corporate balance sheet. 3

4 The principal subsidiaries that primarily affect the consolidated profits or net assets of FHL are shown in the table below: Name of Company Proportion of nominal issued shares held in the FHL Group (%) Country of incorporation or registration Principal Activity Financial Administration Services Limited Significant IFPRU Firm MiFID Firm, CRDIV Regulated by the FCA FIL Pensions Management IFPRU Firm MiFID Firm, CRDIV Regulated by the FCA FIL Investments International BIPRU Firm Regulated by the FCA FIL Investment Advisors (UK) Limited BIPRU Firm MiFID Firm, CRDIII Dual FCA/SEC registered FIL Investment Services (UK) Limited Collective Portfolio Management Firm UCITS Manco/AIFM Regulated by the FCA FIL Retirement Services Limited Small Personal Investment Firm Article 3, MiFID Exempt Regulated by the FCA FIL Investment Management Limited Non-regulated entity FIL Administration Limited Non-regulated entity FIL SIPP Trustees (UK) Limited Non-regulated entity 100 England and Wales 100 England and Wales 98 England and Wales 100 England and Wales 100 England and Wales 100 England and Wales 100 England and Wales 100 England and Wales 100 England and Wales Administration of tax wrapped and other investment accounts for private investors and distribution of funds through Funds Network and Fidelity Personal Investing. Management and administration of pension fund portfolios and distributor of Fidelity funds to professional clients. Provider of investment management services. Provider of investment advisory services for Institutional clients (US40 Act captured clients). Appointed management company of FIL s UK- domiciled UCITS and the appointed Alternative Investment Fund Manager of FIL s UK-domiciled Alternative Investment Funds. Provision of retirement advisory, guidance and administration services. Provision of administration and other services to companies within the FIL Group. Provision of fixed assets to FHL Group companies. Trustee of client cash held in SIPP product on behalf of Financial Administration Services Limited. 4

5 1.3 Materiality The rules provide that an entity may omit one or more of the required disclosures if it believes that the information is immaterial. A disclosure is deemed to be material if the omission or misstatement of that information would be likely to change or influence the assessment or decision of a user relying on that information for the purposes of making economic decisions. Where a disclosure is considered to be immaterial, this has been stated. 1.4 Frequency The disclosures are required to be made on an annual basis at a minimum and, if appropriate, some disclosures will be made more frequently. The FHL Group has an Accounting Reference Date of 30 June and disclosures will be published in conjunction with the date of publication of the FHL Group financial statements. 1.5 Verification, media and location These disclosures have been compiled to explain the basis of preparation and disclosure of certain capital requirements and to provide information about the management of certain risks and for no other purpose. They do not constitute any form of audited financial statement and have been produced solely for the purposes of Pillar 3 regulatory disclosures. These disclosures have been reviewed by the Directors of FHL. They have not been verified independently and should not be relied upon in making any judgement about the financial position of any FHL entities. These disclosures are published on the Fidelity International UK website: 2. Risk management framework and key policies 2.1 Risk management policy FHL s overall approach to risk management recognises that risk-taking is an essential part of doing business and therefore does not need to be, and cannot always be, eliminated. The objective is to operate in a legal and ethical manner to safeguard clients and FHL s assets, whilst allowing sufficient operating freedom to secure a satisfactory return. These responsibilities are mandated in the FIL Group Risk Policy which sets out the requirements for risk management across the FIL Group and which has been adopted formally by the FHL Group. The FHL Group has adopted the FIL Group s decentralised approach to risk management and operates on a multiple lines of defence basis. This ensures that day to day responsibility for risk management is at the business unit level, where risk is seen as part of the overall business process, and a robust framework of risk identification, evaluation, monitoring and control exists. The first line of defence rests with the business. Each board has ultimate responsibility for risk management and the internal control system in place. Management is responsible for understanding the full range of risks faced in their areas of responsibility and for ensuring that those risks are appropriately and effectively managed. The second line of defence is provided by risk management, compliance and other oversight teams. They provide policies and standards and objective oversight of performance and risk management within the business lines. The third line of defence is Internal Audit which provides independent and objective assurance on the effectiveness of the Group s system of internal controls, including financial, operational, compliance and risk management. 2.2 Risk management framework The FHL Group has a formal risk management framework for the identification, assessment, monitoring and control of risk relating to material products, activities, systems and processes. 5

6 This risk management framework provides an enterprise-wide approach to managing risk exposures. A formalised risk policy and risk appetite statement approved by the FHL Board, and approved and adopted by the entity Boards, ensures that the risk management process is embedded within the FHL Group at entity, business and product development levels. The risk management policy and framework are reinforced by the risk appetite statement. The FHL Risk Appetite Statement defines the level and nature of risks that the Board is willing to accept in order to achieve its business objectives while safeguarding corporate assets. 2.3 Risk management systems and techniques Risk identification and assessment A formal risk assessment process is in place throughout the FHL Group. Risks are identified, managed and documented by 1st line staff through the risk assessment process. Risk assessments are used to perform regular reviews of processes, systems, change activities and new product initiatives. The methodology will also consider risks inherent in business models and strategies as well as new risks arising from significant market developments. Each risk is measured by assessing the likelihood and impact of the risk crystallising before and after the application of controls. Impacts are assessed and prioritised across various dimensions: financial, customer, reputational and legal/ regulatory impacts. Mitigation actions are determined where control weaknesses are identified or risks are nearing risk appetite thresholds. Material risks within the internal capital adequacy assessments have been mapped to ensure complete coverage of risks. Risk mitigation The FHL Group employs a number of risk mitigation techniques and activities, including robust systems and controls, monitoring activities, review of risk events, root cause analysis, contingency plans, insurance and capital. A risk profile view is obtained on a quarterly basis by assessing all available information for each material risk. Risks are compared against risk appetite thresholds and mitigation actions are recommended to the Board, where appropriate. This work will continue to enhance and evolve into a more structured and group-wide process. A groupwide control framework has been developed to assist with the systematic identification and assessment of controls across all businesses and global functions. This will be facilitated through the risk and control self-assessment process in the first instance. Monitoring and reporting All material risks are underpinned by Key Risk Indicators ( KRIs ) used to monitor and track changes to risk exposures over time. Quarterly reporting is provided to each of the UK regulated entity Boards, as relevant to each Board s business and governance responsibilities, and material matters are also specifically reviewed by the FHL Audit and Risk Committee. Monthly risk reports are produced for the various business line risk committees. These detail the relevant risk profile and activity, material operational losses and other key risk matters to enable Management of the businesses to form an ongoing view on the overall effectiveness of the internal control environment and risk management framework. Capital assessment The ICAAP, which is performed annually or more frequently if changes to the business require it, is used to assess the adequacy of capital. It uses scenario modelling and stress testing to assess all risks faced by the business, taking into account any mitigation that is in place or could realistically be affected. Capital is then set aside to mitigate the potential impact of residual risks. Stress testing Stress tests and reverse stress tests are completed in order to identify a range of adverse circumstances to ensure that the business is robust financially and to identify very extreme scenarios which could cause the business plan to become unviable and assess the likelihood of such events crystallising. If those tests reveal a risk of business failure that is unacceptably high when considered against risk appetite or tolerance, the FHL Group adopts effective arrangements, processes, systems or other measures to prevent or mitigate that risk. 6

7 2.4 Key risks faced The principal risks which the FHL Group faces are:- Operational Risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. Strategic the risk associated with an inappropriate or non-performing strategy. This risk type includes Market dynamics risks; Business Strategy risk; and Business performance risk. Typically these risks affect the revenues and/ or profitability of the Group or result in opportunity costs which are not directly mitigated by capital. Financial this risk arises in the course of business and includes liquidity risk, market risk and credit risk. In addition, the Group is exposed to Pension Risk, which is the risk that the liabilities of internal defined benefit pension plans are not funded. Investment risk arising in the investment funds managed by the Group. It is borne by investors, provided the Group manages the funds within limits and in line with investor expectations. The entities comprising the FHL Group do not undertake principal trading, except on a de-minimis basis to facilitate customers orders, nor do they actively take on credit, market or liquidity risks, other than incidentally to their operational activity. Accordingly credit, market, liquidity and other risks are relatively small in comparison to the operational risk exposures. Relevant FHL Group risks are considered within the stress testing, operational risk scenarios and reverse stress testing performed. 2.5 Other risks The following risks have also been considered and are not currently deemed material to the FHL Group: Concentration risk is the risk of large individual exposures and significant exposures to groups of counterparts whose likelihood of default is driven by common underlying factors (sector, economy, geography location, instrument type). FHL does not have significant concentrations of clients, fund strategies or balance sheet exposures, and the risk is mitigated through credit exposures being diversified across a range of approved counterparties in accordance with agreed limits. Counterparty monitoring is performed on a daily basis. Residual risk (a sub-category of credit risk) is the risk that recognised risk measurement and mitigation techniques used by the credit institution prove less effective than expected. This risk is not considered to be applicable as FHL does not have a loan book. Securitisation risk is the risk that the capital resources held by the financial institution in respect of assets which it has securitised are inadequate with regard to the economic substance of the transaction, including the degree of risk transfer achieved. The FHL Group does not undertake securitisation and hence this risk is not applicable. Insurance risk is the risk arising from the inherent uncertainties as to the occurrence, amount and timing of insurance liabilities, undertaking insurance business or providing underwriting services. The FHL Group does not undertake insurance business or otherwise provide underwriting services and so this risk is not applicable. 2.6 The governance structure The governance structure and risk management framework are integral to the capital assessment and risk profile, as they underpin the management approach to risk and control across the Group. The Board is ultimately responsible for enterprise-wide risk management and has created governance structures to provide oversight and direction to the business through the delegated authorities of the designated committees. The FIL Board also defines the strategy and, accordingly, its appetite for risk. FHL is committed to the highest standard of corporate governance, business integrity and professionalism in all its activities. The FHL Group aims to comply in all material aspects of Corporate Governance requirements applicable to the UK regulated entities. The FHL Group is governed by a framework of boards and committees. At the UK level, FHL is the holding company for a number of regulated entities. The FHL Board oversees the activities of its subsidiaries; both regulated and unregulated. FHL Board members are listed in Section

8 The FHL Board is collectively responsible for the supervision, leading and controlling of its subsidiaries. The Board is responsible for the setting of the strategy and risk appetite, for maintaining an effective and efficient system of internal control and the monitoring of business performance. It has adopted a formal schedule of matters reserved for Board discussion that details key aspects of the company s affairs. The FHL Board meets on a quarterly basis with additional meetings scheduled as required. The FHL Board receives matters escalated for consideration from subsidiary boards and sub-committees. Any issues arising that have wider implications for the FIL Group or require a FIL group-wide approach are escalated by the FHL Board to the FIL Board for consideration. The FHL Board is chaired by the Managing Director of the UK Financial Services business. He is responsible for developing, driving and implementing the strategy approved by the Board; for financial performance against plans; and for maintaining an effective and efficient system of internal control, including financial, operational, compliance and risk management. He is also a member of the FIL Global Operating Committee ( GOC ). The GOC is responsible for ensuring FIL operates according to the strategy and policies established by the FIL Board. The FHL Board delegates certain responsibilities to Board Committees, which assist the Board in carrying out its functions and ensure that there is independent oversight of internal control and risk management. The Committees are: Women In Finance Charter Committee FHL Audit and Risk Committee UK Conflicts Oversight Forum CASS Oversight Forum The FHL Audit and Risk Committee is responsible for providing independent and objective assurance on the effectiveness of its system of internal control, including financial, operational, compliance and risk management. It recommends risk appetite to the FHL Board and monitors adherence to agreed levels. The Committee also oversees relevant regulatory, tax and legal matters and other emerging matters that the FHL Board deems relevant. Where necessary the FHL Audit and Risk Committee escalates matters to the FIL Audit and Risk Committee for resolution. The FHL Board oversees three further Boards in the UK, responsible for the management of business-specific activities carried out via six regulated legal entities. Each of these businesses is led by a Managing Director, and overseen by the Board. The membership of the Boards of the UK regulated entities is drawn from relevant members of the above committees to ensure the business objectives are appropriately aligned with the obligations and activities of the relevant legal entities. FHL has a Diversity at Work policy for all employees. FHL believes that its success is based on maintaining and developing an environment where employees are recognised as individuals and individuals are not discriminated against. The Board recognises the value of diversity and has signed up to HM Treasury s Women In Finance Charter. The FHL Board has established the Women In Finance Charter Committee that is responsible for overseeing, on behalf of the Board, the management and oversight of the FHL Group s application of the Charter s commitments to build a more balanced and fair industry, whilst aiming to accelerate gender balance across financial services and to ensure there is a greater representation of women in senior management positions. The FHL Board committed to have 30% of female representation on the FHL Board by 2020 which represents an increase of 13% from the starting point of 17%. 2.7 FHL Board Membership (as at 30 June 2017) The FHL Board is comprised of senior executives with management responsibility for business decisions and compliance with the regulatory system. Suitability assessments regarding the selection, appointment and reappointment of new and existing Directors is the responsibility of the Board, the prudential authorisation procedure of the key function holders as published on the FCA s website as well as the guidelines published by the European Banking Authority on 22 November 2012 (Guidelines on the assessment of the suitability of members of the management body and key function holders EBA/GL/2012/06). 8

9 When considering the appointment and succession of Directors, amongst other things, the Board gives due consideration to the composition and commitment of the Board, the selection and assessment of Directors and professional skills and personal qualities and has adopted guidelines for the appointment and succession of Directors, Authorised Management and other key function holders which outline the approach to be taken in this regard. Name Position FHL Directorships Other FIL Directorships Non FIL Directorships Peter Horrell (Chairman) Nicholas Birchall Managing Director, UK Financial Services Global Head of Channel Management 6 3 Simon Haslam Non-Executive Director 1 3 Kristina Isherwood Group Chief Financial Officer 3 1 Anthony Lanser Chief Operating Officer 5 1 Andrew Morris Head of Business Compliance 1 1 Sally Nelson Chief Administrative Officer 2 1 Dominic Rossi Global Chief Investment Officer Equities 2 Bruce Weatherill Non-Executive Director 1 1 David Weymouth Non-Executive Director Scope of application basis of consolidation 3.1 Accounting consolidation The consolidation of the financial statements is based upon the inclusion of all entities controlled by the FHL Group to 30 June each year. Control is achieved where the FHL Group has the power to govern the financial and operating policies of an investee entity so as to obtain benefits from its activities. The consolidated statutory balance sheet includes all subsidiary undertakings which, in the opinion of the Directors, principally affect the consolidated profits or assets of the FHL Group. A list of the principal FHL Group subsidiaries can be found in section 1.2 of this document. 3.2 Prudential consolidation The consolidation for regulatory purposes is on the same basis as above. There is no current or foreseen material, practical or legal impediment to the prompt transfer of own funds or repayment of liabilities among the parent undertaking and its subsidiaries. There are no subsidiaries where actual own funds are less than the capital requirements as at 30 June

10 4. Own funds 4.1 Capital resources Common Equity Tier 1 capital is the highest ranking form of capital. Included in Common Equity Tier 1 capital are permanent share capital, retained profits and other reserves. The FHL Group s capital resources on a consolidated basis comprise Common Equity Tier 1 capital only. The own funds of the FHL Group based on the audited financial statements as at 30 June 2017 were as follows: FHL Group consolidated basis m Common Equity Tier 1 Permanent share capital and related share premium accounts 56 Retained profits 162 Other reserves Regulatory adjustments: computer software accounted for as intangible assets (4) Own funds 276 During the year to 30 June 2017 the FHL Group, and all regulated entities within the FHL Group, held own funds in excess of their Pillar 1 regulatory capital requirements. 4.2 Full reconciliation of own funds items to audited financial statements In accordance with Article 437(1) (a), a reconciliation of regulatory own funds items to the balance sheet in the audited financial statements as at 30 June 2017 is disclosed in Appendix 1. The reconciliation includes all items that are components of, or are deducted from, own funds. Each item is referenced in the table and is also shown in Appendix 2, in line with the CRR disclosure requirements. 4.3 Disclosure of specific items on own funds during the transitional period In order to meet the requirement for disclosure of additional items on own funds during the transitional period from 1 January 2014 to 31 December 2017, the transitional own funds disclosure template and the alignment in accordance with the audited financial statements is provided in Appendix Main features of Common Equity Tier 1 capital instruments Article 437(1) (b) requires disclosure of the main features of Common Equity Tier 1 instruments. The capital instruments main features template is attached in Appendix Capital adequacy Capital is held to ensure the FHL Group maintains a suitable margin in excess of the capital requirement a) or b), whichever is the greater, below: a) The Pillar 1 capital requirement as stated in 5.1; b) The Pillar 2 capital requirement (as referred to in 5.4), which is FHL s own assessment of the minimum amount of capital that the Board believes is adequate to be held against the risks identified. 10

11 5.1 Calculation of the FHL Group s capital resources requirement As a limited licence UK consolidation group under IFPRU 8, the capital resources requirement of the FHL Group for regulatory reporting purposes is the higher of: the Fixed Overhead Requirement ( FOR ); and the sum of the credit and market risk requirements As at 30 June 2017, the capital resources requirement of the FHL Group under Pillar 1 was the FOR. 5.2 Credit risk Credit risk is the risk of a counterparty failing to meet their financial obligations to the FHL Group when due. The FHL Group is exposed to: Counterparty risk from fund partners or third party administrators being unable to continue their regulated business due to an insolvency event. The Group monitors the risk; it does not bear the risk directly, but there is the unlikely possibility of cash in transit being held by an Authorised Corporate Director that becomes insolvent. Counterparty risk from default of banks or liquidity funds: balances are held only with banks and liquidity funds with which the Group has strong, well-established relationships and within counterparty limits and credit rating requirements. Counterparty risk from settlement practices (timing differences between settling a transaction for some customers and receiving payment). In all scenarios, the Group has full recourse to the underlying units should a counterparty fail to settle (delivery versus payment scenario). However, it may be exposed to market movements during the settlement periods which can crystallise losses should the Group be required to action any sell/buy back of the units. Intra-group settlement can create internal counterparty risk at legal entity level if the debtor company failed. All FIL companies are expected to settle on 30 days. Counterparty risk exists in relation to Custodians (BBH and JP Morgan); however all assets/monies are ring-fenced, and a thorough due diligence process is in place to ensure ongoing robustness of their processes. The FHL Group has adopted the standardised approach for credit risk to calculate the credit risk capital requirement under Pillar 1 of the CRD. The FHL Group does not apply any credit risk mitigation techniques as defined in IFPRU 4. The credit risk requirement at 30 June 2017 was 45.8m. The credit risk exposure by class has not been disclosed as the values for each class of risk are individually considered to be immaterial as defined in section Market risk Market risk is the risk of adverse financial impact due to changes in fair values of financial instruments from fluctuations in foreign currency exchange rates, interest rates, property prices and equity prices. The FHL Group is directly exposed to: Foreign exchange rate risk on the holding of currency cash balances and intercompany balances that are not denominated in GBP. Limited market risk positions are taken in relation to manager s box positions in funds, which are only taken to enable the efficient operation of day-to-day fund dealing activities and are actively monitored. Market risk exists indirectly as components of revenue within the Group are driven by asset values of funds under management/administration and hence by the prices of securities. This risk is managed through regular monitoring of the AuM and management of the expense base. The overall impact on revenues and profit is considered as part of the annual scenario stress testing. The market risk requirement has not been disclosed as the amount of the risk is considered immaterial as defined in section

12 5.4 Operational risk Operational risk is the risk of direct or indirect loss to the FHL Group resulting from inadequate or failed internal processes, people and systems, or from external events. Under IFPRU 8, the FHL Group is classed as a limited licence UK consolidation group and there is no Pillar 1 operational risk capital requirement. The Pillar 2 assessment seeks to challenge the appropriateness of the minimum capital requirements of Pillar 1 by identifying and analysing key risk scenarios within each material category of risk that could pose a threat to the Group meeting its objectives and obligations. Pillar 3 disclosures are separate to the Pillar 2 assessment. Operational risk is the largest risk to which the Group is exposed and, therefore, the most significant risk from a capital perspective. The Group is actively managing operational risk and employs a number of mitigation methods, principally the implementation of systems and controls. Where services are provided by third parties, the Group performs due diligence processes and monitors and manages supplier performance. Under Pillar 2, operational risk has been assessed using scenarios to make forward-looking assessments to evaluate the potential impact of extreme events, from which capital values are determined. 6. Remuneration policy and practices 6.1 Background to remuneration disclosure FIL is a private company owned by management and the founding family. Key employees are, from time to time, given the opportunity to purchase FIL common shares (out of their own post tax monies) which helps to ensure strong alignment between shareholders and management and also inculcates a suitably long-term time horizon. Such shareholdings are generally retained throughout the individual s employment at FIL and are relatively illiquid. The Board of FIL believes that over the medium to long term the majority of the wealth creation of a key employee will be derived from the FIL shareholdings, rather than the components of remuneration covered by this disclosure salary, benefits and bonus. In terms of primary legislation, FHL s remuneration policies and practices are governed by CRD IV Articles 75 and 92-95; whilst FHL s remuneration disclosure is governed by CRR, Part Eight (Disclosure by Institutions), Title II (Technical Criteria on Transparency and Disclosure), Article 450 (Remuneration). Primary legislation is then supplemented inter alia by: Committee of European Banking Supervisors ( CEBS ) Guidelines on Remuneration Policies and Practices; FCA Handbook, Senior Management Arrangements, Systems and Controls (SYSC), Chapters 19A (IFPRU Remuneration Code) and 19C (BIPRU Remuneration Code); FCA General Guidance on Proportionality: the IFPRU Remuneration Code (SYSC 19A); and PRA Supervisory Statement LSS8/13, Remuneration Standards: The Application of Proportionality Article 450(2) requires firms to comply with CRR s remuneration disclosure rules in a manner that is proportionate to their size, internal organisation and the nature, scope and complexity of their activities ( the Proportionality Principle ). The FCA s General Guidance on Proportionality: The remuneration code (SYSC19A) clarifies that, as an IFPRU limited licence group (which has no IFPRU 730K firms within its corporate group) FHL should fall within Proportionality Level 3 and thus be able to avail itself fully of CRR s Proportionality Principle. The PRA s Supervisory Statement LSS8/13, Remuneration Standards: The Application of Proportionality, outlines the precise disclosure obligation for firms that fall within Proportionality Level 3 namely, compliance with CRR Article 450(1) (a), (b), (g) and (h). Disclosure is made on the basis of compliance with these elements of CRR Article

13 6.2 Remuneration disclosure The decision-making process for remuneration policy The remuneration policy of FHL, as with all subsidiaries of FIL, is set at FIL Group level, in keeping with Group policy and practices. Subsidiary company Boards have no formal responsibility for setting local remuneration policy (except as prescribed by local legal requirements). The remuneration policy and compensation for individuals is set with an appropriate level of challenge and independence for a privately owned asset management company. From time to time, FHL receives independent advice on technical executive remuneration issues. This advice is provided by PricewaterhouseCoopers LLP and Willis TowersWatson LLP, as well as from other advisers on an ad hoc basis where they are better placed to give advice on specific issues. FIL senior management takes full account of the FIL Group s strategic objectives in setting remuneration policy and is mindful of its duties to shareholders and other stakeholders. In making decisions on remuneration, senior management seeks to preserve shareholder value by ensuring the successful retention, recruitment and motivation of employees. No individual is involved in decisions relating to his or her own remuneration. FHL Code Staff employees have been identified as employees drawn from categories of staff including: Senior management and risk takers; Staff engaged in control functions; Employees receiving total remuneration that takes them into the same remuneration bracket as the lowest paid senior manager or risk taker and whose professional activities are also deemed to have a material impact on the risk profile of the FCA regulated business, as defined by CRR Regulatory Technical Standards. All of our Code Staff who are senior employees have invested their own money in FIL shares, which they still hold. The link between pay and performance for Code Staff and key design characteristics of the remuneration system, including performance criteria and performance-related pay On a proportionate basis, FHL remuneration is made up of fixed pay (i.e. salary and benefits) and performancerelated pay which is designed to reflect performance against a range of quantitative and qualitative targets. The structure of the remuneration package is such that the fixed element is sufficiently large to enable the company to operate a fully flexible and discretionary bonus policy. FHL currently sets the variable component in a manner which takes into account individual performance, performance of the individual s business unit and the overall results of FHL as a whole. Staff performance is formally evaluated annually. Such evaluations also consider the staff member s contribution in promoting sound and effective risk management where appropriate. Aggregate quantitative information on remuneration broken down by senior management and members of staff whose actions have a material impact on the risk profile of the firm FHL has undertaken CRD s quantitative as well as qualitative test of material risk-taking in drawing up a Remuneration Code Staff list for FHL. FHL s Code Staff is a split between senior management and other members of staff whose actions have a material impact on the risk profile of the firm. On a proportionate basis, FHL s aggregate remuneration awards to Senior Management and all other Code Staff during the 2017 fiscal year are as follows: 2016/2017 Pillar III Submission Senior Management Other Code Staff Total m m m Total Remuneration (GBP Millions)

14 7. Appendices Appendix 1 Balance Sheet Reconciliation as at 30 June 2017 FIL Holdings (UK) Limited In order to meet the requirements for disclosure of a full reconciliation of own funds items to audited financial statements, as described in point (a) of Article 437(1) of Regulation (EU) No 575/2013, the table below shows an extract of the FIL Holdings (UK) Limited Group balance sheet and all items that are components of or are adjusted for in own funds. The reference column links to the template in Appendix 2. Balance sheet reconciliation as at 30 June 2017 FHL Group Balance Sheet in the Audited Financial Statements FHL Group Own Funds Items Cross-reference to Appendix Fixed Assets Intangible assets 4,306 4,306 a Tangible fixed assets 104,560 Investments 2,144 Current assets Stocks 2,989 Debtors 401,572 Investments 271,450 Cash at bank and in hand 11,424 Creditors: amounts falling due within one year (445,332) Creditors: amounts falling due after more than one year (39,906) Provision for liabilities (21,961) Pensions and similar obligations (9,969) Net assets 281,277 Capital and reserves Called up share capital 20,151 20,151 b Share premium account 36,075 36,075 c Merger reserve 44,075 44,075 d Capital contribution 18,000 18,000 e Profit and loss account 161, ,984 f Total shareholders funds 280,285 Minority interests g Capital employed 281,277 The amount of encumbered assets held by the Group is considered to be immaterial in relation to the total assets. 14

15 Appendix 2 Transitional Own Funds Disclosure template as at 30 June 2017 FIL Holdings (UK) Limited In order to meet the requirements for disclosure of the specific items on own funds described in points (d) and (e) of Article 437 (1) of Regulation (EU) No 575/2013, institutions are required to disclose general own funds. By way of derogation, during the period 31 March 2014 to 31 December 2017, institutions shall disclose transitional own funds. FIL Holdings (UK) Limited s disclosure of own funds on a consolidated basis is outlined below: Common Equity Tier 1 capital: instruments and reserves (A) Amount at disclosure date 000 (B) Regulation (EU) No 575/2013 Article Reference (C) Amounts subject to preregulation (EU) No 575/2013 treatment or prescribed residual amount of Regulation (EU) No 575/2013 Crossreference to Appendix Capital instruments and the related share premium accounts 56, (1), 27, 28, 29, EBA list 26 (3) Of which: Ordinary shares 56,226 EBA list 26 (3) b + c Of which: Instrument type 2 EBA list 26 (3) Of which: Instrument type 3 EBA list 26 (3) 2 Retained earnings 161, (1) (c) f 3 Accumulated other comprehensive income (and other reserves, to include unrealised gains and losses under the applicable accounting standards) 62, (1) d + e 3a Funds for general banking risk 26 (1) (f) 4 Amount of qualifying items referred to in Article 484 (3) and the related share premium accounts subject to phase out from CET1 Public sector capital injections grandfathered until 1 January Minority Interests (amount allowed in consolidated CET1) 486 (2) 483 (2) , 479, 480 (198) g 5a Independently reviewed interim profits net of any foreseeable charge or dividend 26 (2) 6 Common Equity Tier 1 (CET1) capital before regulatory adjustments 280,483 Common Equity Tier 1 (CET1) capital: regulatory adjustments 7 Additional value adjustments (negative amount) 8 Intangible assets (net of related tax liability) (negative amount) 34, 105 (4,306) 36 (1) (b), 37, 472 (4) a 9 Empty set in the EU 15

16 10 Deferred tax assets that rely on future profitability excluding those arising from temporary differences (net of related tax liability where the conditions in Article 38 (3) are met) (negative amount) 11 Fair value reserves related to gains or losses on cash flow hedges 36 (1) (c), 38, 472 (5) 33 (a) 12 Negative amounts resulting from the calculation of expected loss amounts 13 Any increase in equity that results from securitised assets (negative amount) 14 Gains or losses on liabilities valued at fair value resulting from changes in own credit standing 15 Definedbenefit pension fund assets (negative amount) 16 Direct and indirect holdings by an institution of own CET1 instruments (negative amount) 17 Holdings of the CET1 instruments of financial sector entities where those entities have reciprocal cross holdings with the institution designed to inflate artificially the own funds of the institution (negative amount) 18 Direct and indirect holdings by the institution of the CET1 instruments of financial sector entities where the institution does not have a significant investment in those entities (amount above the 10% threshold and net of eligible short positions) (negative amount) 19 Direct, indirect and synthetic holdings by the institution of the CET1 instruments of financial sector entities where the institution has a significant investment in those entities (amount above 10% threshold and net of eligible short positions) (negative amount) 36 (1) (d), 40, 159, 472 (6) 32 (1) 33 (b) 20 Empty set in the EU 20a 20b Exposure amount of the following items which qualify for a RW of 1250%, where the institution opts for the deduction alternative Of which: qualifying holdings outside the financial sector (negative amount) 36 (1) (e), 41, 472 (7) 36 (1) (f), 42, 472 (8) 36 (1) (g), 44, 472 (9) 36 (1) (h), 43, 45, 46, 49 (2) (3), 79, 472 (10) 36 (1) (i), 43, 45, 47, 48 (1) (b), 49 (1) to (3), 79, 470, 472 (11) 36 (1) (k) 36 (1) (k) (i), 89 to 91 16

17 20c 20d Of which: securitisation positions (negative amount) Of which: free deliveries (negative amount) 21 Deferred tax assets arising from temporary differences (amount above 10% threshold, net of related tax liability where the conditions in 38 (3) are met) (negative amount) 22 Amount exceeding the 15% threshold (negative amount) 23 Of which: direct and indirect holdings by the institution of the CET1 instruments of financial sector entities where the institution has a significant investment in those entities 36 (1) (k) (ii), 243 (1) (b), 244 (1) (b), (1) (k) (iii), 379 (3) 36 (1) (c), 38, 48 (1) (a), 470, 472 (5) 48 (1) 24 Empty set in the EU 25 Of which: deferred tax assets arising from temporary differences 25a 25b Losses for the current financial year (negative amount) Foreseeable tax charges relating to CET1 items (negative amount) 26 Regulatory adjustments applied to Common Equity Tier 1 in respect of amounts subject to precrr treatment 26a 26b Regulatory adjustments relating to unrealised gains and losses pursuant to Articles 467 and (1) (i), 48 (1) (b), 470, 472 (11) 36 (1) (c), 38, 48 (1) (a), 470, 472 (5) 36 (1) (a), 472 (3) 36 (1) (l) Of which: filter for unrealised loss Of which: filter for unrealised loss Of which: filter for unrealised gain Of which: filter for unrealised gain Amount to be deducted from or added to Common Equity Tier 1 capital with regard to additional filters and deductions required pre CRR 481 Of which: Qualifying AT1 deductions that exceed the AT1 capital of the institution (negative amount) 28 Total regulatory adjustments to Common equity Tier 1 (CET1) (4,306) 29 Common Equity Tier 1 (CET1) capital 276,177 Additional Tier 1 (AT1) capital: instruments 36 (1) (j) 17

18 30 Capital instruments and the related share premium accounts 31 Of which: classified as equity under applicable accounting standards 32 Of which: classified as liabilities under applicable accounting standards 33 Amount of qualifying items referred to in Article 484 (4) and the related share premium accounts subject to phase out from AT1 Public sector capital injections grandfathered until 1 January Qualifying Tier 1 capital included in consolidated AT1 capital (including minority interests not included in row 5) issued by subsidiaries and held by third parties 35 Of which: instruments issued by subsidiaries subject to phase out 36 Additional Tier 1 (AT1) capital before regulatory adjustments 51, (3) 483 (3) 85, 86, (3) Additional Tier 1 (AT1) capital: regulatory adjustments 37 Direct and indirect holdings by an institution of own AT1 Instruments (negative amount) 38 Holdings of the AT1 instruments of financial sector entities where those entities have reciprocal cross holdings with the institution designed to inflate artificially the own funds of the institution (negative amount) 39 Direct and indirect holdings of the AT1 instruments of financial sector entities where the institution does not have a significant investment in those entities (amount above the 10% threshold and net of eligible short positions) (negative amount) 40 Direct and indirect holdings by the institution of the AT1 instruments of financial sector entities where the institution has a significant investment in those entities (amount above the 10% threshold net of eligible short positions) (negative amount) 52 (1) (b), 56 (a), 57, 475 (2) 56 (b), 58, 475 (3) 56 (c), 59, 60, 79, 475 (4) 56 (d), 59, 79, 475 (4) 18

19 41 Regulatory adjustments applied to additional tier 1 in respect of amounts subject to pre CRR treatment and transitional treatments subject to phase out as prescribed in Regulation (EU) No 575/2013 (i.e. CRR residual amounts) 41a 41b 41c Residual amounts deducted from Additional Tier 1 capital with regard to deduction from Common Equity Tier 1 capital during the transitional period pursuant to article 472 of Regulation (EU) No 575/2013 Of which items to be detailed line by line, e.g. Material net interim losses, intangibles, shortfall of provisions to expected losses etc. Residual amounts deducted from Additional Tier 1 capital with regard to deduction from Tier 2 capital during the transitional period pursuant to article 475 of Regulation (EU) No 575/2013 Of which items to be detailed line by line, e.g. Reciprocal cross holdings in Tier 2 instruments, direct holdings of nonsignificant investments in the capital of other financial sector entities, etc. Amount to be deducted from or added to Additional Tier 1 capital with regard to additional filters and deductions required precrr Of which: possible filter for unrealised losses Of which: possible filter for unrealised gains 472, 472(3)(a), 472 (4), 472 (6), 472 (8) (a), 472 (9), 472 (10) (a), 472 (11) (a) 477, 477 (3), 477 (4) (a) 467, 468, Of which: Qualifying T2 deductions that exceed the T2 capital of the institution (negative amount) 43 Total regulatory adjustments to Additional Tier 1 (AT1) capital 44 Additional Tier 1 (AT1) capital 45 Tier 1 capital (T1 = CET1 + AT1) 276,177 Tier 2 (T2) capital: instruments and provisions 46 Capital instruments and the related share premium accounts 56 (e) 62, 63 19

20 47 Amount of qualifying items referred to in Article 484 (5) and the related share premium accounts subject to phase out from T2 Public sector capital injections grandfathered until 1 January Qualifying own funds instruments included in consolidated T2 capital (including minority interests and AT1 instruments not included in rows 5 or 34) issued by subsidiaries and held by third parties 49 Of which: instruments issued by subsidiaries subject to phase out 486 (4) 483 (4) 87, 88, (4) 50 Credit risk adjustments 62 (c) and (d) 51 Tier 2 (T2) capital before regulatory adjustments Tier 2 (T2) capital: regulatory adjustments 52 Direct and indirect holdings by an institution of own T2 instruments and subordinated loans (negative amount) 53 Holdings of the T2 instruments and subordinated loans of financial sector entities where those entities have reciprocal cross holdings with the institution designed to inflate artificially the own funds of the institution (negative amount) 54 Direct and indirect holdings of the T2 instruments and subordinated loans of financial sector entities where the institution does not have a significant investment in those entities (amount above 10% threshold and net of eligible short positions) (negative amount) 54a 54b Of which new holdings not subject to transitional arrangements Of which holdings existing before 1 January 2013 and subject to transitional arrangements 55 Direct and indirect holdings by the institution of the T2 instruments and subordinated loans of financial sector entities where the institution has a significant investment in those entities (net of eligible short positions) (negative amount) 63 (b) (i), 66 (a), 67, 477 (2) 66 (b), 68, 477 (3) 66 (c), 69, 70, 79, 477 (4) 66 (d), 69, 79, 477 (4) 20