Pillar 3 Disclosure 2 February 2015

Transcription

1 Pillar 3 Disclosure 2 February 2015 Angela Kos, Finance Director Page 1 of 17

2 Contents PAGE Purpose 3 Frequency 3 Basis of Disclosure 3 Background 4 Management Objectives and Policies 5 Credit 11 Concentration 13 Liquidity 13 Interest Rate 14 Operational 14 Strategic and Reputational 15 Conduct 15 Capital and Leverage 15 Capital Adequacy 16 Remuneration 16 Page 2 of 17

3 Purpose The purpose of this document is to appropriately disclose the Society s risks, provide background information on its approach to risk management, document the quality and quantity of the Society s capital resources and detail minimum capital requirements that must be maintained at all times. Frequency The Society publishes its disclosures on an annual basis in light of the characteristics, size, scale and complexity of the Society. If the information becomes prone to rapid change, the disclosure frequency will increase in accordance with the Capital Requirements Regulation (CRR) Article 433. If the Society materially diversifies away from its stated business model or if the risk profile materially changes, the Audit and Compliance Committee will consider publishing an update to this disclosure document. The Board approves the Society s Internal Capital Adequacy Process (ICAAP) on an annual basis and monitors risk and capital adequacy on an ongoing basis. The Society s formal regulatory capital review, Supervisory Review and Evaluation Process (SREP) took place in Subsequently Individual Capital Guidance (ICG) was issued by the Prudential Regulation Authority (PRA) confirming the percentage of Pillar 1 to be held in addition to a capitalplanning buffer. The ICG issued by the PRA is in line with the level calculated in the Society s ICAAP, however actual capital resources held is significantly in excess of both measures. Basis of Disclosure This disclosure document has been prepared in accordance with the requirements of the CRR Articles The date of publication of the disclosures is in conjunction with the publication of the financial statements for the year ended 2 February Unless otherwise stated, all figures are as at 2 February The disclosure document has been prepared by the Finance Director and reviewed by the Audit & Compliance Committee and the Board of Directors. In line with best practice, the disclosure document is located on the Society s website. The primary business objective of the Society is to promote savings and home ownership particularly within the North West of England through an attractive range of products and services, combined with the provision of a high standard of customer service whilst maintaining a competitive position within the business areas in which it operates. The CRR rules Article 89, Country-by-Country Reporting (CBCR) requires the Society, for purposes of transparency regarding the source of income and the locations of its operations, to disclose annually the following information: Name The Chorley & District Building Society Type of Entity Building Society Credit Institution UK Registered Entity Nature of Activity Location Turnover ( m) A UK financial institution owned by its members as a mutual organisation. The principal purpose of the Society is that of making loans that are secured primarily on residential property and funded substantially by its members as detailed in the Directors Report in the Annual Report and Accounts. As a solo entity, wholly UK based, the Society transacts with UK counterparties only and in GDP. Lancashire, England, UK No. of Employees 3.8m 43 (Full Time Equivalent) Page 3 of 17

4 The Board of Directors can confirm that the Society s current capital position, in its opinion, is sufficient to meet the minimum capital resources requirement and that sufficient capital will continue to meet minimum requirements for its planned future strategy. In addition, Management arrangements adequately assess and control the principal risks facing the Society and are proportionate in light of the characteristics, size, scale and complexity of the Society. If the reader of this disclosure document requires further explanation an application should be made in writing to the Society Secretary at The Chorley and District Building Society, Key House, Foxhole Road, Chorley, Lancashire PR7 1NZ. Background The Basel Accords are recommendations on banking regulations known as Basel I, Basel II and Basel III, issued by the Basel Committee on Banking Supervision (BCBS) and form part of the legislative framework under the Capital Requirements Directive (CRD). They are called the Basel Accords as the BCBS normally meet in Basel, Switzerland. Basel I/CRD was enforced by law in the G10 countries in It mainly focussed on credit risk, with banks and building societies required to hold capital equal to 8% of risk weighted assets, but Basel I was superseded by a more comprehensive set of guidelines known as Basel II. Basel II/CRD II and III created European standard for regulators to control how much capital banks and building societies maintained to safeguard against the types of financial and operational risks banks, building societies and the whole economy faced. Basel III/CRD IV was developed to address the deficiencies in financial regulation highlighted by the most recent financial crisis in 2008 that identified insufficient levels of capital, both in quantity and quality, resulting in external support provided by national authorities. Basel III is a European standard aimed at strengthening banks and building societies capital adequacy, stress testing and liquidity risk. It requires firms to hold capital of a higher quality together with a higher level, broadened by enhanced definitions of liquid assets and liquidity requirements. CRD IV implements the Basel III agreement in the EU comprising new Capital Requirements Regulation (CRR) that build on the concept of three pillars developed under Basel II. Pillar 1: Minimum capital requirements, using a risk-based calculation focussing particularly on credit and operational risk, to determine the Capital Resources Requirement (CRR) Pillar 2a: The Society follows an Internal Capital Adequacy Assessment Process (ICAAP) and Supervisory Review and Evaluation Process (SREP) in order to establish additional capital required for specific risks not covered by Pillar 1 Pillar 2b: Additional capital required in the form of a capital buffer agreed by firms and supervisors to cover potential capital requirements under certain stressed conditions Pillar 3: The appropriate disclosure of risks, capital and risk management arrangements CRD IV is in an extended period of implementation that started in 2014 and will last until Page 4 of 17

5 Management Objectives and Policies The technical criteria on transparency and disclosure as detailed in the CRR Rules, Article 435 are as follows: Governance and Responsibilities management and accountability for the ICAAP lies ultimately with the Board. This is evidenced through having in place appropriate delegated authorities, sub-committees, policies, procedures and systems & controls. The Role of the Board The Board is responsible for effectively managing risk through a formal risk management framework, including relevant risk management and risk appetite policies The Board has established its own Terms of Reference that include a formal schedule of matters reserved to it which can be found on the Society s website. As at 2 February 2015, the Board comprised three executive and six Non-Executive directors. There are eleven meetings a year with additional meetings as often as necessary to discharge the duties effectively and the internal auditors carry out a Board effectiveness review as part of a rolling audit plan. The Board delegates responsibilities to a number of sub-committees that are attended by directors. A full description of each Director s background and relevant experience is included in the Annual report and Accounts for 2014/15 on pages and a comprehensive list of other directorships is included on page 43. Non-Executive director appointments are made on merit, based on the specific skills, competencies and experience required under the Society s succession plan. The Board gives consideration to equality and diversity on the Board although it has adopted the principle that appointments should be made on merit. Vacancies are advertised widely and all directors must meet and maintain the regulatory fitness and proprietary standards and must be authorised by the FCA as an Approved Person in order to fulfil their Controlled Function as a director. The rules of the Society clearly set out the procedure for nominating a director and the Society welcomes nominations from suitably qualified individuals. During 2014, the Society used Warren Partners, executive search and selection consultants in the recruitment and appointment of two Non-Executive directors. The Society had identified vacancies on the Board in accordance with the succession plan in place. The Society has no other connection with Warren Partners. The Society is committed to promoting equality and diversity and promoting a culture that actively values difference and recognises that people from different backgrounds and experiences can bring valuable insights to the workplace and enhance the way the Society works. The Nominations & Remuneration Committee leads the process for Board appointments although the Board as a whole makes the final decision. Audit & Compliance Committee The Audit & Compliance Committee is a sub-committee of the Board, consists solely of Non-Executive directors, meets at least four times a year and considers all aspects of audit, risk and compliance. It is responsible for assessing the adequacy and effectiveness of internal controls, the accuracy and completeness of financial information, reviewing accounting policies, audit reports and agreeing the annual internal audit and compliance plans. It recommends the acceptance of the Annual Report & Accounts to the Board. It monitors the relationship with internal and external auditors and is responsible for recommending appointment, re-appointment or removal of the internal and external auditors. The Chief Executive, Deputy Chief Executive Secretary & Treasurer, Finance Director and Head of Compliance, attend each meeting of the Committee and representatives of the Society s Internal Auditors and External Auditors attend by invitation. The Board is satisfied that the composition of the Committee provides recent and relevant financial experience. Page 5 of 17

6 Nominations & Remuneration Committee The Nominations & Remuneration Committee is a sub-committee of the Board, consists solely of Non-Executive directors and meet at least four times a year or as frequently as is required to fulfil its duties. It considers matters relating to Board & management succession, staff performance & remuneration and general employee matters. It leads the process for Board appointments and makes recommendations to the Board. It considers the balance and diversity of skills, knowledge and experience of the Board and Executive team, the requirements of the business and recommends change where appropriate. It is responsible for the Remuneration Policy. The Chief Executive, Deputy Chief Executive Secretary & Treasurer and Finance Director attend each meeting of the Committee although none are involved in consideration of any matters relating to their own remuneration. Assets & Liabilities Committee The Assets & Liabilities Committee is a management committee reporting to the Board, chaired by the Chief Executive, which meets on a monthly basis and is responsible for monitoring the structure of the Society s assets and liabilities, controlling financial, liquidity and treasury risks and reviewing control procedures including limits, reporting lines and mandates. The Committee focuses on liquidity risk, interest rate risk, counterparty credit risk, funding risk, basis risk and refinancing risk. Two Non-Executive directors, the Chief Executive (Chair), Deputy Chief Executive Secretary & Treasurer and Finance Director are members and attend each meeting of the Committee. Credit Committee The Credit Committee is a management committee reporting to the Board. It meets quarterly or as frequently as is required to fulfil its duties and considers matters relating to the Lending Policy Statement. The Chief Executive (Chair), Deputy Chief Executive Secretary & Treasurer and Finance Director are members of the Committee. Product Committee The Product Committee is a management committee reporting to the Board, meets on a monthly basis or as frequently, as is required to fulfil its duties, ensuring the Society s products, services, distribution channels and marketing campaigns are appropriate and compliant. The Committee also assesses product profitability at both the design stage and the end of product life stage. The Chief Executive (Chair), Deputy Chief Executive Secretary & Treasurer and Finance Director are members of the Committee. and Compliance Committee The and Compliance Committee is a management committee reporting to the Board and meets on a quarterly basis or as frequently as is required to fulfil its duties. The Committee is responsible for reviewing the Management Framework including Appetite Policy Statement and monitors risk based activity through departmental risk registers, identifying and controlling risks on a monthly basis. The Chief Executive, Deputy Chief Executive Secretary & Treasurer (Chair) and Finance Director are members of the Committee. The full terms of reference for the Board and all sub-committees are available on the Society s website in the About Us section. Page 6 of 17

7 Management Strategy and Processes The Society operates a Three Lines of Defence model to manage its risks. First line of defence: Departmental Identification and Control Assessment Primary responsibility for the identification, control, monitoring and mitigation of risks lies with the appropriate operational areas. Second line of defence: Management and Compliance Functions The risk management function comprises the Compliance department and oversight is provided by the Head of Compliance reporting to the Deputy Chief Executive, Secretary and Treasurer, who has oversight of Society and chairs the management & Compliance Committee. Oversight and governance is provided through Audit & Compliance Committee via the management & Compliance Committee. The risk structure facilitates and monitors the implementation of effective risk management practices by departmental management. It also assists the risk owners in reporting adequate risk-related information. This provides oversight over business process and risks. Third line of defence: Internal audit Internal audit undertakes a programme of risk-based audits covering all aspects of both first and second lines of defence. The Internal Auditors and the Audit and Compliance Committee provide independent assurance that the Society s assets are being safeguarded. This involves ensuring that controls are in place and working effectively in accordance with Society policy and procedures as well as with laws and regulations, and that Society records and reports are accurate and reliable. The work carried out includes providing assurance on the effectiveness of the second line of defence functions as well as that of controls operated by the Senior Team and the Board. The Audit and Compliance Committee approve the annual Audit Plan and receive regular reports detailing the results of audit visits, including an Annual Report reflecting on internal audit activity Page 7 of 17

8 Management Governance Structure The Board has implemented a clearly defined, Board approved Management Framework Policy, a summary of the structure is as follows:- Management Information Management Management Framework Framework Governance Incidents & Loss Events Appetite Policy Strategic Planning Roles & Delegated Authorities Profiles & Quantification Analysis Identification & Control Assessment Management and Reporting Policies Predictor Events Systems and Training Board & Committees Compliance Review & Assurance Internal Audit Review & Assurance Page 8 of 17

9 The Board is ultimately responsible for the Management Framework which is supported through roles and subcommittees and/or by management operating under delegated mandates outlined as follows:- Key s First Line Second Line Management Oversight Governance Credit Retail Credit Branches and Relevant Department Managers Commercial Credit Head of Mortgages, Senior Underwriters and Treasurer Compliance, General Manager Customer Services, Credit Committee and & Compliance Committee General Manager Customer Services, Credit Committee, ALCO and & Compliance Committee Interest Rate Treasurer CEO, ALCO and & Compliance Committee Liquidity & Funding Treasurer and Head of Finance CEO, Finance Director, ALCO and & Compliance Committee Market Treasurer CEO, ALCO and & Compliance Committee Operational Concentration Conduct Business/Strategic Branches and Relevant Department Managers Head of Mortgages and Treasurer Branches and Relevant Department Managers Relevant Department Managers Compliance, CEO & Compliance Committee CEO, Credit Committee, Product Committee and & Compliance Committee General Manager Customer Services, Head of Conduct and Compliance Department CEO, DCEO, Finance Director, General Manager Customer Services, ALCO, Product Committee and Credit Committee Audit and Compliance Audit and Compliance Audit and Compliance Audit and Compliance Audit and Compliance Audit and Compliance Audit and Compliance Audit and Compliance Audit and Compliance Appetite The Society is a very prudent, risk averse business and its risk appetite is set out in the separate Board Approved Appetite Policy Statement. The Board has approved the following high-level risk appetite:- we will not knowingly take risk positions that threaten our ability to remain an independent mutual building society that is able to continue to provide long term value to our members. In addition, we will conduct our activities in a manner that safeguards the Society s investing members balances whilst maintaining at all times the minimum amount of capital required to meet the Individual Capital Guidance (ICG) and an additional capital planning buffer (CPB) determined by the appropriate regulator. Implicit within this risk appetite statement are the assumptions that we will not make decisions that might: Result in a year-end financial loss being reported, which would weaken our capital position Damage our business model or threaten our market position Adversely affect our reputation or reduce confidence in the Society amongst key stakeholders such as our members, staff, the community in which we operate, business partners and the regulators Reduce liquidity to a level where the Society cannot survive 90 days in a business as usual environment or 14 days under stressed market conditions Adversely impact funding capability Endanger our compliance with legislation, regulations, guidance and relevant codes of conduct Page 9 of 17

10 The Society considers the following risks as part of the ICAAP:- Strategic Concentration Credit Liquidity Interest Rate / Market Operational Reputational Regulatory Specific s Residual Capital Definition Strategic risk is defined as any risk (threat and/or opportunity) that materially affects the ability of an organisation to survive. This includes future business plans and strategies, including plans for entering new business lines, new products and services, expanding existing services through mergers and acquisitions. Concentration risk is defined as the risk of loss arising from heavily lopsided exposure to a counterparty or group of counterparties, geographical region, product type or market segment. Credit risk is defined as the risk that customers or counterparties will not be able to meet their obligations as they fall due. This applies to mortgage customers and to treasury counterparties. The Society has adopted the standardised approach to credit risk. Liquidity risk is defined as the risk that a firm, although balance-sheet solvent, cannot maintain or generate sufficient cash resources to meet its payment obligations (current and future) in full as they fall due, or can only do so at materially disadvantageous terms. Interest rate risk is defined as exposure to an adverse variation in costs or returns resulting from a change in interest rates. Market risk is defined as the risk of loss arising from fluctuations in the market value of positions attributable to changes in market variables, such as interest rates, foreign exchange rates, equity and commodity prices or an issuer's credit worthiness. Operational risk is defined as the risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems or from external events. The Society will lose potential business because its character or quality has been called into question. This may be defined as damage to the society (or sector) through loss of its reputation or standing which can arise as a consequence (or impact) of operational failures - as well as from other events. Regulatory risk is defined as the risk that a change in laws and regulations will materially impact a security, business, sector or market. e.g. FSCS Levy, the current structure of the Financial Services Compensation Scheme. s that may result from the partial performance or failure of credit risk mitigation techniques for reasons that are unconnected with their intrinsic value. This could result from, for instance, ineffective documentation, a delay in payment or the inability to realise payment from a guarantor in a timely manner. Capital risk is the risk that the Society is unable to meet its minimum level of regulatory capital requirement (ICG) and the additional capital planning buffer (CPB) (including any applicable scalar that may be imposed) together with the additional requirement to hold the minimum capital conservation buffer and any counter cyclical buffer that may be determined by the appropriate regulator Appetites are set for each category of risk and they are reviewed annually and continually re-assessed and monitored on a monthly basis via the Dashboard Report. appetite is always within any regulatory or statutory limits. In addition, triggers are established as early warning indicators that highlight to Senior Management and the Board where management action may be considered appropriate. Each risk category is described in detail with relevant mitigating controls in an originating policy statement i.e. credit risk features in the treasury and lending policy statements. appetite is reviewed and approved at least annually by the Management & Compliance Committee, the Audit & Compliance Committee and by the Board. Changes to risk appetite are approved by the Board and subsequently updated into policy statements. All policy statements are subject to an independent formal review at least annually by the Board or sub-committees. Page 10 of 17

11 Credit The Society adopts the Standardised Approach for assessing credit risk as documented in the Capital Requirements Regulations (CRR). The Society s total assets are first risk-weighted using the calculations in the CRR before credit risk is applied at 8% of those risk-weighted assets. Mortgages Credit risk is the risk that mortgage customers will not be able to meet their obligations as they fall due. The Credit Committee is responsible for reviewing lending policy, arrears and recommending an updated policy statement to the Board for approval on an annual basis. The Credit Committee considers all matters relating to the Lending Policy Statement. A summary of credit risk in mortgages is as follows: Mortgages (net of specific provisions) Weighting % Value net of specific provisions % of total mortgages Fully Secured on Residential Property: <80% LTV ,932 96% Unsecured on Residential Property: >80% LTV 75 3,092 2% Past Due and ully secured: <80% LTV or unsecured with a provision of >20% 100 2,092 1% Past Due and unsecured: >80% LTV % Secured on Real Estate 50 1,035 1% General Mortgage Loss Provision 0 (128) 0% Total 163, % Past Due Items For the purposes of capital allocation, arrears are classed as established arrears if they exist for 90 days or more. The table below provides a Society analysis, for capital adequacy purposes, of loans and advances exposures: Society Performing Balances Past Due Balances Total Net Redemption Balances Fully Secured on Commercial Real Estate 1, ,035 Fully Secured on Residential Property (FSRP) 160,024 2, ,124 General Mortgage Loss Provision (128) 0 (128) Total Net Commercial Assets 160,931 2, ,031 Mortgage Loss Provisions The Society provides specifically for cases in arrears with a LTV of 75% or above, where an expected shortfall on the sale of the property can be predicted. A further review is undertaken of cases where the borrower is suffering hardship, has been transferred onto an interest only repayment basis and has an LTV ratio in excess of 75% whether they are in arrears or not. Where a shortfall can be predicted, a specific provision is created. In addition to specific provisions, the Society calculates a general mortgage loss provision to capture possible impairments arising in the remainder of the loan book. These are calculated by adopting a risk-based approach. Each category of lending is risk assessed based on its LTV. Loans Fully Secured on Residential Property 000 Provisions for Mortgage Losses Specific General Total Brought Forward 4 February Utilised during the year Charge for the year 31 (24) 7 Carried Forward 2 February Page 11 of 17

12 Treasury Counterparties Credit risk is the risk that treasury counterparties will not be able to meet their obligations as they fall due, addressed in the Society s Board approved Treasury Policy Statement. ALCO is responsible for credit risk associated with treasury assets and the Society s processes, systems and controls for managing this risk are documented in the Treasury Policy Statement and Individual Liquidity Systems Assessment (ILSA). These policy statements are reviewed by ALCO which recommend changes to the Board for approval on an annual basis. The Society invests with counterparties with high quality credit ratings awarded by Fitch and/or Moody s external credit rating agencies, UK building societies regulated by the PRA and FCA and/or local authorities. The Society restricts investments with unrated entities to other building societies that are regulated by the PRA and FCA. Where a bank is unrated, investments may be placed only where the bank is guaranteed by its parent and the parent is on the Society s approved list. All counterparty limits are reviewed annually and approved by the Board. The Society s Board is responsible for setting limits for the level, composition and maturity of liquidity and funding balances and such limits are quantified in the Treasury Policy Statement. Reviews and compliance checks against some of these limits are monitored daily by the Finance Department and other limits are monitored via the monthly Dashboard Report. In addition, the Society carries out stress testing each month of varying firm-specific, market-wide and idiosyncratic events, to ensure its level of liquidity remains sufficient. These results are presented to ALCO. Credit risk within liquid assets under Pillar 1 is based on external counterparty credit ratings, as issued by an external ratings agency and the length of time to maturity. Credit risk within liquidity is analysed under Pillar 1 as follows: Liquid Assets Credit Rating Weighting Value % of Total Liquid Assets Exposures to Central Government AA+ 0% 32,261 52% Exposure to Institutions with residual maturity <3 months A 20% 5,010 8% Exposure to Institutions with residual maturity <3 months A- 20% 16,164 26% Exposure to Institutions with residual maturity <3 months BBB+ 20% 1,001 2% Exposure to Institutions with residual maturity <3 months NR 20% 2,005 3% Exposure to Institutions with residual maturity >3 months A 50% 1,001 2% Exposure to Institutions with residual maturity >3 months A- 50% 3,000 5% Exposure to Institutions with residual maturity >3 months BBB+ 50% 1,001 2% Total 61, % The table below provides an analysis of credit risk exposure by residual maturity: Society Mortgages Loans and Advances to Credit Institutions Cash in hand n/a 225 Repayable on demand 64 45,188 Repayable in not more than 3 months 1,105 10,995 Repayable in more than 3 months but not more than 1 year 2,912 5,000 Repayable in more than 1 year but not more than 5 years 18,893 0 Repayable in more than 5 years 140,402 0 Accrued Interest 35 Sub-total 163,376 61,443 Provisions (345) 0 Total 000s 163,031 61,443 Page 12 of 17

13 Concentration Concentration risk arises from a lack of diversification in the Society s business. The Society s business model is a traditional regional building society with business being made up of predominantly loans that are fully secured on residential property (FSRP) funded by retail savings. The Society faces concentration risks in its balance sheet from the following areas: Mortgages Secured on Property in Geographical Regions Mortgage Lending Types Large Exposures Intermediary Business The Society manages concentration risk in a variety of ways: Treasury Policy sets out both investment and funding limits by counterparty Lending Policy restricts the amount of loans to individuals and connected counterparties and details risk appetite in relation to geographial region, product type or market segment Specific limits are detailed in the Lending Policy Statement, Treasury Policy Statement and Appetite Policy Statement. Limits are reported to the Board on a monthly basis. The table below shows a geographical analysis of mortgage exposures: Region Balances with an LTV < 80% Balances with an LTV > 80% Total Mortgage Balance % of Loan Book Net Balances with arrears Specific provisions NW 56,794 21,202 77, % 1,243 5 YH 7,819 5,833 13, % OSE 12,003 1,377 13, % OME 8, , % 162 WM 8,655 1,866 10, % 95 GL 6, , % 537 SW 6, , % EM 5,727 2,674 8, % EA 4, , % N 2,196 2,499 4, % WA 3,182 2,058 5, % SCOT % 63 Total 000 s 123,326 39, , % 2,100 5 Liquidity Liquidity risk is the risk that the Society is not able to meet its financial obligations as they fall due, or can only do so on materially disadvantageous terms. The Society maintains sufficient liquid resources to meet known and unknown financial obligations as they fall due. This is achieved by maintaining an appropriate, prudent level of liquid assets by quantity, quality and maturity, by an appropriate combination of savings and deposit funding balances and by having access to additional sources of funds through the wholesale market. The aim is to ensure that in times of stress, assets can be realised quickly and at full value. The Society s maintains high quality, unencumbered liquid resources that can be realised under market-wide and firm-specific liquidity shocks to ensure that it remains solvent and operates as a going concern. A significant proportion of liquidity is held in high quality liquid buffer assets comprising the Bank of England Reserve account and as at 2 February 2015, buffer assets equated to % (2014: 62.62%) against a minimum 50% requirement. The risk framework for managing Liquidity risk is documented in detail in the Board approved Treasury Policy Statement and processes, systems and controls are described in the Individual Liquidity Systems Assessment (ILSA). These documents are reviewed by the Board on an annual basis, prepared by the Treasurer and monitored through management information presented at the monthly Board meetings and the Assets and Liabilities Committee (ALCO) meetings. Page 13 of 17

14 Interest Rate The Society is exposed to interest rate risk arising from changes in the prices and interest rates of its financial instruments. The Society does not take speculative views on future interest rate movements when investing surplus funds nor does it hold a trading book. The Society faces the following interest rate risks in its balance sheet: Assets and liabilities that re-price on different days at different rates Loss on financial instruments arising from a movement in market prices Matched interest basis may change between an asset and a liability or between a hedge and the hedged asset (basis risk) Administered rates; which allow the Society to control the rates on mortgages and shares fixed rates; where the rate is set for a pre-determined rate and period of time on mortgages, shares, treasury investments and funding Bank Base rate (BBR); where the control is with the Bank of England in setting bank base rate, we are affected by the impact on products linked to BBR e.g. tracker rate products Non-interest bearing balance sheet items that do not attract an interest rate. Reserves, other assets and liabilities and fixed assets The Society manages interest rate risk in the following ways: Overall management of interest rate risk is controlled by the Board through the ALCO Fixed rate mortgages and savings are initially matched off against each other month by month of their maturity appetite limits are set for monthly mismatches, in any one quarter and in any one year Regulatory reporting (gap reports) are produced monthly for monitoring purposes Gap limits are set to allow for flexibility in the timing differences on interest re-pricing of assets and liabilities Gap re-pricing is subject to a parallel interest rate shock of 2%. Products are priced with due consideration given to the effects of interest rate risk demonstrated in the product Basis risk (interest basis) within assets and liabilities is monitored monthly against risk appetite Operational Operational risk is defined as the risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems or from external events. Operational risk is identified by each business department, assessed and scored using likelihood and consequence. These risks are compiled into risk registers and presented to the management and Compliance Committee and the Audit and Compliance Committee. The top risks are presented to the Board on a monthly basis. The and Compliance Committee is a management committee reporting to the Board of Directors and meets on a quarterly basis. The committee is responsible for reviewing the Management Framework including Appetite Policy Statement and monitors risk based activity through a departmental risk register, identifying and controlling risks on a monthly basis, including an annual report reflecting on internal audit activity. The Society maintains comprehensive terms of reference for the and Compliance Committee meetings. Capital Required for Operational Capital required to cover operational risk is calculated using the Basic Indicator Approach (BIA), as detailed in the Capital Requirements Regulations, articles 311 to 317. Using the standardised BIA it states capital is calculated at 15% of average net income over the previous three years. Page 14 of 17

15 Strategic and Reputational This is the risk that the Society follows an inappropriate strategy including entering unprofitable markets or failing to safeguard the interest of its members leading to a loss of public confidence. The Board ensures that the Society maintains its capital strength by mantaining an adequate amount of profitability to stregthen reserves and long-term financial stabiltiy for all its members. Conduct Conduct is the risk that actual or potential customer detriment arises from the way in which the Society conducts its business and the Society restricts its activities to areas where appropriate expertise is in place. Conduct risk management is embedded in the culture of the Society and is considered as part of all decisions at Board and Committee meetings. The Society has developed a Conduct Dashboard to facilitate monitoring and review of conduct risks. Capital Resources and Leverage Capital Resources as at 2 February 2015 total m and consists predominantly of core Tier 1 capital. Capital Resources 000 Common Equity Tier 1 Capital Resources Accumulated Profits held as General Reserves 15,860 Tier 2 Capital Resources General Provisions for Bad and Doubtful Debts 128 Total Capital Resources 15,988 The external regulatory framework under which we operate continues to evolve, with changes covering the introduction of the Leverage Ratio, a measure of capital strength, which takes Tier 1 capital as a percentage of assets, including off-balance sheet assets such as mortgage commitments. The European Capital Requirements Directive introduces minimum leverage ratio limits expected to be 3%. As at 2 February 2015, the Society s leverage ratio was 6.7%, calculated in line with the current interpretation of the regulation. Page 15 of 17

16 Capital Adequacy The Society maintains a five-year Corporate Plan that is reviewed by the Society s Board on at least a six-monthly basis. The Society assesses the impact of the planned assumptions and stressed assumptions on its capital resources to ensure sufficient capital is maintained over the planning horizon. Performance against plan is monitored monthly by the Board of Directors. The following provides details of the minimum capital resources requirement under Pillar 1 Pillar 1 Capital Resources Requirement 000 s Assets RWA Capital Required Credit Treasury Assets Central Government 32, Credit Institutions 29,182 7, Cash Total Treasury Assets 61,443 7, Loans and Advances to Customers Residential Performing Loans 160,024 58,596 4,688 Past Due 2,100 2, Non-Residential/Commercial Performing 1, Past Due Total Loans and Advances to Customers 163,159 61,217 4,897 Provisions (237) 0 0 Fixed and Other Assets 2,428 2, Total Credit Exposures and Credit Required 226,793 70,982 5,678 Operational Capital Required 534 Pillar 1 Capital Resources Required 6,212 Remuneration The Directors Remuneration report contained within the Annual Report and Accounts 2014/15 (Page 20-21) provides details of remuneration policy and quantitative figures relating to Directors. The CRR rules (Article 450) require additional disclosure regarding remuneration to be disclosed in this document. To avoid the risk of remuneration structures being in place that could encourage staff to take more risky decisions or behaviours such as overriding controls, the Society promotes enhanced performance and will fairly and responsibly reward individuals for their contribution to the success of the Society, bearing in mind at all times the parameters of the Society s risk framework. The Society seeks to establish an appropriate balance between fixed and variable elements of remuneration. The design features of the remuneration system comprise: Fixed: Basic salary which are reviewed annually by reference to jobs carrying similar responsibilities in comparable organisations and in the light of market conditions Variable: Discretionary bonuses based on individual performance based on a balanced scorecard to ensure that no single factor can unduly influence the amount payable. Bonus payments are paid in cash and are approved in advance by the Nominations and Remuneration Committee Fixed: Company car allowance (subject to individual contract arrangements) Fixed: Benefits-in-kind Fixed: Defined contribution pension benefits. Page 16 of 17

17 CRR rules (Article 450) require disclosue of aggregate information for those individuals defined as having a material impact on the risk profile of the Society. Based on this definition, the following individuals fall into this category: Chief Executive Deputy Chief Executive Secretary and Treasurer Finance Director General Manager Customer services The following table is a breakdown of the remuneration awarded to those members of staff: Remuneration 000 Number of staff Salary Pension Bonus Total Non-Executive Directors Executive Staff Total % 84% 8% 8% Page 17 of 17