Pillar 3 Disclosure 2017

Transcription

1 Pillar 3 Disclosure 2017

2 Background The Capital Requirements Directive (CRD) of the European Union establishes a regulatory capital framework across Europe governing the amount and nature of capital credit institutions and investment firms must maintain. In the UK, CRD has been implemented by the Financial Conduct Authority (FCA). The FCA framework consists of three Pillars: Pillar 1: sets out minimum capital requirements firms are required to meet for credit, market and operational risk Pillar 2: requires firms to assess the amount of internal capital they consider adequate to cover all of the risks to which they are, or are likely to be, exposed. This is implemented through the Internal Capital Adequacy Assessment Process (ICAAP) Pillar 3: requires firms to publicly disclose certain details of their risks, capital, and risk management arrangements. The rules in the Capital Requirements Regulation (CRR) set out the provision for Pillar 3 disclosure. This document is designed to meet James Hambro and Partners ( JH&P ) Pillar 3 obligations. JH&P are permitted to omit required disclosures if it is believed that the information is immaterial such that omission would be unlikely to change or influence the decision of a reader relying on that information for the purpose of making economic decisions about the firm. In addition, disclosures may be omitted where the information is proprietary or confidential. Proprietary information is that which, if shared, would undermine JH&P s competitive position. Information is considered to be confidential where there are obligations binding JH&P to confidentiality with customers, suppliers and counterparties. Scope and application of the requirements JH&P is regulated as a Principal firm in the UK and owns 100% of Appointed Representative James Hambro and Co Ltd ( JH&C ), a Restricted Financial Adviser. They are known together as the Group. JH&P is an IFPRU Limited Licence Firm for capital purposes and has no trading book exposures. The Group s management accounts are reviewed as one firm as opposed to separate entities. With this in mind, this Pillar 3 disclosure is prepared with reference to the Group as a whole, not JH&P standalone. JH&P is an independent private asset management partnership providing bespoke wealth management services to predominantly high net worth individuals, trusts, charities and other tax efficient structures such as OEICs, SIPPS and ISAs. JH&C provides Restricted Financial Advice largely to high net worth individuals. Page 2

3 Risk management The risk management process for the Group is reviewed annually through the ICAAP. Despite the fact that JH&P is not part of a consolidation group for prudential purposes, the Group s senior management feel it prudent to consolidate the results and consider the risks of both entities together. This ensures that every risk is considered and the greatest level of capital required is measured. The risk management process is overseen by the Chief Executive Officer (CEO), with the Risk and Strategy Committees taking responsibility for this process and the fundamental risk appetite of JH&P. The Compliance Officer has responsibility for the implementation and enforcement of JH&P s risk principles, working closely with senior management and the Finance team who prepare, review and analyse various stress tests and projections. The ICAAP is reviewed and approved annually first by the Risk Committee with final approval from the Strategy Committee. On a monthly basis, the Group s management accounts are reviewed by the Head of Finance and CEO. These are presented to the Strategy and Partners Committees regularly. Where material changes to the business occur, the risk profile of the business is reviewed and consideration is given to whether the ICAAP or capital position is still adequate. The senior management team meets fortnightly to discuss all operational matters within the Group. Appropriate action is taken where risks fall outside of the Group s tolerance levels or where the need for remedial action is required in respect of identified weaknesses in mitigating controls. Specific risks applicable to the Group are discussed below. All categories of risk are reviewed in more depth within the ICAAP and scenario testing is undertaken alongside the preparation of a risk matrix which identifies and mitigates risks. The Group has adopted a Pillar 1 plus approach to determine the level of capital that needs to be held. This method takes the Pillar 1 capital resource requirement calculations as a starting point and then considers whether this delivers an adequate capital sum to cover the Group s actual risks. Review of Material Risks Credit Risk The main source of credit risk comes from non-payment of discretionary management fees. Stress and scenario testing has given the Group comfort that they are adequately diversified in terms of client numbers and sizes and that they have a good level of regulatory capital and cash cover. This helps reduce the threat that non-payment will cause. This risk is further mitigated by the fact that JH&P charges management fees directly to client portfolios which helps give greater control over payment of fees. The Group feel there are sufficient controls in place that no further capital, above what has been calculated via the standard method, is required. Market Risk A significant portion of income is dependent on the value of funds under management. This runs the risk of income fluctuating and potentially dropping in times of poor market performance. This could also lead to clients leaving due to poor performance of their portfolios. That risk is mitigated by having diverse portfolios amongst clients and across the firm. Page 3

4 Some cash balances within the firm are held in Euros or US Dollars. These balances are maintained at a minimal level and funded by currency management fees. There are a few creditors who request payment in Euros or US Dollars. Where higher than expected balances are held in Euros or US Dollars, surplus balances are converted to sterling. This reduces our foreign exchange fluctuations. There are a small number of clients who hold portfolios in Euros and US Dollars. Any accruals against their management fees are treated as having the same level of market risk to exchange rate fluctuations. The Group considers both the management fee accruals and bank deposits in currencies other than sterling to hold a level of exchange rate risk and holds a certain level of capital (per the standard calculation) against this. The Group does not believe this risk to be high enough to require holding extra capital above that already calculated through the standard calculation. Liquidity Risk There is always a risk that cash will drop and the Group will not be able to meet liabilities as they fall due. Cash resources are managed by the Group in such a way that they maximise interest rates and efficiency of treasury management. Prudent cash flow forecasts are produced and reviewed monthly to plan all cash flows. The Group previously held an 850k overdraft facility with the Bank of Scotland. This was to cover any short term cash flow problems but effective cash management has negated the need for an overdraft facility at this time. Where resources are predicted to run lower than the Group is comfortable with, we have the opportunity to request extra funding immediately from the Partners of the business. With this plan in place, the Group does not feel it necessary to hold extra capital. Operational Risk Operational risk includes everything from high level strategy failing to administrative errors. The policy is to operate a robust and effective risk management process, embedded within the governance and Management structures of the Group. The concept of reducing risk to acceptable levels implies some articulation of risk appetite. The Group maintains a risk matrix outside of the ICAAP that discusses all areas of risk facing the firm and how they are mitigated. This is prepared by the Management Committee and approved annually by the Strategy Committee. This ensures the people who are responsible for controlling and monitoring the risks have full involvement in the production of the risk matrix. This also ensures that all levels of the business are an integral part of the risk management process and that its importance is filtered throughout the Group. We articulate our risk appetite through a framework of net risk levels running from gross, initial (pre-mitigation) risk level, through the mitigating controls and out to a net risk category which helps focus our risk management processes. All business areas are subject to an annual risk review conducted by the Group s Risk Committee. During these reviews, potential and actual operational risks are identified and controls put in place to mitigate them. Risks remaining within tolerance levels after mitigating controls have been put in place are actively monitored. These risk registers are reviewed regularly as part of our control framework. The risk management process consists of a cycle of risk identification and assessment, control and evaluation. This leads to action planning, measurement, reporting, monitoring and assurance followed finally by Partner level review. Whilst the Risk Committee s role is to facilitate this process, the process is really embedded in existing governance structures and does not operate in isolation. Page 4

5 Concentration Risk The Group investigates the risk of exposures to individual clients and key men within the Group. It is not overly reliant on one or a small number of clients and the scenario testing models the effects that the departure of up to 3 fund managers plus all their clients will have on the Group. This gives comfort over the diversification of the Group s client base and that they are well covered with regulatory capital and cash. The monthly management accounts report and monitor the concentration levels of fund managers/ consultants and the top 10 clients. This gives Management regular visibility on any concentration risk within the Group that may appear. Business Risk Our Pillar 2 business risk assessment principally takes the form of a fall in assets under management following a market downturn that leads to lower management fees. However, other risks such as loss of key staff members and systems failures are also considered. To mitigate our business risk, the Finance team analyse various different economic scenarios to model the impact of economic downturns on our financial position Residual, Securitisation, Interest Rate, Excessive Leverage, Pension Obligation and Group Risks The Group does not consider any of these risks to be either material or relevant. Page 5

6 Regulatory capital Capital Item as at 30th April Members Capital Introduced 4,478 Members Current Accounts 0 Tier 1 Capital 4,478 Tier 2 Capital 0 Tier 3 Capital 0 Total Capital Resources, net of deductions 4,478 The main features of JH&P s capital resources for regulatory purposes are as follows: JH&P is categorised by the FCA as a 125k limited licence IFPRU firm and has permission to hold client money. As a consequence, they have to hold a minimum of 8% of their total risk exposure which is the higher of: The Base Capital Requirement of 125,000; or The aggregate of the Credit and Market risk; or The Fixed Overhead Requirement ( FOR ) Capital requirement Pillar 1 Summary Pillar 1 Requirement as at 30th April 2016 ( 000) Base Capital Requirement (a) 98 Credit Risk Requirement 1,083 Market Risk Requirement 5 Aggregate of Credit and Market Risk Requirement (b) 1,088 Fixed Overhead Requirement (c) 2,143 Pillar 1 Requirement (higher of a, b and c) 2,143 Page 6

7 The FOR is based on JH&P s previous year s audited expenditure and they have adopted the standardised approach to credit and market risk. JH&P is not subject to an operational risk requirement. In addition to the minimum level Pillar 1 requirements, JH&P must also hold sufficient additional capital and maintain sufficient liquidity that Management deems necessary based on the risks faced by the business. The ICAAP helps the Group consider risks to business activities, to consider how they are managed and to determine the level of additional risk-based capital they should hold ( Pillar 2 ) in order to mitigate those risks. Satisfaction of capital requirements The Group s ICAAP has not identified any need for additional capital to be held over and above the Pillar 1 requirement, the capital resources previously detailed are considered adequate to continue to finance the Group over the next year. No additional capital injections are considered necessary and the Group expects to remain profitable. In managing its capital, the Group considers the variety of requirements and expectations. Sufficient capital is in place to support current and projected business activities, according to both the Group s own internal assessment and the requirements of its regulator. Remuneration code disclosure JH&P is subject to FCA Rules on remuneration. The Remuneration Code covers an individual s total remuneration both fixed and variable. The Group incentivises staff through a combination of the two. The Group s policy is designed to ensure that they comply with the Remuneration Code and the compensation arrangements: 1. are consistent with and promote sound and effective risk management; 2. do not encourage excessive risk taking; 3. include measures to avoid conflicts of interest; and 4. are in line with the Group s business strategy, objectives, values and long-term interests. The Group s Remuneration Policy is reviewed by the Remuneration Committee annually. In the year ending 30th April 2016, 17 Code staff received remuneration totalling 3.5m. Proportionality Enshrined in the European remuneration provisions is the principle of proportionality. The FCA have sought to apply proportionality in the first instance by categorising firms into 3 levels. The Group falls within the FCA s level 3 and as such this disclosure is made in line with the requirements for a level 3 firm. Page 7