CBRE Clarion Securities UK Limited PILLAR 3 RISK DISCLOSURES April 2017 1. Introduction The Capital Requirements Directive (CRD) sets out regulatory capital adequacy standards and an associated supervisory framework in the European Union. In light of the implementation of CRD IV and the Capital Requirements Regulation (CRR), the UK has exercised its national discretion in Article 95(2) of the CRR to allow certain investment firms to continue to comply with CRD III rules from 1 January 2014, rather than moving to CRD IV and CRR rules. CRD has been implemented in the UK by the Financial Conduct Authority (FCA) through amendments to the Financial Services Handbook, including the: General Prudential Sourcebook for Banks, Building Societies, Insurers and Investment Firms (GENPRU); Prudential Sourcebook for Banks, Building Societies and Investment Firms (BIPRU); Prudential Sourcebook for Investment Firms (IFPRU); and Senior Management Arrangements, Systems and Controls Sourcebook (SYSC). The regulatory framework consists of three Pillars : Pillar 1 - Specifies the minimum capital requirements that firms are required to meet for credit, market and operational risk; Pillar 2 - Supervisory review process that requires an overall assessment of the adequacy of capital to meet risks which the firm is exposed to and any additional capital required for risks not adequately covered by Pillar 1 (also known as the Internal Capital Adequacy Assessment Process (ICAAP)); Pillar 3 - Introduces public disclosure of qualitative and quantitative information and is designed to promote market discipline by providing market participants with information on the firm s capital, risk exposures and risk management processes and also disclosure requirements on remuneration. 2. Basis of Disclosures CBRE Clarion Securities UK Limited (CBRE Clarion UK or the Company) is authorized and regulated by the FCA. This document is designed to meet CBRE Clarion UK s Pillar 3 disclosure obligations in accordance with Chapter 11 of BIRPU. 1
Firms 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. In addition, firms are permitted to omit required disclosures where it is believed that the information is regarded as proprietary or confidential. In our view, proprietary information is that which, if it were shared, would undermine our competitive position. Information is considered to be confidential where there are obligations binding us to confidentiality with our customers, suppliers, or counterparties. 3. Frequency of Publication Pillar 3 disclosures will be reviewed on an annual basis and some disclosures will be made more frequently in the event of a material change in calculating regulatory capital. Disclosures will be made as soon as reasonably practicable after completion of the ICAAP and annual financial statements. 4. Verification, Media and Location of Publication Pillar 3 disclosures have been reviewed by the Board and will be published on CBRE Clarion s website (www.cbreclarion.com) under the Regulatory Disclosures link. The information contained in this disclosure is not subject to external audit and does not constitute any form of financial statement. 5. Governance CBRE Clarion UK s parent company, CBRE Clarion Securities LLC (CBRE Clarion LLC), is headquartered in the United States, with the ultimate parent being CBRE Group, Inc., a publicly traded U.S. company. CBRE Clarion UK is not subject to consolidated reporting with other entities for prudential purposes. The Board of directors and senior managers of the Company determine the business strategy and risk appetite together with the design and implementation of a risk management framework. CBRE Clarion UK s Board of directors is responsible for the consideration, identification and management of the risks that the Company faces. CBRE Clarion UK principally manages and monitors its risks by maintaining appropriate internal controls and documented procedures which include processes to identify, measure, control and report risk, with the aim of operating a defined and transparent risk management framework. Additionally, as new risks arise, these are managed appropriately at the time. Extensive support is provided by risk management, compliance, legal, finance and operations staff at the parent company. The Company s auditors are also consulted. 6. Risk Management CBRE Clarion UK is a small firm with a simple operational infrastructure and does not undertake any trading on its own account, hold any clients assets or provide any discretionary investment management services. Given the nature of CBRE Clarion UK s business as an investment advisor to CBRE Clarion LLC, the types and level of risks applicable to CBRE Clarion UK is lower than if it was a direct manager of funds or provided discretionary services. 2
The range, nature and level of risks are determined and assessed in terms of the probability of the risk occurring after having taken into account any risk mitigation together with the impact. Reasonable steps are taken by CBRE Clarion UK to mitigate risk and reduce the probability of any risk materializing. Furthermore, additional capital resources will be maintained for risks which CBRE Clarion UK does not wish to bear. 6.1. Credit Risk Credit risk is the risk of financial loss arising from the default of counterparties failing to repay its debt obligations. CBRE Clarion UK is not exposed to high levels of credit risk as it does not undertake any principal trading in relation to its own balance sheet. Capital is predominantly held in cash on deposit with banks that are assigned high credit ratings. Consequently, risk of past due or impaired exposures is minimal. CBRE Clarion UK is primarily exposed to credit risk from the non-collection of investment advisory fees from its parent company. Management regards such events as extremely unlikely, which is further supported through an indemnity cover provided by CBRE Clarion LLC to the Company in the event of losses, liabilities, actions, proceedings, claims, costs and expenses incurred against CBRE Clarion UK. As a result, the exposure is an immaterial credit risk which is calculated using the standardized approach and the simplified method of calculating risk weights. Credit risk is mitigated by periodic monitoring of the financial strength of the credit institution and contractual arrangements between CBRE Clarion UK and its parent company, CBRE Clarion LLC. 6.2. Market Risk Market risk is the risk that the values of assets or positions are adversely affected by fluctuations arising from changes in market prices, interest or exchange rates. Given CBRE Clarion UK s simple operational structure, it carries very limited exposure to market risk since positions are not held in its own name and there is no exposure to foreign currencies. Capital is primarily held in cash and whilst changes to interest rates received on bank deposits affect the company s income, it does not pose a material risk to CBRE Clarion UK. 6.3. Operational Risk Operational risk is the risk of loss arising from external events or inadequate/failed internal processes, staff and/or systems. CBRE Clarion UK has identified key operational risks such as loss of key staff, misleading investor communications, trade/dealing errors, failure of IT system, breach of security, inadequate business continuity plan, financial crime and changes in regulation (which includes the potential impact of Brexit and MIFID II). Not all of these risks can be eliminated; however the ICAAP reviews and assesses a variety of techniques which 3
manage, mitigate and/or reduce operational risks and also documents a range of scenarios for capital modeling purposes. The Company is also covered under professional liability and other insurance policies maintained by its affiliate companies. 7. Capital Resources CBRE Clarion UK is subject to minimum capital requirements and categorized as a BIPRU firm. The calculation of capital requirements is derived from the aforementioned risks. As such the Company s minimum capital requirement is the greatest of: The base capital requirement of 50,000; The sum of its market and credit risk requirements; or The fixed overhead requirement. The Company s Capital Resources consist of Tier 1 capital reserves. There are no tier 2 or tier 3 deductions. The Company s capital position as at 31 December 2016 is as follows: Capital Item Tier 1 capital less innovative tier 1 capital 748,124 Total tier 2, innovative tier 1 and tier 3 capital - Deductions from tier 1 and tier 2 capital - Total capital resources net of deductions 748,124 Since CBRE Clarion UK s market and credit risks are not considered material for the Company, the fixed overhead requirement is the greatest and therefore establishes the minimum capital requirement of 296,690. Disclosures relating to credit and market risk are considered to be immaterial in assessing the risk exposures assessment processes of the business. The approach of the business to assessing the adequacy of its internal capital to support current and future activities is contained in the Company s ICAAP. All known risks, including operational risks, have been rigorously assessed and appropriate stress tests and scenario analyses have been undertaken to help determine any additional capital required under Pillar 2. Additional internal capital of 115,356 relating to operating risks is considered appropriate by the Board. CBRE Clarion UK has an ICAAP capital of 412,046 and therefore a capital surplus of 336,078. CBRE Clarion UK does not have a trading book and does not undertake securitization. CBRE Clarion UK does not hold any equities in its non-trading book, other than those considered immaterial or confidential. 4
8. Remuneration Code CBRE Clarion UK is subject to the CRD III remuneration rules, which are contained in the FCA's BIPRU Remuneration Code (the Code) within SYSC Chapter 19C and is classified as a Level 3 firm. The Company has a documented Remuneration Policy which is compliant with the Code. Remuneration of CBRE Clarion UK staff is determined by its U.S. parent company, CBRE Clarion LLC, which has established a Compensation Committee to make such determinations across the parent company group (i.e., CBRE Clarion LLC and its subsidiaries, including the CBRE Clarion UK (the CBRE Clarion Group)). The remuneration policy for the CBRE Clarion Group (and accordingly, for the Company) is based on the following core principles: promote long-term interests of shareholders, investors and other stakeholders; attract, retain and motivate key executives who are essential to the strategic growth and development strategy of the CBRE Clarion Group (including CBRE Clarion UK); discourage risk-taking by its employees that exceeds or is inconsistent with the risk management principles of the CBRE Clarion Group companies; and align incentive compensation awards with overall financial and operational performance and business conduct, whilst ensuring the capital base of the CBRE Clarion Group is strengthened in line with long-term business objectives. Staff remuneration includes base salary and incentive compensation awards. Base salary is established at market competitive rates. Incentive compensation awards are made annually from an incentive compensation pool determined as a percentage of CBRE Clarion Group EBITDA (excluding certain allocated expenses). The incentive compensation awards are driven by CBRE Clarion Group s profitability rather than investment performance. The Compensation Committee has broad authority to allocate the incentive compensation pool among employees (including employees of CBRE Clarion UK), as well as to determine the portion of such awards that should be deferred. The Compensation Committee takes into account current and future risks when determining incentive compensation awards and deferral thresholds. As a matter of policy, the parent company requires deferral of incentive compensation awards exceeding an established threshold, and the Compensation Committee may require deferral of additional amounts. Deferred amounts are subject to the terms of a deferred compensation plan. Amounts deferred are invested in funds managed by the CBRE Clarion Group, provided that the Compensation Committee may elect to leave amounts uninvested. Individual performance is measured against objectives examined through an annual performance appraisal process coordinated by the parent company. Performance of investment staff is based on the measurement of performance in their respective area of coverage, although objectives also include items unrelated to investment performance such as contribution to the team, Company, compliance with internal and external rules and achievement of strategic targets. Variable incentive compensation awards are paid if both CBRE Clarion Group meets its performance targets and the individual has met their objectives. 5
In the performance year 2016 (including variable remuneration actually paid in 2017 based on 2016 performance), two Code Staff received a total remuneration of 492,733, of which a substantial proportion of the variable remuneration was deferred and invested in investment funds or pools managed by CBRE Clarion in accordance with the terms of the firm s deferred compensation plan. Approved for issue April 2017 6