Pillar 3 Disclosure November 2016

Pillar 3 Disclosure November 2016 1

1. Overview 1.1 Background This document comprises the Capital and Risk Management Pillar 3 disclosures as at 30 September 2016 for River and Mercantile Group PLC and its subsidiary undertakings (together the Group ). The principal purpose of the document is to satisfy regulatory disclosure requirements under European and UK legislation and Financial Conduct Authority (FCA) rules, established in order to address the information asymmetry between those market participants preparing information and those using it. Accordingly, the Pillar 3 disclosures are being prepared in order to promote transparency and contribute to the orderly functioning of the financial market. Basel Rules and CRD IV The Basel Committee on Banking Supervision s Basel III framework is implemented in the European Union by way of (i) the Capital Requirements Regulation (EU No. 575/2013) ( CRR ) which is directly binding on the Group and (ii) the Capital Requirements Directive (Directive 2103/36/EU) ( CRD ). Collectively the CRR and CRD are known as CRD IV. CRD IV and certain applicable national discretions afforded to the FCA as competent authority under CRD IV are implemented and applied to investment firms regulated in the UK by way of prudential rules set out in the FCA s Handbook. The Pillar 3 disclosures for the Group reflect the fact that both River and Mercantile Asset Management LLP (RAMAM) and P-Solve Investments Limited (P-Solve) are subject to the prudential standards set out in the FCA s prudential sourcebook for investment firms ( IFPRU ). The Group s regulatory capital requirements are assessed pursuant to the CRD IV framework, which consists of three pillars : Pillar 1 establishes the capital resources requirement, which is the minimum capital requirement necessary to cover credit, market and operational risk exposures using standard criteria; Pillar 2 requires firms (or groups in our case) and their supervisors to consider and assess the Group s actual risk profile and the resulting need to hold additional capital to cover risks not covered under the Pillar 1 requirement. The determination is made by the Group s Board of Directors (the Board) using the Internal Capital Adequacy Assessment Process ( ICAAP ) and assessed by the FCA via its Supervisory Review and Evaluation Process ( SREP ); and Pillar 3 seeks to encourage market discipline by requiring firms/groups to disclose certain information on their risks, capital and risk management processes for the benefit of the market. 1.2 Basis of disclosure This document sets out the Pillar 3 disclosures of the Group. The disclosures have not been audited and do not form part of the annual audited financial statements of the Group. Unless otherwise stated all figures are as at 30 September 2016. 1.3 Frequency of disclosure In accordance with Article 433 of CRR, Pillar 3 disclosure must be made on an annual basis, and more frequently as appropriate. The Group has an Accounting Reference Date of 30 June RAMAM has an Accounting Reference of 31 March P-Solve has an Accounting Reference of 30 September These disclosures are made as at 30 September 2016. 2

1.4 Location of disclosure These disclosures are published on the Group s corporate website www.riverandmercantile.com. 1.5 Verification of disclosure These disclosures are not subject to audit; they do not constitute any form of audited financial statement and have been produced solely for the purposes of satisfying Pillar 3 regulatory requirements. The Board is responsible for ensuring that the Group has in place a suitable governance and risk management framework in order to ensure that risks are adequately identified, assessed and mitigated. 1.6 Scope of disclosure The disclosures within this document are for the Group, which is the UK consolidation group for the regulated firms in the Group. These disclosures relate to the following entities regulated by the FCA ( the CRD entities ) on a solo basis: RAMAM; and P-Solve. Both RAMAM and P-Solve are classified as IFPRU 125k Limited Licence firms. The Group s consolidated accounts, prepared in accordance with International Financial Reporting Standards (IFRS), are used as the basis for the regulatory capital resources calculation. Included within the consolidated accounts are the results of the above regulated entities as well as other Group entities. 1.7 Group Structure and business activities The Group is the parent company of an asset management group providing client-led advisory and investment solutions via a broad range of services, from consulting and advisory to fully-delegated fiduciary and fund management. The Group is focused on creating investment solutions for its clients across its core markets: UK DB pension schemes; UK DC pension schemes; Insurance; Retail financial intermediaries; US pensions (DB and DC); and Wholesale and institutional equity The Group s business is conducted by a number of subsidiaries located in the UK and USA, which are subject to regulation and oversight in those jurisdictions. The Group is organised through four divisions, Advisory, Fiduciary Management, Derivative Solutions and Equity Solutions. The Group (River and Mercantile Group PLC (RIV)) is listed on the Premium Main Market of the London Stock Exchange and is subject to the UK Corporate Governance Code. Market capitalisation as at 30 September 2016 was 151 million. 2. Governance and Risk Management 2.1 The Board The Board has overall responsibility for risk management and responsibility for ensuring high standards of corporate governance. As appropriate, and in order to promote the effective and efficient operation of the Group s business, the Board has delegated certain powers to Board committees which have responsibilities for different aspects of risk 3

management across the Group. The following Board committees are in operation and are in each case chaired by Non- Executive Directors of the Group: Audit and Risk Committee; Remuneration Committee; Investment Committee; and Nominations Committee. 2.2 Audit and Risk Committee (ARCom) ARCom meets not less than quarterly, and met six times during the financial year ended June 2016. The committee is led by a Non-Executive Director. ARCom assists the Board in discharging its responsibilities in respect of financial reporting, external and internal audits and controls, including monitoring the integrity of the Group s financial statements. ARCom is also responsible for providing oversight and advice to the Board in relation to current and potential risk exposures of the Group and future risk strategy, reviewing and approving formal reporting requirements and promoting a risk awareness culture within the Group. Business heads through their COOs are responsible for all operational and IT risk and compliance matters in their business. Risks identified at a business level are formulated into Group risk which is reported to the ARCom not less than quarterly. On an annual basis the Board reviews the principal risks in the business and sets the risk appetite statement for the Group. 2.3 Board recruitment The selection and appointment of directors is governed by the Nominations Committee. The Board is committed to the principles of corporate governance set out in the UK Corporate Governance Code issued by the Financial Reporting Council. Further details on the Board, compliance with the UK Governance Governance Code and other relevant matters are set out in the Group s Annual Report and Accounts for the year ended 30 June 2016 on page 38. 2.4 Board Declaration Adequacy of risk management arrangements The Board considers that it has in place adequate risk management arrangements with regard to the Group s risk profile and strategy. 3. Risk Management objectives and policies 3.1 Risk management Risk is an inherent part of the Group s business activities. When a Group member advises a customer on their investments, performs a fiduciary management mandate or offers products and services, the Group takes on a degree of risk. The Group s overall objective is to manage its business and associated risks, in a manner that balances the safety and soundness of the Group with limiting the risk of the Group and its constituents not delivering expected outcomes to clients. The Group considers this objective to be strongly aligned to the outcomes expected by its other stakeholders: shareholders, employees, regulators and the broader market and community. 3.2 Risk Management Framework The Group s risk management framework is designed to enable the Board to receive assurance that risks are being appropriately identified and managed in line with its risk appetite. There is a formal structure for monitoring and managing risks across the Group comprising a risk appetite approved by the Board, detailed risk management frameworks (including policies and supporting documentation) and independent governance and oversight of risk. 4

The Group s risk management framework is structured around risk culture, strategy, governance and control, risk identification, assessment and escalation, reporting and support processes. 3.3 Risk Appetite It is both necessary and desirable for the Group to accept and assume a level of risk in pursuit of achieving its strategy. However, it is also necessary to ensure that the amount of risk taken is within acceptable limits. Risk appetite is the amount of risk exposure, or potential adverse impact from an event that the Group is prepared to accept and assume in business as usual operations. The Group has developed risk appetite statements and these have been formally approved by the Board. These statements are reviewed annually. 3.4 Three lines of defence To ensure effective risk management the Group has adopted the three lines of defence model with clearly defined roles and responsibilities. First line of defence Business operations - The first line owns the risk that the business runs day-to-day and is accountable for ensuring that the risks to which the Group is exposed as a result of its activities remain within levels prescribed by the relevant risk appetite statements and other applicable policies of the Group, and for ensuring that an appropriate control environment is established as part of daily operations. The first line is responsible for developing and maintaining the appropriate control environment through the identification and maintenance of effective internal controls for their respective business lines. The first line is accountable for identifying and mitigating the risks in its business. Second line of defence Oversight functions - the risk, compliance, legal and finance functions are responsible for the provision of specialist expertise and oversight of business processes and risks, drafting and implementing policies and procedures, providing guidance and direction upon them, and for monitoring their proper execution. The second line is responsible for providing assurance oversight for ARCom and the Board on relevant matters. Third line of defence Independent assurance function provides independent challenge, review of controls, formal reporting and the provision of assurance to the business and the Board on the operational effectiveness of the systems of internal controls and first and second line management procedures. The Group does not have a dedicated internal audit function. ARCom continues to consider the Group s requirements and believes that, based upon the size and complexity of the organisation, the appropriate approach is to rely upon engaging third parties to perform specific engagements on areas of risk which have been identified. During the financial year ended 30 June 2016, these included the controls within the Group s Derivative Solutions division and regulatory compliance generally. Risk reports are provided to the ARCom which includes material business risks such as credit, market and operational risks. The Risk function also maintains an incident management process. 3.5 Compliance and Risk Management The compliance and risk management functions are responsible for identifying, assessing, evaluating, monitoring and reporting on compliance and risk related issues faced by the Group. Processes include assessing the impact to the Group of specific issues, determining their expected likelihood and consequences, and developing and implementing prioritisation and management strategies. The compliance and risk management functions also monitor and provide assurance as to the adequacy and effectiveness of the Group s internal controls. The Group continues to operate three separate regulated entities, P- Solve, P-Solve LLC and RAMAM, each of which has its own compliance officer who attends the ARCom meetings as required. The Group has compliance policies and procedures in place and all employees receive ongoing training to instil sensitivity to and awareness of risk and compliance and a client orientated culture. 5

4. Capital Resources 4.1 Capital Resources as at 30 September 2016: 000 Permanent share capital 246 Share premium 14,688 Other reserves 49,621 Retained earnings (2,049) Deductions from tier 1 capital (36,041) Total tier 1 26,465 Tier 2 capital - Tier 3 capital - Total own funds regulatory capital 26,465 Tier 1 capital comprises Common Equity Tier 1 capital and Additional Tier 1 capital items which meet the requirements of Part Two (Own Funds) of the CRR. For Group purposes Tier 1 capital represents Ordinary Share Capital, share premium account, other reserves and retained earnings. There are no unusual terms attached to these items of capital. Neither the Group nor any part of it applies Additional Tier 1 items or instruments to its calculation of own funds. 5. Capital adequacy 5.1 Capital Management A strong capital position is essential to the Group s business strategy and competitive position. The Group s policy in respect of capital adequacy is to maintain a strong capital base so as to retain investor, creditor and market confidence. Regulatory capital currently consists entirely of Tier 1 capital. 5.2 Internal Capital Adequacy Assessment Process (ICAAP) The ICAAP is the process by which the Board is able to assess the adequacy of the Group s financial resources and systems and controls in the context of the Group s activities and the risks which impact them. This includes requirements on the Group to: Carry out regular assessments of the amounts, types and distribution of financial resources, capital resources and internal capital that it considers adequate to cover the nature and level of risks to which it is or might be exposed; identify the major sources of risk to its ability to meet its liabilities as they fall due; conduct stress and scenario tests; ensure that the processes, strategies and systems required by the overall Pillar 2 rule and used in its ICAAP, are both comprehensive and proportionate to the nature, scale and complexity of the Group s activities; and document its ICAAP. 5.3 Operational Risk Operational risk is the risk that the Group will sustain losses through inadequate or failed processes, people, systems or external events or indirect losses as a result of reputational damage suffered from the crystallisation of operational risks. The Group uses the basic indicator approach to calculate the Pillar 1 capital requirement for operational risk which is equal to 15% of the audited relevant income for the past 3 years. 5.4 Exposure to Market Risk Market risk is the risk that changes in market prices, such as FX rates or interest rates or equity prices will affect the Group s income or the value of its assets. The Group manages market risk with the objective of maintaining market risk exposures within accepted tolerances, while optimising the return on risk. 6

5.5 Foreign Currency Risk The Group s business is primarily UK based and revenues are earned in GBP. The Group s exposure to foreign currency risk is therefore limited. The Group has an advisory, derivatives and fiduciary management business in the United States of America and earns fees in respect of that business in USD. The impact of fluctuations in USD/GBP exchange rates is partially offset by operating costs incurred in USD for the US business. Where the Group transacts in a currency other than GBP the foreign currency value is translated in GBP using prevailing exchange rates on the date of the transaction. 5.6 Interest Rate Risk The Group does not have significant exposure to interest rate risk. The Group has no external borrowings and cash deposits held at banks earn fixed interest rates. Interest income is not a significant asset for the Group. 5.7 Liquidity Risk The liquidity risk management objective of the Group is to ensure that at all times it has sufficient liquidity to ensure that it can meet its liabilities as they fall due under both business as usual and stressed conditions and without incurring losses above the applicable risk tolerance. 5.8 Credit Risk Credit risk refers to the risk that a counterparty or creditor defaults on their contractual obligations resulting in financial loss to the company. The Group has adopted the standardised approach to the calculation of the minimum credit risk capital requirements provided for under Pillar 1 of CRD IV. The Group s minimum capital requirement for credit, market and operational risk is therefore 8 percent of all of its risk weighted exposures 5.9 Pillar 1 Assessment The minimum own funds requirement is that the Group must hold regulatory capital equivalent to at least 8% of its total risk exposure amount. The total risk exposure amount is calculated as the higher of: the base capital resources requirement; the risk exposure amounts for credit risk; dilution risk; position risk; large exposures; foreign exchange, settlement and commodities risk; derivatives adjustment; and counterparty risk; the fixed overhead exposure (equivalent to one quarter of the previous year s fixed overheads multiplied by 12.5) As at 30 September, the Group s Pillar 1 exposure was: Risk-weighted exposure 000 Credit and dilution risk 32,038 Settlement risk 0 Position, foreign exchange and 0 commodities risk Additional risk due to fixed overheads 51,737 Total Pillar 1 exposure 83,775 5.10 Pillar 2 Assessment The Group has been through a process of identifying and quantifying material risks at a Group, and subsidiary entity level. The Pillar 2 capital requirement for the Group has been calculated using management judgment and has been informed by the following information where available: 7

A review of internal loss data; Comparison with external loss-data (for firms of similar size and industry); and Management action and mitigating controls. The Group believes that this is prudent and presents an adequate measure of capital to support the business. 5.11 Wind-down and Stress analysis To provide additional information to support the Pillar 2 calculation, a capital assessment was made of the wind-down costs facing the Group, and the results compared to the other elements of the Pillar 2 calculation. The Group has considered an immediate cessation of business as its wind-down scenario. The Group created three scenarios based on a Key Economic Indicators. The scenarios are based on a realistic, but dramatic market event, which has a significant impact on the Group s businesses. The scenarios are assumed to occur on 30 September 2015, with recovery periods dependent on the scenario. 5.12 External Credit Assessment Institution (ECAI) The Group and its subsidiaries follow the standardised approach to calculating counterparty credit risk exposures. The Group s largest sources of credit risk exposure are bank balances, trade receivables and revenue balances. The Group obtains external credit ratings for bank counterparties in order to calculate credit quality step information. All of the Group s bank counterparties were credit quality step 1 as at 30 September 2016. The Group treats all corporate counterparties (UK and US based) as unrated and subject to a 100% risk weighting. 6 Capital Adequacy Summary At 30 September 2016 and throughout the year ended 30 June 2016 the Group complied with the capital requirements that were in force. 7 Remuneration Policy 7.1 Background The Group is subject to the FCA Rules on remuneration as contained in the remuneration code set out in the SYSC Sourcebook (SYSC 19) of the FCA s Handbook. The remuneration code is designed to ensure that firms have risk focused remuneration policies which are consistent with and promote effective risk management and do not expose them to excessive risk. The remuneration code implements the primary provisions of the CRD relating to remuneration arrangements and covers all aspects of remuneration which could have a bearing on effective risk management including salaries, bonuses, long term incentive plans, options, hiring bonuses, severance packages and pension arrangements. Accordingly, the remuneration code requirements cover an individual s total remuneration, fixed and variable, both of which are used by the business to incentivise its staff. 7.2 Decision making process The Group has a Remuneration Committee (RemCo) which meets regularly (and met eleven times in the financial year ended 30 June 2016) in order to consider issues relevant to the Group s remuneration objectives, policy and structures. RemCo oversees implementation of the Group s objectives in setting remuneration policy and seeks to preserve shareholder value by ensuring appropriate attraction, retention and motivation of staff, with an emphasis on clarity and fairness in the context of both annual and longer term objectives set for staff and compliance with the applicable remuneration code. The Group complies with its Remuneration Policy, which is designed to ensure compliance with the requirements of Article 92 of CRD and the remuneration code and accordingly that the Group s compensation arrangements: 1. Are consistent with and promote sound and effective risk management; 8

2. Do not encourage excessive risk taking or risk taking in excess of the relevant risk tolerance of the Group; 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. Certain aspects of the remuneration code are only applicable to a limited category of staff ( Remuneration Code Staff ). Remuneration Code Staff include senior management, risk takers, staff engaged in controlled functions and any employee receiving total remuneration that takes them into the same remuneration bracket as senior management and risk takers whose professional activities have a material impact on the Group s risk profile, including any employee who is deemed to have a material impact on the Group s risk profile in accordance with Regulation (EU) 604/2014 (RTS to identify staff who are material risk takers). 7.2 Remuneration Proportionality For the purposes of the remuneration code both P-Solve and RAMAM are considered to be proportionality level 3 firms. Further details of the application of the remuneration code to the Group are set out in the RemCo report in the Group s Annual Report and Accounts for the year ended 30 June 2016 on pages 43 to 50. 9