Pillar 3 Disclosure Statement 1 BACKGROUND From the beginning of 2014, the new Capital Requirements Directive 4 ( CRD 4 ) and the Capital Requirements Regulation ( CRR ) came into effect, replacing the Capital Requirements Directive ( CRD ). Whilst they primarily represent the implementation of Basel 3 in the EU they also introduce a number of broader regulatory framework changes not provided for under the previous Basel proposals. The new CRR rules by virtue of being directly applicable across the EU, remove a significant number of national discretions from the current CRD. Whilst the new legislation includes enhanced requirements for the quantity and quality of capital the broader principles of the holding of capital ( own funds ) remain the same with three key pillars: è Pillar 1 sets out the minimum capital requirements to meet credit, market and operational risk è Pillar 2 requires firms (and their regulators) to consider whether additional capital should be held to cover risks not adequately covered by the Pillar 1 requirements through the Internal Capital Adequacy Assessment Process ( ICAAP ); and è Pillar 3 requires firms to publish certain details of their policies for managing risk and their capital resources. This encourages market discipline by developing a set of disclosure requirements which will allow market participants to assess key pieces of information on a firm s capital, risk exposures and risk assessment process. The disclosures are to be made public for the benefit of the market. In the UK, CRD was implemented by the Financial Conduct Authority (FCA) through the publication of the Prudential Sourcebook for Investment Firms (IFPRU). Subsequent amendments to CRD introduced additional Pillar 3 disclosure requirements in respect of remuneration. 2 SCOPE OF THIS STATEMENT Octopus Capital Limited is a UK consolidation group consisting of four firms regulated by the FCA: Octopus Investments Limited, Octopus Healthcare Adviser Limited, Rednel Limited and Octopus AIF Management Limited (Not subject to the CRD). For regulatory capital purposes, Octopus Capital Limited is subject to consolidated supervision by the FCA. Unless specifically stated, the disclosures that follow relate to the Octopus Capital Limited group ( Octopus or the group ). This statement is for the financial year ended 30 April 2016, is based on Octopus s current UK ICAAP formally adopted by the Board and meets the disclosure requirements of Chapter 11 of BIPRU. This Pillar 3 disclosure is based on the fully consolidated statement of the capital position of the group at a key point in time (normally the financial year end). The regulatory requirements and risk exposures are therefore backward looking.
3 CAPITAL REQUIREMENTS AND RESOURCES The Pillar 1 capital requirement is the greater of (i) the Fixed Overhead Requirement and (ii) the sum of Market and Credit risk requirements. Both of these measures are calculated in accordance with criteria set by the FCA. The Group s Pillar 1 capital requirement is determined by its Fixed Overhead Requirement (FOR), calculated in accordance with Genpru 2.1 and relates to 3 months of the Group s annual expenditure less certain variable items such as discretionary bonuses and fee commission. Expenditure is monitored monthly in the management accounts and the FOR is monitored quarterly to ensure it remains appropriate to the size and nature of the Group. The Pillar 2 requirement is based on an assessment of Octopus s business, operational and other risks. This is known as the Individual Capital Adequacy Assessment Process ( ICAAP ). The process involves considering the most significant risks and assessing whether additional capital should be held against those risks. In addition, as part of the ICAAP, Octopus performs stress and scenario analysis to project the financial impact of various risk events and assess the group s ability to mitigate the impact of these risks. These include, for example, considering how the group would cope with the loss of a significant part of the business and revenue downturns. As required by the FCA, Octopus also performs an analysis to consider the capital required to complete an orderly wind down of its regulated activities. The ICAAP is an integrated part of Octopus s risk management framework, and is updated at least annually or more frequently if material internal or external factors make it prudent to do so. The ICAAP is considered in detail by the Octopus Management Committee and is formally approved by the Board. The Capital Resource Requirement ( CRR ) of Octopus Capital Limited ( Octopus ) is calculated as 17,297k. Octopus Group Consolidated Capital Pillar 1 ICAAP - Pillar 2 Requirements Minimum Capital k Firm s Additional Pillar 2 Capital k (a) Limited License Min Req. 104 - (b) Consolidated Credit Risk (8% of Risk Weighted Exposure Amounts) (c) Consolidated Market Risk (8% of Risk Weighted Asset Values) 10,484-4,071 - (d) Total Credit + Market Risk (b+c) 14,555 - (e) Fixed Overhead Req. 16,247 - Pillar 1 Total Requirement (Higher of d and e) 16,247 - Pillar 2 Total Requirement (additional capital held for operational risk not covered by Pillar 1) - 1,050 Total Pillar 1 and Pillar 2 Capital Requirement 17,297
Octopus maintains an internal buffer of a further 30% on the Pillar 1 capital requirement, taking our capital requirement to 22,171k. The Group held regulatory capital of 143,429k after deductions as at 30 th April 2016 (Tier 1 capital is the highest ranking form of capital and includes permanent share capital and reserves). Octopus Group Consolidated Capital Resources 000s (a) Permanent Share Capital 920 (b) Profit and loss and other reserves 176,417 Total Tier 1 Capital (a+b) 177,337 Deductions from own funds (33,908) Total Own Funds 143,429 Consolidated Capital Resource Requirement 17,297 Surplus 126,132 4. RISK MANAGEMENT The above capital requirements are deemed sufficient for the following key risks: Credit Risk Capital Requirement The Credit Risk element comprises the credit risk capital component which reflects the risk that the Group is unable to realise the cash value of its assets or has to pay out an off-balance sheet liability. It is calculated based on the standardised approach using 8% of the risk weighted exposure amounts. This has been estimated at 10,484k and is adequately covered by current capital levels. The credit risk is monitored monthly through the management accounts which are reviewed by the Management Committee. Debtors are managed monthly through an aged debtors report and are collected in a timely manner. Consolidated Credit Risk by Exposure Class 000s a) Institutions 1,306 b) Corporates 7,930 c) Other items 1,248 Total Consolidated Credit Risk Capital Component 10,484
Market Risk Capital Requirement The firm does not have any trading book however it does have significant Investment in Associate positions on its own account in the non-trading book. These assets have limited direct or immediate correlation with the broader equity markets but the value does reflect the Groups holding in equity instruments. Our assessment of an appropriate risk weighting is 150% based on the relative illiquidity countered by the fact that the fair value exceeds the book value. The risk that the group is unable to realise the cash value of its assets has been estimated at 4,071k and is adequately covered by current capital levels. Operational Risk Capital Requirement As a limited license firm we are not required to calculate an operational risk capital requirement under Pillar 1. However, operational activities are fundamental to the successful running of the Group and one of our key risks is operational risk. We have undertaken scenario and sensitivity analysis and have concluded that we will hold 1,050 as Pillar 2 capital as an addition to the Pillar 1 Capital requirements. This equates to c.30% of total Pillar 1 capital. Counterparty and concentration risk Octopus has the choice of holding its cash at a number of strong, well established banks. The majority of cash is held with an Institution offering a high credit rating and a well-capitalised balance sheet. Liquidity risk Octopus holds sufficient cash to meet its liquidity needs. Cash flow forecasts are performed and reviewed monthly and cash is reconciled daily. Sufficient cash is held daily in a current account, with excess funds held in a monthly deposit account according to cash flow forecasts at the time. Liquidity risk is considered and the systems and controls reviewed annually as part of the ICAAP process. 5. REMUNERATION Decision-making process for remuneration policy On behalf of the Board, the Remuneration Committee is responsible for approving and overseeing the implementation of Octopus s remuneration policy. This includes ensuring that the group s remuneration arrangements are consistent with, and promote sound and effective risk management and do not encourage excessive risk taking. The Committee also reviews and approve the remuneration of those employees that have been identified by the policy as being within the scope of the requirements of the FCA s Remuneration Code ( Code Staff ). Employees are considered to be code staff if their role has a material impact in determining the Group s risk profile. The Octopus Group s Code Staff are defined as the Executive Director s and other employees performing FCA Significant Influence Functions (SIFs) and a record is maintained by the Organisational Development team. The link between remuneration and performance Remuneration is comprised of fixed pay (salary and benefits) and variable pay (performance-related bonuses). Performance related bonuses are designed to reflect performance in individual roles and success against a balanced range of targets. A proportion of variable pay is deferred each year.
Aggregate remuneration for Code Staff Octopus is required to disclose the aggregate remuneration of Code Staff. For the year ending 30 April 2016 the annual remuneration was 12.7m. This is comprised of fixed pay, variable pay, non-contributory pension and benefits in kind in accordance with the rules. Octopus considers that it does not operate with distinct business areas given its position as a UK focused fund management business and therefore the aggregate information on remuneration is disclosed for the Group as whole. Due to the limited number of Code Staff within Octopus, the group considers it appropriate to disclose aggregate remuneration across all Code Staff so as not to prejudice individuals with regard to disclosure of personal information.