PILLAR 3 DISCLOSURE
The Firm is authorised and regulated by the Financial Conduct Authority (the “FCA”). It hosts managers under its regulatory license. The Firm does not hold client money or assets. The Firm is a full scope Alternative Investment Fund Manager (“AIFM”) and categorised as a Collective Portfolio Management Investment firm by the FCA for capital purposes. The Firm reports on a solo basis. The Firm’s Pillar 3 disclosure fulfils the Firm’s obligation to disclose to market participants’ key information on a firm’s capital, risk exposures and risk assessment processes.
We are permitted to omit required disclosures if we believe that the information is immaterial i.e. where that omission would be unlikely to change or influence the decision of a reader relying on that information. In addition, we may omit required disclosures where we believe that the information is regarded as proprietary or confidential. 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 and counterparties.
We have made no such omissions.
The Firm’s Board of Directors determine its business strategy and the level of risk acceptable to the Firm. In conjunction with the its Regulatory Hosting Committee which includes a director of the Firm and 3 senior members of Robert Quinn Consulting Limited, they have designed and implemented a risk management framework that recognises the risks that the business faces and how those risks may be monitored and mitigated and assess on an ongoing basis. The Firm has in place controls and procedures necessary to manage those risks.
The Firm considers the following as risks to the business:
Market Risk – the Firm does not operate a trading book and therefore the Firm’s market risk relates to fluctuations in foreign exchange;
Credit Risk – this relates to the extent the Firm may suffer a financial loss due to failure of one of the Firm’s counterparties, the only significant credit risk for the Firm is failure of the clients to pay fees due;
Operational Risk – this is defined by the FCA as ‘the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events, including legal risk’; and
Business Risk/liquidity risk – the Firm considers this to be any risk arising from changes in the Firm’s business and includes risks to earnings posed by falling or volatile income, risks relating to the Firm’s business strategy and model and risks arising from the Firm’s remuneration policy.
The Firm is a Limited Liability Company. Its capital comprises share capital.
The capital resources of the business comprise Tier 1 capital with a deduction for holdings in subsidiary companies.
As a limited licence firm the capital resources requirement is calculated as the total of Pillar 1 and Pillar 2 capital requirements.
In addition as an AIFM there is a second capital adequacy test that Own Funds must exceed the FOR plus a professional indemnity risk requirement.
Pillar 2 capital is calculated by the Firm as representing any additional capital to be maintained against any risks not adequately covered under the requirement in Pillar 1 as part of its ICAAP.
As at the date of this disclosure the Firm’s regulatory capital position is:
Capital Item – £’000
Tier 1 capital and Audited Reserves – 810
Total capital resources, net of deductions – 310
PILLAR 1 CAPITAL REQUIREMENT
The Firm is subject to quantitative rules-based capital adequacy calculations which set out the minimum capital requirements for the Firm. This is called the Pillar 1 capital requirement.
Pillar 1 capital is the higher of:
In addition the Firm, on account of its classification as a full-scope AIFM, is subject to a parallel “own funds” requirement as follows:
The higher of:
Plus whichever is applicable of:
a. the professional negligence capital requirement; or
b. the PII capital requirement.
Although the foregoing “own funds” requirement is not a component of the “Three Pillars” regime, it is likely that the Firm’s “own funds” requirement will exceed its Pillar 1 requirement.
It is the Firm’s experience that its Pillar 1 capital requirement normally consists of the own funds requirements.
The Firm’s market risk is limited to foreign exchange risk on accounts receivable in a foreign currency. The Firm applies a standardised approach to credit risk, applying 8% to the Firm risk weighted exposure amounts, consisting mainly of investment management and performance fees due but not paid, and cash balances held at top tier banks. Furthermore, the market and credit risks component excludes such risks related to the management of alternative investment funds.
PILLAR 2 CAPITAL REQUIREMENT
Pillar 2 capital is calculated by the Firm as representing any additional capital to be maintained against any risks not adequately covered under the requirement in Pillar 1 as part of its Internal Capital Adequacy Assessment Process (“ICAAP”).
The Firm’s ICAAP assesses the adequacy of its internal capital to support current and future activities. This process includes an assessment of the specific risks to the Firm, the internal controls in place to mitigate those risks and an assessment of whether additional capital mitigates those risks. The Firm also considers a wind down scenario to assess the capital required to cease regulated activities.
When making this calculation, the Firm also takes into account the own funds requirement detailed above, in particular where the own funds exceeds Pillar 1 capital (and the extent to which the Firm is able to use capital instruments to fulfill both requirements).
Having performed the ICAAP, the Firm has concluded that no additional capital is required in excess of its Pillar 1/own funds capital requirement.
Our capital requirement at 30 June is £203,000 which is well within the level of regulatory capital held.
The Firm’s ICAAP is formally reviewed by the Board of Directors annually, but is reviewed and revised more frequently should there be any material changes to the Firm’s business or risk profile.
Given the nature and small size of our business, remuneration for all employees is set by the Board of Directors of the Firm. The Firm formally reviews the performance of all employees and based thereon determines each employees overall level of remuneration and the split of that between base salary and bonus in compliance with the FCA Rules on remuneration.
Due to the size of the Firm and limited number of “Code Staff”, quantitative disclosures in relation to remuneration have not been included.
The Firm is subject to the AIFMD Remuneration Code (“the Code”), has applied proportionality and, pursuant to this application and where relevant, has disapplied various provisions of the Code.