Pillar 3 disclosure requirements
The Capital Requirements Directive (‘the Directive’) of the European Union establishes a revised regulatory capital framework across Europe governing the amount and nature of capital credit institutions and investment firms must maintain.
In the United Kingdom, the Directive has been implemented by the Financial Conduct Authority (‘FCA’) in its regulations through the General Prudential Sourcebook (‘GENPRU’) and the Prudential Sourcebook for Banks, Building Societies and Investment Firms (‘BIPRU’).
The FCA framework consists of three ‘Pillars’:
The rules in BIPRU 11 set out the provision for Pillar 3 disclosure. This document is designed to meet our Pillar 3 obligations.
The Pillar 3 disclosure document has been prepared by Spire Partners LLP (“The Firm”) in accordance with the requirements of BIPRU 11 and is verified by the Management Committee. Unless otherwise stated, all figures are as at the 31st March 2015 financial year-end.
Pillar 3 disclosures will be issued on an annual basis after the year end and published as soon as practical when the audited annual accounts are finalised.
We are permitted to omit required disclosures if we believe 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, we may omit required disclosures where we believe 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 and counterparties.
We have omitted certain data on the grounds of materiality.
Scope and application of the requirements
The Firm is authorised and regulated by the FCA and as such is subject to minimum regulatory capital requirements. The Firm is categorised as a “Limited Licence Firm” by the FCA for capital purposes.
It is an investment management firm and as such has no trading book exposures.
The Firm is not a member of a group and so is not required to prepare consolidated reporting for prudential purposes.
The Firm has established a risk management process in order to ensure that it has effective systems and controls in place to identify, monitor and manage risks arising in the business. The risk management process is overseen by the senior management team, with the Management Committee taking overall responsibility for this process and the fundamental risk appetite of the firm. The senior management team has responsibility for the implementation and enforcement of the Firm’s risk principles.
Senior Management meet on a regular basis and discuss current projections for profitability, cash flow, regulatory capital management, business planning and risk management. Senior Management engage in the Firm’s risks though a framework of policy and procedures having regard to the relevant laws, standards, principles and rules (including FCA principles and rules) with the aim to operate a defined and transparent risk management framework. These policies and procedures are updated as required.
The senior management team has identified that business, operational, market and credit are the main areas of risk to which the Firm is exposed. Annually the senior management team formally review their risks, controls and other risk mitigation arrangements and assess their effectiveness.
A formal update on operational matters is provided to the Management Committee on a regular basis. Management accounts demonstrate continued adequacy of the firm’s regulatory capital are reviewed on a regular basis.
Appropriate action is taken where risks are identified which fall outside of the Firm’s tolerance levels or where the need for remedial action is required in respect of identified weaknesses in the firm’s mitigating controls.
Specific risks applicable to the Firm come under the headings of business, operational, credit and market risks.
The Firm’s revenue is reliant on the performance of the existing funds under management and its ability to launch new funds/obtain new mandates. As such, the risk posed to the firm relates to underperformance resulting in a decline in revenue and adverse market conditions hindering the launch of new funds and ultimately the risk of redemptions from the funds managed by the firm. This risk is mitigated by:
the use of non-call and/or lock up periods and, where relevant, redemption gates imposed by the funds;
the use of notice periods on managed accounts and sub-advisory contracts; and
significant levels of capital held by the firm which will continue to cover all the expenses of the business.
The Firm places strong reliance on the operational procedures and controls that it has in place in order to mitigate risk and seeks to ensure that all personnel are aware of their responsibilities in this respect.
The Firm has identified a number of key operational risks to manage. These relate to key man, loss of clients, reputational damage and failure of key third party provider. Appropriate polices are in place to mitigate against these risks, which includes taking out adequate professional indemnity insurance.
The Firm is exposed to credit risk in respect of its investment management fees billed and cash held on deposit.
The number of credit exposures relating to the Firm’s investment management clients is limited. Management fees are drawn monthly or quarterly from the funds managed and performance fees are paid where applicable. The Firm considers that there is little risk of default by its clients. All bank accounts are held with large international credit institutions.
Given the nature of the Firm’s exposures, no specific policy for hedging and mitigating credit risk is in place. The Firm uses the simplified standardised approach detailed in BIPRU 3.5.5 of the FCA Handbook when calculating risk weighted exposures of 1.6% (Cash in Bank) and 8% in respect of its other assets.
The Firm takes no market risk other than foreign exchange risk in respect of its accounts receivable and cash balances held in currencies other than GBP.
No specific strategies are adopted in order to mitigate the risk of currency fluctuations.
The Firm calculates its foreign exchange risk by reference to the rules in BIPRU 7.5.1 of the FCA Handbook and applies an 8% risk factor to its foreign exchange exposure.
The Firm is required to maintain sufficient liquidity to ensure that there is no significant risk that its liabilities cannot be met as they fall due or to ensure that it can secure additional financial resources in the event of a stress scenario.
The Firm retains an amount it considers suitable for providing sufficient liquidity to meet the working capital requirements under normal business conditions. The Firm has always had sufficient liquidity within the business to meet its obligations and there are no perceived threats to this given the cash deposits its holds. Additionally, it has historically been the case that all management fee debtors are settled promptly, thus ensuring further liquidity resources are available to the firm on a timely basis. The cash position of the Firm is monitored by the Management Committee on a regular basis, and the Firm would be able to call on its Shareholders for further capital as required.
The Firm maintains a Liquidity risk policy which formalises this approach.
The Firm is a Limited Liability Partnership. Its capital is summarised as follows:
The main features of the Firm’s capital resources for regulatory purposes are as follows:
|31st March 2015
|Tier 1 capital *
|Tier 2 capital
|Deductions from Tiers 1 and 2
|Total capital resources
|* No hybrid tier one capital is held|
Our Firm is small with a simple operational infrastructure. Its market risk is limited to foreign exchange risk on its accounts receivable in foreign currency, and credit risk from management and performance fees receivable from the funds under its management. The Firm follows the standardised approach to market risk and the simplified standard approach to credit risk.
Limited License – The Firm is subject to the Fixed Overhead Requirement and is not required to calculate an operational risk capital charge though it considers this as part of its process to identify the level of risk based capital required. Our Firm is small with a simple operational infrastructure. Its market risk is limited to foreign exchange risk on its accounts receivable in foreign currency, and credit risk from management and performance fees receivable from the funds under its management. The Firm follows the standardised approach to market risk and the simplified standard approach to credit risk.
The sum of the market & credit risk requirements; or
The fixed overheads requirement (‘FOR’) which is essentially 25% of the firm’s operating expenses less certain variable costs.
We have not identified credit risk exposure classes or the minimum capital requirements for market risk as we believe that they are immaterial.
The FOR is calculated, in accordance with FCA rules, based on the Firm’s previous years audited expenditure. The Firm has adopted the simplified standardised approach to credit and market risk and the above figures have been produced on that basis. The Firm is not subject to an operational risk requirement.
The basic indicator approach calculates operational risk as a simple 15% of average annual income over 3 years. Where possible this has been based on historic figures.
It is the Firm’s experience that the Fixed Overhead Requirement establishes its capital requirements.
The Firm’s Pillar 1 capital requirement has been determined by reference to the Firm’s Fixed Overheads Requirement (“FOR”) and calculated in accordance with the FCA’s General Prudential Sourcebook (“GENPRU”) at GENPRU 2.1.53.The requirement is based on the FOR since this exceeds the total of the credit and market risk capital requirements it faces and also exceeds its base capital requirement of €50,000.
The FOR is based on annual expenses net of variable costs deducted. The Firm monitors its expenditure on a monthly basis and takes into account any material fluctuations in order to determine whether the FOR remains appropriate to the size and nature of the business or whether any adjustment needs to be made intra-year.
This is monitored by the senior management team and reported to the Management Committee on a regular basis.
UK Financial Reporting Council’s Stewardship Code [for Firms managing investments]
FCA COBS Rule 2.2.3R requires FCA authorised firms to disclose whether they conform to the requirements of the UK Financial Reporting Council’s Stewardship Code (the “Code”). Adherence to the Code is voluntary. The Firm pursues a credit strategy which involves a wide variety of investment products and timeframes. Therefore, while the Firm supports the principles of the Code, it does not consider it appropriate to conform to the Code at this time.
If the Firm investment strategy changes in such a manner that the provisions of the Code become relevant, the Firm will amend this disclosure accordingly.
Remuneration code disclosure
The Firm is authorised and regulated by the Financial Conduct Authority as a Limited Licence Firm and so, it is subject to FCA Rules on remuneration. These are contained in the FCA’s Remuneration Code located in the SYSC Sourcebook of the FCA’s Handbook. The Remuneration Code (“the RemCode”) covers an individual’s total remuneration, fixed and variable. The Firm incentivises staff through a combination of the two.
The Firm’s business is to provide investment advisory and management services to its clients.
Our policy is designed to ensure that we comply with the RemCode and our compensation arrangements:
are consistent with and promotes sound and effective risk management;
do not encourage excessive risk taking;
include measures to avoid conflicts of interest; and
are in line with the Firm’s business strategy, objectives, values and long-term interests.
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 three levels. The Firm falls within the FCA’s proportionality level three and as such this disclosure is made in line with the requirements for a Level three.
Application of the requirements
We are required to disclose certain information on at least an annual basis regarding our Remuneration policy and practices for those staff whose professional activities have a material impact on the risk profile of the Firm. Our disclosure is made in accordance with our size, internal organisation and the nature, scope and complexity of our activities.
1. Summary of information on the decision-making process used for determining the firm’s remuneration policy including use of external benchmarking consultants where relevant.
2. Summary of how the firm links between pay and performance.
Individuals are rewarded based on their contribution to the overall strategy of the business.
Other factors such as performance, reliability, effectiveness of controls, business development and contribution to the business are taken into account when assessing the performance of the senior staff responsible for the infrastructure of the firm.
3. Aggregate quantitative information on remuneration broken down by significant business division (where such business divisions exist).
||Aggregate compensation expense for prior fiscal year (£’000)
|Investment Management and Advisory
4. Aggregate quantitative information on remuneration, for staff whose actions have a material impact on the risk profile of the firm.
||Aggregate compensation expense in financial year ending 31st March 2015
5. Amounts of remuneration for the financial year and the number of beneficiaries (Tier 3 only)
|Code Staff (Number)
||Totals amounts of remuneration
We may omit required disclosures where we believe that the information could be regarded as prejudicial to the UK or other national transposition of Directive 95/46/EC of the European Parliament and of the Council of 24 October 1995 on the protection of individuals with regard to the processing of personal data and on the free movement of such data.
We have made no omissions on the grounds of data protection.
A note on Materiality
A firm must regard information as material in disclosures if its omission or misstatement could change or influence the assessment or decision of a user relying on that information for the purposes of making economic decisions.
A firm must regard information as proprietary information if the sharing of that information with the public would undermine its competitive position.
Proprietary information may include information on products or systems which, if shared with competitors would render the firm’s investment in them less valuable.
A firm must regard information as confidential if there are obligations to customers or other counterparty relationships binding the firm to confidentiality.
CEBS has stated that it is unlikely that the disclosure of information relating to remuneration would be confidential or proprietary for firms that have been allowed to aggregate the information due to proportionality. Where there is a limited number of Code Staff then the firm may consider such omissions.
SEE FCA Templates on Remuneration Code and FAQ for further consideration.