16.
PILLAR 3 Disclosure
Background
This is the Pillar 3 disclosure made in accordance with the UK Financial Conduct Authority (FCA) Prudential Sourcebook for Banks, Building Societies and Investment Firms ('BIPRU').
The European Capital Requirements Directive (CRD) created a regulatory capital framework consisting of three 'pillars' namely:
- Pillar 1 - which sets out the minimum capital requirements that firms are required to meet for
- Pillar 2 - which requires firms to take a view on whether additional capital should be held against capital risks not covered by Pillar 1, and
- Pillar 3 - which requires firms to publish certain details of its risks, capital and risk management process
Disclosure policy
The rules in BIPRU 11 provide that the firm may omit one or more of the required disclosures if it believes that the information is immaterial. Materiality is based on the criteria that the omission or misstatement of material information would be likely to change or influence the assessment or decision of a user relying on that information for the purposes of making economic decisions. Where the firm considers a disclosure immaterial, this will be stated in the relevant section.
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The firm is also permitted to omit one or more of the required disclosures where it believes that the information is regarded as proprietary or confidential. Proprietary information is that which, if it were shared, would undermine the firm's competitive position. Information is considered confidential where there are obligations binding the firm to confidentiality with its clients and counterparties.
Where the firm has omitted information for any of the above reasons, a statement explaining this will be provided in the relevant section.
Unless stated as otherwise, all figures contained in this disclosure are based on the firm's audited annual reports for the year ending 31st December 2022.
Frequency
These Pillar 3 Disclosures will be reviewed on an annual basis as a minimum. The disclosures will be published as soon as is practical following the finalisation of the firm's Internal Capital Adequacy Assessment Process (ICAAP) and the publication of its annual reports.
Verification
The information contained in this disclosure has not been audited by our firm's external auditors and does not constitute any form of financial statement.
Scope and application of directive requirements
The disclosures in this document are made in respect of discretionary investment management services, a BIPRU firm.
Risk management objectives and policies
Our risk management policy reflects the FCA requirement that we must manage a number of different categories of risk. These include: liquidity, credit, market, interest rate, business and operational risks.
1.Liquidity risk
Liquidity risk is the risk that SFIA will not be able to meet its financial obligations as they fall due. We are equity funded with no debt and due to the strength of our balance sheet which holds significant net cash reserves there is no liquidity risk. We have sufficient liquid resources to meet continued business operating needs supported by a robust budgeting and forecasting process which involves the senior management team.
2.Credit risk
SFIA regularly monitor amounts due from its clients and has appropriate credit control procedures in place. The firm's revenues include annual management charges received from clients based on a percentage of client assets under management. These charges are made directly to the clients' portfolios, and therefore the credit risk relating to this income is minimal.
3.Interest rate risk
The firm has no borrowings and no exposure to interest rate risk.
4.Business risk
The firm's Pillar 2 business risk assessment principally takes the form of a fall in assets under management following a market downturn that leads to lower management fees. To mitigate our business risk, we regularly analyse various different economic scenarios to model the impact of economic downturns on our financial position.
Whilst we monitor business risk, given our size and nature, no separate risk management function is considered necessary in respect of SFIA's own balance sheet. Matters arising from the review are considered and remedial action is taken where appropriate.
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SFIA's revenue is dependent on the size and performance of its portfolios/funds under management. As such, risks posed relate to underperformance the consequence of which could be a decline in revenue and potentially a risk of loss of clients from the funds managed. This risk is mitigated by our conservative investment approach, its diversified and well-established client base and is further mitigated by capital maintained within the business which is kept at a sufficient level to cover expenses for at least twelve months.
5.Operational risk
Operational risk is the potential risk of financial loss or impairment to reputation resulting from inadequate or failed internal processes and systems, from the actions of people or from external events.
Major sources of operation risk include: Outsourcing of operations, IT security, internal and external fraud, implementation of strategic change and regulatory non-compliance.
The firms risk management process is regularly reviewed and updated with details provided to all staff.
All senior management will bear responsibility for internal controls and the management of business risk as part of their accountability to the board.
Individuals are responsible for identifying the risks surrounding their work, implementing controls over those risks and reporting areas of concern to their line manager.
The Compliance Oversight will provide the board with a quarterly / half-yearly summary report on all significant risk issues.
6.Other risks
The firm operates a simple business model. Accordingly, many of the specific risks identified by the FCA do not apply.
Capital resources
Pillar 1 requirement
In accordance with GENPRU 2.1.45R (calculation of variable capital requirement for a BIPRU firm), our capital requirement has been determined as being our fixed overhead requirement and not the sum of our credit risk capital requirement and our market risk capital requirement.
The Pillar 1 capital requirement was £50,000 as at 31st December 2022.
Pillar 2
Our overall approach to assessing the adequacy of our internal capital is set out in our ICAAP. The ICAAP process involves separate consideration of risks to our capital combined with stress testing using scenario analysis. The level of capital required to cover risks is a function of impact and probability. We assess impact by modelling the changes in our income and expenses caused by various potential risks over a 1-year time horizon. Probability is assessed subjectively.
In addition, we have reviewed the outputs of our risk reviews to quantify any risks identified. This has identified a number of key business risks which we have classified against the risk categories contained in GENPRU 1.2.30R and reviewed the guidance in BIPRU 2.2.61-65.
Our Pillar 2 capital requirement, which is our own assessment of the minimum amount of capital that we believe is adequate against the risks identified, has been assessed as no greater than our Pillar 1 requirement. There is a considerable surplus of reserves above the capital resource requirement deemed necessary to cover the risks identified.
Regulatory capital
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The main features of capital resources for regulatory purposes, as at 31st December 2022 are as follows:
Capital item: £
Tier 1 capital (called up share capital, share premium account, profit and loss account, externally verified interim net profits) £406,198
Total of tier 2 and tier 3 capital (broadly long- and short-term subordinated loans) £
Deductions from tier 1 and tier 2 capital £
Total capital resources, net of deductions £406,198
The firm holds regulatory capital in accordance with the Capital Requirements Directive. All such capital is classified as Tier 1 capital and is therefore of the highest quality.
Remuneration code disclosure
We are subject to the BIPRU Remuneration Code. This section provides further information on our remuneration policy.
BIPRU Remuneration Code Staff
We have identified, and maintain a record of, 'BIPRU Remuneration Code Staff' - i.e. staff to whom the BIPRU Remuneration Code applies. This includes senior management and members of staff whose actions may have a material impact on a firm's risk profile. All of our Code Staff fall into the 'senior management' category of Code Staff (rather than the 'risk taker' category) for the purposes of the BIPRU Remuneration Code.
Decision making / remuneration committee
We do not have a Remuneration Committee. The Directors are responsible for our remuneration policy including:
- Determining the framework and policy for remuneration and ensuring it does not encourage undue risk taking
- Agreeing any major changes in remuneration structures
- Reviewing the terms and conditions of any new incentive schemes and in particular, considering the appropriate targets for any performance related remuneration schemes
- Considering and recommending the remuneration policy for the senior employees taking into account the appropriate mix of salary, discretionary bonus and share based remuneration
- In determining remuneration arrangements, the Directors / Partners will give due regard to best practice and any relevant legal or regulatory requirements including the BIPRU Remuneration Code
Quantitative information on remuneration
The FCA rules require certain firms to disclose aggregate information on remuneration in respect of its BIPRU Remuneration Code Staff broken down by business area, senior management, and other Code Staff, including 'risk takers'.
The firm only has one business area - investment management.
The firm has 2 Directors but no risk takers.
Director remuneration is agreed formally at board meetings. The link between performance and pay is inevitable in a small firm, but the firm's risk adverse strategy and robust risk management systems mitigate any risks.
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We have calculated our firm's aggregate quantitative information on remuneration inclusive of all elements of remuneration.
The aggregate quantitative remuneration for our firm's BIPRU
SFIA identified Code Staff, as defined by the FCA Remuneration Code, are the Directors, who exercise significant control functions. Due to the size and scale of the business no separate remuneration committee exists; this function is instead undertaken by the Directors. The overall policy is that the remuneration of Code Staff complies with the FCA's Remuneration Code, with an appropriate balance being struck between financial performance and risk management. The remuneration policy is agreed and approved by the Directors due regard to risk management.