Pillar 3 Disclosure
30 September 2017
City Asset Management PLC needs to comply with all the regulations concerning capital requirements and this document has been developed and published by us in order to provide material information for stakeholders and potential investors to assess key information about our risk management, remuneration policies and our capital position. This document is designed to meet our Pillar 3 disclosure obligations and will be published on our website (www.city-asset.co.uk).
The Capital Requirements Directive IV is the regulatory capital framework across Europe governing how much capital financial services firms must retain. The rules set the three pillars in the process:
Pillar 1 sets out the minimum capital resource requirement firms are required to maintain to meet credit, market and operational risks.
Pillar 2 requires firms to assess firm-specific risks not covered by Pillar 1 and, where necessary, maintain additional capital. This is implemented through the Internal Capital Adequacy Assessment Process (ICAAP) undertaken by the firm.
Pillar 3 requires firms to disclose information regarding their risk assessment process and capital resources with the aim to encourage market discipline by allowing market participants to assess key information on risk exposure and the risk assessment process.
Frequency and Verification of disclosure
The Pillar 3 disclosures have been reviewed and approved by the Board and will be issued on an annual basis. The disclosures are not subject to audit except where they are equivalent to those prepared under accounting requirements for inclusion in the financial statements.
Scope and Application of the requirements
We were established in 1988, privately owned and are authorised and regulated by the Financial Conduct Authority (122483). We predominantly provide discretionary investment management and financial advice services to private clients and over 95% of our client base may be categorised as “Retail Clients” for FCA purposes, with a small number of “Professional Investors” and “Eligible Counterparties”. For regulatory purposes, we have a Prudential Category of 3 and are classified as a Flexible Portfolio Firm for the purposes of FCA conduct supervision. We are classified as an IFPRU €125,000 limited licence firm, which holds client assets but does not trade on our own account.
There are no current or foreseen material, practical or legal impediments to the prompt transfer of capital resources or repayment of liabilities.
Risk Management and Governance
Our Board is the governing body ultimately responsible for the risk management regime, as well as ensuring that the governance and culture of the Firm. The Board has a number of committees that report to it together with monthly Management Information which helps it to identify trends and issues that may need addressing. In addition the Board reviews and determines the Business Model, Business Plan, Capital Adequacy and other significant regulatory reports. Staff are regularly updated on major themes in the industry together with training on key risk areas as well as major initiatives within the Firm. All of this ensures the culture of good consumer outcomes, coupled with a strong culture of compliance and governance, are at the heart of the business.
We give serious attention to risk control across the whole range of our activities with specific reference to the following functions:
- Organisational structure;
- Business and operational processes;
- Compliance monitoring and reporting;
- Staff development and integrity.
We proactively manage the risks that arise from our operations and have identified Liquidity Risk, Market Risk, Operational Risk, and Business Risk as the principal risks affecting the Firm.
Because of the nature of our operation and business scope, we do not routinely expect to be materially exposed to Credit Risk, Insurance Risk, Concentration Risk, Securitisation Risk, and Pension Obligation Risk. Although interest is not a material direct risk, variations in rates may have an impact on our profitability from interest earned on cash balances.
Our directors and managers are fully involved in risk management and hold both regular monthly and ad hoc Board meetings, and also weekly Risk and Compliance Committee (“RACC”) meetings where risk controls and risk events are discussed and action taken, where necessary.
The Risk and Compliance Department monitors departmental reporting processes covering all regulated activities across the entire Firm.
We maintain a Risk Register which details all of our main risks together with procedures and controls to address them. Risks are rated, reviewed and monitored on an ongoing basis with a register that is dynamic in terms of how it operates as the business environment changes.
We aim to maintain capital equivalent to 350% of the minimum capital adequacy requirement and manage the firm with an approach that seeks to minimise or mitigate identified risks that we are exposed to. The business aims to utilise working capital to its maximum potential to grow the firm and meet our business targets, always recognising the importance of the balance between regulatory capital and making sound business judgements.
Capital Adequacy and ICAAP
Our overall approach to assessing the adequacy of our internal capital is documented in the Internal Capital Adequacy Assessment Process (“ICAAP”). The ICAAP process includes an assessment of all material risks faced by ourselves and the controls in place to identify, manage and mitigate these risks. The risks identified are stress-tested against various scenarios to determine the level of capital that needs to be held.
Where risks can be mitigated by capital, we have adopted the reporting requirements for Pillar 1 but where the Board considers that the Pillar 1 calculations do not adequately reflect the risks, additional capital is added in Pillar 2.
Whilst the ICAAP is formally reviewed by the Board once a year, Senior Management review risks and the required capital more frequently and will particularly do so when there is a planned change impacting risks and capital or when changes are expected in the business environment potentially impacting the ability to generate income.
We do not deal for our own account or underwrite issues on a firm commitment basis and we must maintain at all times capital resources equal to or in excess of the base requirement of €125,000. The “Total Risk Exposure Amount” (TREA), which, for our firm, is defined as the Fixed Ovehead Requirement (FOR) is the amount used for Pillar 1 capital adequacy purposes. CAM has no innovative Tier 1 capital instruments or deductions.
We must maintain at all times capital resources equal to or in excess of the Pillar 1 requirement.
During the 12-month accounting period to 30th September 2017, we complied fully with all capital requirements and operated well within regulatory requirements. At the accounting reference date, we held the following capital position:
Ordinary share capital £80,313
Share Premium £236,604
Other Reserves £893,905
Retained earnings £5,761,721
Regulatory adjustments -£81,647
CET 1 Capital Resources £6,890,896
Tier 1 & Tier 2 Capital Nil
Own Funds £6,890,896
Total Risk Exposure Amount (TREA) £12,633,487
CET 1 and Total Capital Ratio 54.54%
Surplus capital over Total Requirement £5,880,217
There are three tests of capital adequacy relating to the above TREA figure :
1. Common Equity Tier 1 capital of 4.5% of TREA. Our minimum requirement is £568,507 and we currently have a Common Equity Tier 1 capital amount of £6,890,896 (54.54% of TREA);
2. Tier 1 capital of 6% of TREA. Our minimum requirement is £758,009 and we currently hold a Tier 1 capital amount of £6,890,896 (54.54% of TREA) and
3. Total capital (Own Funds) of 8% of TREA. Our minimum requirement is £1,010,679 and we currently hold Own Funds of £6,890,896 (54.54% of TREA).
The Board are therefore comfortable that we are and have been throughout the financial year adequately capitalised for Pillar 1 purposes. We hold approximately £7.20m in cash and cash equivalents as at year end which the Board is comfortable will ensure prudent capitalisation and cover for market downturns and other risks that may materialise in the short to medium term.
The Board regularly monitors the performance of the Firm and capital adequacy is assessed at the monthly Board meetings and future liquidity aspects at the quarterly Treasury Policy Committee meetings. The Risk Committee and the Board will constantly monitor risks throughout the year and decide if additional capital should be held against them. Additional risks that supplement the Pillar 1 requirements are detailed below and, where necessary, additional capital is provided.
We are exposed to the following primary risk factors:
Liquidity risk - is the risk that we will not have adequate cash flow to meet our operating expenses and other liabilities when they fall due. Our policy is to ensure that we hold surplus cash resources in excess of regulatory capital adequacy in order to meet both current and foreseeable liquidity requirements.
Market, Investment Performance and Economic Risk - is the risk of losses in the balance sheet positions arising from downward movements in their value due to factors such as market prices, currency or interest rates . Our fee income is affected directly by the value of the Funds under Management (“FUM”) but as we do not hold equity instruments on our balance sheet we are not directly exposed to such risks. We can, from time to time, hold short dated high quality fixed income instruments on our balance sheet to complement the return on our cash resources. Whilst this does represent a risk, it is not a material risk given the amount held in these securities is never more than 50% of the available cash/liquid resources of the firm.
We review the market risks and the likelihood of market falls across the FUM on a monthly basis. Where required, steps are then taken to restructure and reposition portfolios to minimise or eliminate any potential risks. The Research Director takes responsibility for key aspects of the asset allocation and stock selection processes whilst a robust investment process is in place to ensure portfolios and investment managers are in alignment with the policies and procedures.
Interest Rate Risk – As we are not a bank or financial institution we are not directly dependent on interest income. However, we do earn interest from the investment of surplus corporate funds and we also derive interest income on certain client balances. Therefore, any rise or fall in interest rates will affect profit margins but is not considered to be material to our profitability.
Foreign exchange risk - We do not have material foreign exchange related transaction activity and therefore we are not materially exposed to this risk.
Credit Risk - Our income on management fees and third-party commissions are on a cash basis taken directly from client’s accounts and do not represent a material risk. A very small portion of income is derived from invoiced services, primarily generated by the Financial Planning team, where the credit risk is not material. Credit risk also covers the default risks of institutional counterparties with whom the Firm deals. Our exposure to credit risk results from institutions with whom we place our corporate cash and the settlement of market transactions. We continually review our corporate cash balances and the counterparties with whom it is placed in order to ensure diversification and sufficient capital strength of the depository bank. All business is conducted in the UK and transactions are executed on a Delivery Versus Payment or current settlement basis. We do not therefore have any long-term exposures. We have used the standardised method of calculating Credit risk and the output is lower than the FOR which has been used for the purposes of Pillar 1.
Other risks are reviewed on an ongoing basis by the directors but are either not applicable to ourselves or the risks involved are not material. We use a number of approaches to manage our exposure to the financial risks arising from our operations. Our financial assets consist of bank deposits and short-term receivables and we do not use derivative based instruments to effect risk management of our balance sheet and liquidity.
These risks arise from failures or weaknesses in the internal systems and controls operated by ourselves, including those which rely upon computer systems. We maintain a series of procedures and policies to mitigate operational risk and monitors these systems both through its management control and reporting processes and through our independent compliance function. Operationally, we are exposed to the following risks:
People - We ensure that we employ people with the necessary skill sets appropriate for the business needs through recruitment and development of existing employees. To mitigate the risk of a loss of expertise, there are competitive remuneration plans and deferred benefits targeted at all employees. At all times, such arrangements are implemented in accordance with SYCS 19. Plans are in place for the loss of staff through leaving or redundancy. While neither is ideal, training and procedures ensure that such loss can be met and managed by departments without significant disruption to the business.
Regulatory – This risk involves the loss arising from the failure to meet regulatory requirements . The Risk and Compliance function supports the business to meet these obligations and closely monitor actual and planned changes in regulation to ensure ongoing compliance with regulatory standards. They are also assisted by professional consultants. We carry professional indemnity cover in excess of the minimum FCA requirement. Amongst day to day oversight of regulatory impacting matters, the Risk & Compliance Committee meets on a weekly basis to assess the risks and compliance related topics that affect us. Some of the major strategic areas such as Conduct, Governance, Financial Crime, Systems and Controls are also key areas that are overseen by the Board and the Risk and Compliance team. Staff receive training to address the key areas in the regulatory field.
Technology - We are reliant on technology to maintain our infrastructure and services which is partly outsourced to Netstar and also uses well-established and tested technology. Significant investment has been made in core IT systems over the last few years as part of a strategy of upgrading and strengthening procedures and management information. We continue to use an external party as our IT consultants and advisers and provider of our Business Continuity Plan (“BCP”).
Social and Environmental – These factors may prevent access by staff to our office and we mitigate these risks with a BCP that ensures the business will operate by leveraging our remote access to systems and ongoing client support. The BCP Committee reviews, upgrades and tests this plan on a regular basis.
The FCA define business risk as those risks that arise from the fluctuations in the business cycle and economic conditions. Any deterioration in business or economic conditions could require a firm to increase capital or alternatively to contract its business at a time when market conditions are most unfavourable to raising capital.
Additional business risks which have been considered by the Directors are:
- Bank counter party risk;
- Trading counter party risk;
- Physical disaster risk.
- Non-financial risks
Non-financial risks are the risks that pose a threat to the successful functioning of the business. However, with careful monitoring and planning the impact does not suggest immediate financial exposure. The material non-financial risks we face are as follows:
Technical - The risk that our IT system become inoperable. Our IT consultants constantly monitor the security system to ensure threats are identified and deal with issues that compromise our ability to operate. The use of external IT consultants means that we have permanent access to expertise in the event of a serious issue. More specific internal technical risks are mitigated through technology/operational risk management.
Political - A change in Govenrment can result in changes to local tax rates, investments attractiveness and other challenges. Our staff stay abreast of current tax guidance and political commentary to ensure that we are able to anticipate and plan for changes in the background.
Legal – The costs arising from faiing to comply with laws, regulations, rules and standard codes of conduct. We rely on our employees to carefully consider our obligations and to comply with them and any relevant policies. From time to time, we have retained legal counsel and external compliance consultants to provide advice.
Distribution - The risk from concentration across different distribution channels and products. A broad range of distribution changes mitigate against a key dependency on any sales channel.
Competition - The risk of losing clients due to poor performance or poor communication. These events can be triggered by failure to change along with market, the loss of key investment professionals, and poor training. We have a policy of recruiting high quality staff and regularly review remuneration practices to ensure continuing competitiveness in order to maintain and motivate individuals.
Reputational - The risk to our reputation is seen as fundamentally important and can arise from poor performance, communication or from external public criticism and regulatory censure. The impact of such factors can be material in that a loss of clients will affect profitability as well as make it more difficult to attract new clients. In order to mitigate such risks, the management maintains a high degree of oversight over our activities and is backed up in its efforts by a Risk and Compliance function which reports directly to the Chief Executive Officer.
Risks which do not apply
The following risks do not affect us and are not reported upon:
- Insurance risk;
- Securitisation risk;
- Pension obligation risk.
In conclusion, the Directors consider their analysis in accordance with ICAAP results in the following additional capital provisions:
Operational Risk £250k
Residual Risk £50k
This £300k provision is in addition to the £1,011k Pillar 1 calculation (25% of FOR) resulting in £1.311m of capital required. Given that the Company has own funds of £6,890,896, this is still an excess buffer of 426%.
The Directors therefore conclude that we are adequately capitalised to take account of all the risks that we face.
We follow the prescribed FCA guidelines and are classified as a level 3 firm from proportionality within the Remuneration Code with regard to remuneration policies and our disclosures relative to the size of the Firm. Remuneration is designed to ensure that the Firm does not encourage excessive risk taking and staff interests are aligned with those of the clients.
The Board, as the Remuneration Committee, is directly responsible for the overall remuneration policy which is reviewed annually. We do not employ external remuneration advisers but the Committee is chaired by a non-executive Director. Variable remuneration is adjusted in line with capital and liquidity requirements as well as the our performance. The Board will review the remuneration strategy on an annual basis together with the Code Staff.
We ensure that our remuneration structure promotes effective risk management and balances the fixed and variable remuneration components for all Code and Non-Code staff. Total Remuneration is based on balancing both financial and non-financial indicators together with the performance of the Firm and the staff member’s business unit. We will monitor the fixed to variable compensation to ensure we comply with the Remuneration Code with respect to Total Compensation where applicable.
In addition to basic salary, we operate three reward schemes:
- A discretionary annual bonus linked to the Firm’s performance but subject to profitability and cash reserves as well as linked to performance of the individual;
- A discretionary share option scheme where vesting cannot occur until after 3 years;
- A commission incentive scheme for staff in the business development department.
Department Total Remuneration 2017
Investment Management £1,729,396
Financial Planning £351,975
Senior Management & Other £1,625,968
Code Staff Remuneration
Senior management and members of staff whose actions have a material impact on the risk profile of the business are classified as Code Staff. No staff have aggregate remuneration over £500,000 p.a. The below table shows the number of Code Staff in each business unit during the financial year.
Sector No of Code Staff
Investment Management 8
Financial Planning 3
Senior Management & Other 13
Number of Staff 24
Total Remuneration £2,642,314
Fixed Remuneration (including BIK and Pension Contributions) £1,955,946
Variable Remuneration (including value of share option grants) £686,367
We adhere to the principles of the FCA’s Remuneration Code and ensure the required disclosures are made on our website. Further information about our compliance with the Remuneration Code is available on request.
Version EH3450 Feb 2018