Pillar 3 Disclosure
INTRODUCTION AND SCOPE
The Capital Requirements Directive (‘CRD’) of the European Union establishes a revised regulatory capital framework across Europe governing the amount and nature of capital that must be maintained by credit institutions and investment firms. In the United Kingdom, the Directive has been implemented by the Financial Conduct Authority (‘FCA‘).
The FCA framework comprises three Pillars:
- Pillar 1 sets out the minimum capital amount that meets the firm’s Credit, Market and Operational risks;
- Pillar 2 requires the firm to assess whether its Pillar 1 capital is adequate to meet its risks or whether additional capital is required and to document this in an ICAAP document. The results of the ICAAP are subject to annual disclosure to the FCA; and,
- Pillar 3 requires public disclosure of specified information about the capital position and the underlying risk management controls.
This Pillar 3 disclosure document covers Saracen Fund Managers Ltd (‘SFM’).
Figures are based on the financial year ended 31st March 2021 and the ICAAP (Internal Capital Adequacy Assessment Process) document approved in June 2021. SFM provides investment management services and is authorised and regulated by the FCA. SFM is categorised as a BIPRU limited licence firm by the FCA.
It is the policy of SFM to publish its Pillar 3 disclosure annually on the firm’s website (www.saracenfundmanagers.com). This disclosure is made on or around mid-June each year and is based on the audited annual reports and financial statements for the previous year ended 31st March 2021 and the ICAAP document approved in June also. Information will not be disclosed if it is not regarded as material or if it is regarded as proprietary or confidential.
RISK MANAGEMENT FRAMEWORK
The Board of SFM determines the business strategy and risk appetite for the firm together with the design and implementation of an appropriate risk management framework.
The Board of SFM is the governing body ultimately responsible for the risk management framework. The Board is responsible for ensuring an appropriate governance regime is in place, including ensuring effective processes are in place to identify, monitor, report and manage the risks that the firm is, or may be, exposed to.
Risk management is viewed as the responsibility of all employees and directors within the firm. Risks are assessed in terms of the probability of the risk occurring and likely Pillar 3 Disclosure incorporating Remuneration Code Disclosure impact. Reasonable steps are taken to reduce the probability of any risk crystallising and any impact arising. Key risks are routinely monitored.
SFM is required to prepare an internal assessment of its capital adequacy, referred to as an ICAAP.
The purpose of the ICAAP is to document the firm’s risk appetite (the degree of risk that the Board is willing to accept without applying further resources and capital to mitigate the risk) and to assess whether the Capital Resources are sufficient to meet all the principle risks to which the firm could be exposed. The ICAAP includes a series of stress tests and scenarios which are used to help assess whether SFM is adequately capitalised to withstand a range of adverse circumstances and scenarios. The ICAAP also models a wind down over 6 months in order to demonstrate that sufficient capital is maintained to ensure that such a wind down can be conducted in an orderly manner.
The following risks are considered within the risk management framework:
- Market Risk
- Credit Risk
- Interest Rate risk
- Operational Risk
SFM does not trade on its own account, and income is generated from the ICVC managed by SFM of which T Bailey Fund Services Ltd is the ACD. Therefore, Market Risk and Credit Risk are both assessed as low.
SFM does not have any borrowings, so interest rate risk is also assessed as exceptionally low. Operational Risk is the risk that losses could be sustained (either directly or indirectly) through inadequate or failed internal processes, people, systems and/ or external events. SFM has a Risk Assessment document in place which is designed to assist in capturing all material operational risks and is used to rank the risks (likelihood, impact) and identify mitigating factors (e.g. existing controls).
SFM is small and its business is not viewed as complex following the guidance in the FCA handbook (BIPRU 2.2). It does not have to calculate a Market Risk or Operational Risk capital requirement since it is BIPRU Limited Licence firm with no trading book.
SFM’s Base Capital Requirement is €125,000 and its total variable capital requirement is the greater of:
- The sum of the Market and Credit risk requirements; and,
- The Fixed Overhead Requirement plus Pillar 2 adjustment.
SFM’s Fixed Overhead Requirement is £200k, a figure which is greater than the sum of the Market and Credit risk requirements. This is therefore the basis of the Pillar 1 requirement.
When considering the adequacy of Pillar 1, an assessment of risks is performed. Thus, the Pillar 2 adjustment increases SFM’s ICAAP Capital requirement total to £323k. The cost of an orderly wind down in addition to the Pillar 2 requirement, is less than SFM’s Pillar 1 requirement.
SFM’s capital reserves as at May 2021 are £418k. Therefore, SFM maintains an adequate level of total capital resources to satisfy the regulatory capital requirements.
SFM has policies and practices for those staff whose professional activities have a material impact on the risk profile of the combined activities. SFM is a BIPRU firm and is therefore subject to the BIPRU Remuneration Code.
SFM’s Remuneration Policy:
- Is consistent with and promotes sound and effective risk management;
- Does not encourage risk taking that exceeds the level of tolerated risk of the firm;
- Encourages behaviour that delivers results which are aligned to the interests of SFM’s clients and the funds it manages;
- Aligns the interests of Code Staff with the long-term interests of SFM’s clients and the funds it manages;
- Recognises that remuneration should be competitive and reflect both financial and personal performance. Accordingly, Remuneration for Code Staff is made up of fixed pay (salary and benefits, including pension) and variable (performance-related) pay;
- Recognises that fixed and variable components should be appropriately balanced and that the variable component should be flexible enough so that in some circumstances no variable component may be paid at all. Variable pay is made up of short-term awards typically based on short-term financial and strategic measures for the area of the business in which the member of Code Staff works;
In accordance with BIPRU 11.5.18R the following disclosures are made:
- Decision making process for determining remuneration policy, link between pay and performance
There is no remuneration committee. The Board of SFM oversees the setting and review of remuneration levels. Remuneration is set within the context of a 1-year plan which ensures any threats to capital adequacy, liquidity and solvency caused by excessive remuneration would be identified. However, should adverse market conditions dictate, remuneration levels will be reviewed and adjusted, as appropriate, throughout the year. The bonus arrangements are agreed annually at the end of the year and are approved by the Board. There is no specified bonus scheme. SFM’s annual Budget includes the level of remuneration for all staff including Code Staff.
- Policy on link between pay and performance
The staff bonus scheme is operated to allow for meaningful rewards to be paid to staff whose performance during the year merits recognition but within the context of the firm’s financial Budget. The Board bears in mind the projected performance Pillar 3 Disclosure incorporating Remuneration Code Disclosure when making any adjustments to the scheme. Payment of non-guaranteed bonused to individuals is linked to their performance against agreed objectives from staff appraisals.
- Required statistics under the Code (year ended 31.12.2020)
The remuneration for Code Staff was as follows:
|Variable (all cash)||£20k|
Issued June 2021