Capital Requirements Directive

Last reviewed: 31 December 2014 

Pillar 3 Disclosure

1. Background

The European Union’s Capital Requirements Directive (the “Directive”) creates a revised regulatory capital framework across Europe governing how much capital financial services firms must retain. In the United Kingdom, this is implemented by the Financial Conduct Authority (“FCA”), through its Handbook of rules and guidance including the General Prudential Sourcebook (“GENPRU”) and specifically the Prudential Sourcebook for Investment Firms (“IFPRU”).

This disclosure is underpinned by the Tilney Bestinvest group of companies’ Risk Management Framework, which is well established and comprises a number of procedures and processes.

Ownership of the Risk Management Framework sits with the Tilney Bestinvest Group Board, which regularly considers and reviews risk management matters, and in particular reviews the Risk Management arrangements, the Risk Management Plan and the Business Continuity Plan.

The FCA framework consists of the ‘Pillars’

  • • Pillar 1 sets out the minimum capital requirement that we need to retain to meet our credit, market and operational risks
  • • Pillar 2 requires us and the FCA to take a view on whether we need to hold additional capital against firm specific risks not covered by Pillar 1
  • • Pillar 3 requires us to develop and publish a set of disclosures, which will allow market participants to assess key information about our underlying risks, risk management controls and capital position.

This framework obliges us to publish this formal disclosure in accordance with our disclosure policy but this obligation relates only to Tilney Investment Management (“TIM”) and Bestinvest (Brokers) Limited (“BIB”) (the “companies”).

The rules do allow us not to disclose one or more of the specified items where we consider the information to be immaterial. Materiality is based on the criterion that the omission or misstatement of any information would be likely to change or influence the decision of a reader relying on that information. Where we have considered a disclosure to be immaterial we have stated this in the document.

Additionally, we may also omit one or more of the required disclosures where we believe that the information is 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 clients, suppliers and counterparties. Where we have omitted information for either of these two reasons we have stated this in the relevant section.

2. Scope and application of the requirement

Tilney Investment Management and Bestinvest (Brokers) Limited are both authorized and regulated by the FCA and have permission to provide discretionary investment management, investment advisory services, and execution-only services.

Tilney Bestinvest acquired Ingenious Asset Management Group Holdings Limited and its subsidiaries after the end of the applicable reporting period (31 December 2015). This disclosure statement therefore does not include companies in the acquired group which are subject to the Directive (Tilney Asset Management Limited and Thurleigh Investment Managers LLP).

3. Risk management

Our risk management framework reflects the FCA requirement that we must manage a number of different categories of risk, including liquidity risk, operational risk, credit risk, reputation risk, business risk, interest rate risk and concentration risk. Liquidity risk has group implications but insurance risk, residual risk, securitization risk and pension obligation risk are not applicable to the subsidiary companies. Further information on applicable risks is set out below.

Liquidity risk

The companies’ liquidity resources are their own funds, which they generate from their on-going operations. The companies consider their respective liquidity positions as a part of their continuous prudential risk management and under Pillars 1 and 2 through their ICAAP assessment processes. The companies’ key process for liquidity risk management is the continuous management of their profitability and balance sheet, which provides a high level of confidence in their financial security.

Operational risk

The group outsources certain operational activities to third party companies who are experts in their field, and provide such services to many of our competitors.  Our investment in a new, industry leading operating model will further enhance our operational risk management.  We review the financial and operational stability of our third party outsource partners regularly through the Operational Risk Committee, to ensure that service standards and financial stability requirements are met.

There is an overlap between operational and reputation risk to the extent that any significant operational failure impacts the companies’ reputation.  Reputation risks are covered under the heading Business and Reputation risks below. 

Credit risk

BIB does not undertake any lending activity. TIM undertakes minimal lending activity in the form of occasional loans to clients to provide short-term financing. Lending facilities are provided by either Pershing Securities Limited or Credit Suisse (UK) Limited and no exposure is taken on within the company. The major assets on the companies’ balance sheets are bank deposits, commissions due from fund managers, intercompany debt representing amounts advanced by holding companies and outstanding management invoices.

With regards to bank deposits, we only deposit money with approved counterparties on agreed terms. For investment management clients these are governed by our agreements with these clients. For commission due from fund managers, their terms are subject to confidentiality clauses and therefore we are not disclosing this information.

Business and Reputation risk

Our Pillar 2 business risk principally takes the form of a fall in assets under management due either to a market downturn or a loss of clients through reputation risk that leads to a significant reduction in revenues. To mitigate business risk, our Finance team regularly analyses various different economic scenarios to model the impact of economic downturns on our financial position. Our exposure to business risk is hedged to a degree by having significant exposure to both bonds and equities.

Market risk

The companies do not have any foreign exchange exposures nor do they have permission to engage in proprietary trading book activities and are not directly exposed to market risk. Company revenues are linked to the values of clients’ investments so market risk resulting in a decrease in investment values will cause a reduction in revenue.

Interest rate risk

The companies are exposed to interest rate risks as the group is partly financed by bank debt and the companies are required to participate in the servicing of that debt. Total debt between the companies and their parent is 80% hedged through a three-year interest rate swap.

Concentration risk

The companies have a wide client base and diverse revenue streams, and are not reliant on the income generated by a single client or single revenue stream.

4. Capital resources and requirements

The companies have calculated their respective Pillar 1 capital requirement in accordance with Part 2 of the Capital Requirements Regulations (CRR). However, both companies have obtained a formal waiver from the FCA meaning that their respective capital resources may be calculated independently and not as part of a consolidated group, as defined.

Tier 1 regulatory capital (based on most recent audit accounts 31 December 2014)

Company Tier 1 capital (£m) Minimum capital requirement (£m) Surplus (£m)
Tilney Investment Management 22.9 3.6 19.3
Bestinvest (Brokers) Limited 8.8 4.1 4.7

Our annual Internal Capital Adequacy Assessment Process identifies credit risk, business risk and operational risk capital requirements and will determine future capital requirements for both companies.

5. Remuneration disclosure

The FCA expects public disclosure of

  • Information concerning the decision-making process used to determine the remuneration policies
  • Information on the link between pay and performance
  • Aggregate quantitative remuneration data by business area
  • Aggregate quantitative remuneration data broken down by employees whose activities have a material impact on the risk profile of the firm.

These requirements are set out in the FCA Remuneration Code. The companies both comply with Remuneration Code that the Boards consider is proportionate to their size, internal organization and the nature and scale of their respective business activities.

The remuneration scheme operating relevant to the companies’ Remuneration Policy is

  • Annual discretionary performance related bonus schemes, to enable most or all employees to receive a share of the group’s profit in the form of a discretionary cash bonus the amount of which depends primarily on their performance against prescribed Key Performance Indicators (“KPI”)
  • Both companies’ remuneration decision making governance is made at Board, Group Board and Group Remuneration Committee level.
  • The remuneration disclosure is as follows
  • Aggregate remuneration of staff of whom disclosure is required by business area
Business area Bestinvest (Broker) Limited
Fixed remuneration Variable remuneration
Investment management, Direct and Advisory £0.6m Less than £0.5m
Senior Management £2.5m £0.8m

 

Business area Tilney Investment Management
Fixed remuneration Variable remuneration
Investment management £0.7m Less than £0.5m
Senior Management Less than £0.5m Less than £0.5m

 

Business area Amount No. of Staff
Tilney investment management Bestinvest (Brokers) Limited
Senior management More than £0.5m 1 1
Senior Management Less than £0.5m 4 11
Investment management, Direct and Advisory Less than £0.5m 5 6