Pillar 3 Disclosures
31 January 2019
The Capital Requirements Directive (CRD) of the European Union establishes the regulatory capital framework with which FCA regulated investment firms must comply and sets out the amount and nature of capital they must maintain.
The FCA framework consists of three “pillars”:
- Pillar 1 sets out the minimum capital firms must maintain to cover its credit, market and operational risks;
- Pillar 2 requires firms to assess any firm-specific risks not covered by Pillar 1 and, if necessary, set additional capital aside to mitigate them; and
- Pillar 3 requires the public disclosure of key information relating to the firm’s risk management controls and capital resources, for use by the market.
This document is designed to fulfil our Pillar 3 requirement and is published annually on our website.
Scope & Application of the Requirements
Murdoch Asset Management Ltd (MAM Ltd) is a discretionary investment management firm with permission to control client investments but not client money and is authorised and regulated by the FCA. It is categorised as a BIPRU Limited Licence firm and is required to have a minimum capital requirement of €50,000.
The Board of MAM Ltd determines the firm’s business strategy and risk appetite and meets monthly to consider financial and operational issues, thus enabling the directors and senior management to play an integral part in the early identification and successful management of risk.
The Board prepares, at least annually, an Internal Capital Adequacy Assessment Process (ICAAP) which identifies and analyses the material risks faced by the firm and the controls in place to mitigate them. We have identified the following risks to its business:
- Credit risk
This risk relates only to possible delays in the payment of our fund management fees. In practice, however, all fees are paid on time through agreed deductions from client portfolios through the host platform. The firm is not exposed to the credit risk capital component referred to in BIPRU.
- Market risk and loss of income
The main business risk that the Firm could be exposed to is a fall in the value of funds under management due to an economic downturn resulting in a fall in profits. This risk has been assessed and is less than the firms Fixed Overhead Requirement (FOR) which is detailed in the Firm’s Internal Capital Adequacy Assessment Process (ICAAP).
- Legal and Operational risk
The firm maintains legal and professional relations with external firms so as to provide it with up to date guidance and advice to mitigate risks raised in this area.
- Regulatory Risk
The firm maintains appropriate contact with the FCA for a firm of this size, as well as using external consultants to assist where required.
- Loss of key personnel
The personnel are recognised as valuable to the business and the Directors ensure that where possible all best endeavours are undertaken to retain staff that add to the business. All staff, including senior management functions have potential locums that can take over responsibilities in the short or long term should the need arise.
- Business Interruption
Sufficient plans are in place to allow the firm to operate if required under its Disaster Recovery Plan.
- Remuneration risk
The nature of the firm’s remuneration policy is set by the firms Directors. As a small firm only the Directors are considered “Code Staff” under the disclosure requirements.
A “probability and impact” assessment is carried out as part of the ICAAP to arrive at a suitable level of capital to be held in mitigation (Pillar 2). The Board has adopted a conservative approach to risk, which is achieved in the following ways:
- The firm’s simple business structure and service offering;
- The appointment of experienced and independent senior managers to the controls and oversight functions within the firm;
- No exposure to credit risk;
- Regular investment strategy meetings;
- A comprehensive compliance monitoring programme;
- An appropriate range of insurance policies; and
- The retention of expert external advisers.
Capital Requirements and Resources
The firm’s Capital Requirement is the total of its Pillar 1 and Pillar 2 capital.
Pillar 1 capital is the greater of:
- The base capital requirements of €50,000
- The sum of the market and credit risk requirements
- The Fixed Overheads Requirement (FOR)
Pillar 2 capital is the amount calculated by the firm within its ICAAP as necessary to cover any risks not covered by Pillar 1.
As MAM Ltd has no exposure to credit risk and low market and operational risk related to its discretionary investment activities, the Pillar 2 capital requirement is less than the minimum capital requirement. The minimum capital requirement is equal to the firms Fixed Overhead Requirement which is £293,491.
The Capital Resources for Tier 1 capital consists of called up share capital, reserves and profit and loss, and is regarded by the FCA as the core measurement of a firm’s financial strength.
Murdoch Asset Management Limited’s capital position as at 31st January 2019 is as follows:
|Pillar 1 requirement||£ 293,491|
|Pillar 2 requirement||£ Nil|
|Tier 1 Capital||£2,632,991|
The Capital Requirements Directive (CRD) of the European Union and the FCA Code on Remuneration require regulated investment firms to establish and maintain remuneration policies, procedures and practices that are consistent with and promote sound and effective risk management. The Code also requires firms to report annually on their remuneration policy for employees termed Code Staff. Code Staff can generally be defined as employees who perform a significant influence function, senior management and other staff who have a material impact on the risk profile of the business. Code Staff for the firm are its Directors only.
How Murdoch Asset Management Ltd staff remuneration is determined
The Board of MAM reviews remuneration annually for all staff. Basic salaries are reviewed in line with individual performance. Bonuses and pension contributions are discretionary and linked directly to the firm’s overall financial position. The firm does not have a remuneration committee and any decisions are made by the Directors having due regard to performance and profitability of the firm overall.