Pillar 3 Disclosure Statement for the year ended 30 June 2020
To be read in conjunction with ICAAP and Liquidity Risk Framework Reports
The Capital Requirements Directive ('the Directive') of the European Union establishes a revised regulatory capital framework across Europe governing the amount and nature of capital credit institutions and investment firms must maintain.
In the United Kingdom, the Directive has been implemented by the Financial Conduct Authority ('FCA') in its regulations through the General Prudential Sourcebook ('GENPRU') and the Prudential Sourcebook for Banks, Building Societies and Investment Firms ('BIPRU').
The FCA framework consists of three 'Pillars':
- Pillar 1 sets out the minimum capital amount that meets the firm's credit, market and operational risk capital requirement;
- Pillar 2 requires the firm to assess whether its capital reserves, processes, strategies and systems are adequate to meet pillar 1 requirements and further determine whether it should apply additional capital, processes, strategies or systems to cover any other risks that it may be exposed to;
- Pillar 3 requires disclosure of specified information about the underlying risk management controls and capital position to encourage market discipline
The rules in BIPRU 11 set out the provision for Pillar 3 disclosure. This document is designed to meet our Pillar 3 obligations.
The Pillar 3 disclosure document has been prepared by Joseph R Lamb Independent Financial Advisers Ltd ("The Firm") in accordance with the requirements of BIPRU 11 and is verified by the senior management. Unless otherwise stated, all figures are as at the financial year end.
Pillar 3 disclosures will be issued on an annual basis after the year end and published with the annual accounts.
We are permitted to omit required disclosures if we believe that the information is immaterial such that omission would be unlikely to change or influence the decision of a reader relying on that information for the purpose of making economic decisions about the firm.
In addition, we may omit required disclosures where we believe that the information is regarded as 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 customers, suppliers and counterparties.
We have made no omissions on the grounds that it is immaterial, proprietary or confidential.
Scope and application of the requirements
The Firm is authorised and regulated by the FCA and as such is subject to minimum regulatory capital requirements. The Firm is categorised as a Limited License Firm by the FCA for capital purposes. It is an investment management firm and as such has no trading book exposures.
The Firm is not a member of a group and so is not required to prepare consolidated reporting for prudential purposes.
The Firm has established a risk management process in order to ensure that it has effective systems and controls in place to identify, monitor and manage risks arising in the business. The Senior Management team takes overall responsibility for this process and the fundamental risk appetite of the firm. The team has responsibility for the implementation and enforcement of the Firm's risk principles. Senior Management meet on a regular basis and discuss current projections for profitability, cash flow, and business planning and risk management. Senior Management engage in the Firm's risks though a framework of policy and procedures having regard to the relevant laws, standards, principles and rules (including FCA principles and rules) with the aim to operate a defined and transparent risk management framework. These policies and procedures are updated as required.
The Senior Management team has identified that business and operational are the main areas of risk to which the Firm is exposed with market and credit risk being significantly lower risks in the team's perception. Annually the Senior Management team formally review their risks, controls and other risk mitigation arrangements and assess their effectiveness.
Management accounts demonstrate continued adequacy of the firm's regulatory capital and are reviewed monthly.
Appropriate action would be taken if risks were to be identified which fell outside of the Firm's tolerance levels or where the need for remedial action is required in respect of identified weaknesses in the firm's mitigating controls.
Specific risks applicable to the Firm come under the headings of business, operational, credit and market risks.
The primary risk the business faces as a result of our investment management permissions is that of switching errors. At the time of writing we 'manage' circa £300m+ of client assets and significant 'switching risk'. Significant re-rating of asset prices could potentially see up to half of the value of this portfolio switched at any one time. Clearly any error in directing funds to or from the wrong fund or missing clients from our model portfolio switches could lead to several million pounds being exposed to the wrong funds. I am confident that our processes and controls mitigate any foreseeable risk to the maximum possible degree. Should however we commit a switching error there is a business risk in the financial impact of any switching error caused by us. Whilst our switch audit process should identify any errors for prompt rectification, in these days of rapidly moving markets and the scale of the switches involved. The PI cover in place is £1.75m in accordance with regulatory requirements. It is clear that we need to ensure our systems and controls are robust enough to prevent the errors described above. To date they have been and no cause for concern has been found, but every care still needs to be maintained in our switching activities.
Old Mutual Wealth provide the underlying platforms that our Discretionary Investment Services are built upon. There is therefore a risk to the business from any significant failure on the part of Old Mutual. If its systems were to fail or they were to cause any switching errors then we would of course expect them to be put right. To date, despite numerous requests we still do not have a written policy from them in respect of errors or system failures, however we do a have their assurances that they will rectify any errors or delays caused by them. In the event of any such failure on their part it seems reasonable for us assume that would meet any regulatory requirements and rules and guidance in bringing any issues to a correct and prompt conclusion. These are factors out with of our control and influence.
Old Mutual will be 're-platforming' client assets under a new trading platform during the coming 6 months. We have not taken part in any trialing or guinea pigging of the re platform as we would rather see how progress is made with other firms. Aviva have recently performed a similar re-platforming exercise with the same new host that OM will be using and it appears to have been an unmitigated disaster from numerous press stories and indeed announcements from Aviva themselves. Clearly this causes us concern and as part of a wider development exercise we are considering alternative platform providers just in case we need to pursue an alternative strategy.
There is always the risk of inappropriate advice being given, I am confident that with the file checking processes we have, the exemplary past conduct of our team of experienced advisers and the fact the business is all contained within one building that we have no more risk than any other business and that it does not need any further detail within this document, as the primary purpose of the ICAAP is to identify risks to capital resulting from investment management activity.
Clearly COVID represents an unknown risk. To date it has impacted turnover by approximately £150,000. The portfolio income has recovered strongly at year end and if current AUM is maintained we would still expect turnover and profitability to exceed 2019/20, however there is an unquantifiable impact on new business volumes, nevertheless our stress testing shows that this would still allow us to remain profitable and meet our Regulatory Capital requirements.
The Firm places strong reliance on the operational procedures and controls that it has in place in order to mitigate risk and seeks to ensure that all personnel are aware of their responsibilities in this respect.
The Firm has identified a number of key operational risks to manage. These relate to systems failure, failure of a third-party provider, potential for serious regulatory breaches, and market abuse. Appropriate polices are in place to mitigate against these risks, which includes taking out adequate professional indemnity insurance, compliance training for employees and business continuity planning.
More specific to the business is the Operational risk derived from the primary platform providers. Due to the functionality of the various platforms and products, and to maintain quality control and 'scalability' within our Discretionary Service, we only Manage Investments using our Discretionary powers via Old Mutual's platforms. We do not permit any advisers to manage investments themselves. This means that only our centralised investment proposition team can create model portfolios and these are triple checked and signed off by M C Lamb or Ricky Daniels in his absence, before any switching is performed. The switching itself is done via web-based model portfolios that are input by senior staff only. When switching is occurring the switch team are isolated from phone calls or disturbance in order to minimise the risk of errors, and all switching across all portfolios is done within one day and within one days unit pricing in order to eliminate further operational risk. These switch processes are written in full detail in our Internal D-PIMS Operations manual.
The Firm is exposed to credit risk only in respect of its debtors which only represent 2.9% of annual turnover at year end.
Management fees are drawn monthly from the funds managed. The Firm considers that there is little risk of default by its debtors, which in the main are the investment platforms of life insurers. All bank accounts are held with Cater Allen Private Bank, (part of the Santander Group) and Svenska Handelsbanken AB.
Given the nature of the Firm's activities, no specific policy for hedging and mitigating credit risk is in place.
The Firm takes no market risk and has no foreign exchange risk in respect of its accounts receivable and cash balances.
The Firm is required to maintain sufficient liquidity to ensure that there is no significant risk that its liabilities cannot be met as they fall due or to ensure that it can secure additional financial resources in the event of a stress scenario.
The Firm retains an amount it considers suitable for providing sufficient liquidity to meet the working capital requirements under normal business conditions. The firm has always had sufficient liquidity within the business to meet its obligations and there are no perceived threats to this given the cash deposits it holds. Additionally, it has historically been the case that all management fee debtors are settled promptly, thus ensuring further liquid resources are available to the firm on a timely basis. The cash position of the firm is monitored by the Senior Management on a weekly basis.
The Firm is a Limited Company and its capital arrangements are established in its Memorandum and Articles of Association. Its capital is summarised as follows:
Tier 1 capital*
Tier 2 capital
Tier 3 capital**
Deductions from Tiers 1 and 2
Total capital resources
*No hybrid tier one capital is held
**Note: Tier 3 capital is to be removed under the CRD IV
The Firm is small with a simple operational infrastructure. There is no market risk (as established above) and credit risk is based on debtor balances from fees receivable from the funds under its management as well as a percentage of cash held at bank.
Limited License - The Firm is subject to the Fixed Overhead Requirement and is not required to calculate an operational risk capital charge though it considers this as part of its process to identify the level of risk-based capital required.
As discussed above the firm is a limited license firm and as such its capital requirements are the higher of:
- €50,000; and
- The higher of:
- the fixed overhead requirement
- the sum of the market & credit risk requirements
The FOR is calculated, in accordance with FCA rules, based on the firm's previous years audited expenditure. The firm has adopted the standardised approach to credit and market risk and the above figures have been produced on that basis. The firm is not subject to an operational risk requirement.
The firm's fixed overhead requirement is £260,375 as detailed in our ICAAP Document.
Remuneration Code Disclosure
Joseph R Lamb Independent Financial Advisers Ltd ("the Firm") is authorised and regulated by the Financial Conduct Authority as a Limited License Firm and so, it is subject to FCA Rules on remuneration. These are contained in the FCA's Remuneration Code located in the SYSC Sourcebook of the FCA's Handbook. The Remuneration Code ("the RemCode") covers an individual's total remuneration.
Our policy is designed to ensure that we comply with the RemCode and our compensation arrangements:
- are consistent with and promotes sound and effective risk management;
- do not encourage excessive risk taking or miss-selling
- include measures to avoid conflicts of interest; and
- are in line with the Firm's business strategy, objectives, values and long-term interests
Enshrined in the European remuneration provisions is the principle of proportionality. The FCA have sought to apply proportionality in the first instance by categorising firms into 4 tiers. The Firm falls within the FCA's fourth proportionality tier and as such this disclosure is made in line with the requirements for a Tier 4 Firm.
Application of the requirements
We are required to disclose certain information on at least an annual basis regarding our remuneration policy and practices for those staff whose professional activities have a material impact on the risk profile of the firm. Our disclosure is made in accordance with our size, internal organisation and the nature, scope and complexity of our activities.
- Summary of information on the decision-making process used for determining the firm's remuneration policy.
- The Firm's policy has been agreed by the Senior Management in line with the RemCode principles laid down by the FCA
- Due to the size, nature and complexity of the firm, we are not required to appoint an independent remuneration committee
- The Firm's policy will be reviewed as part of annual process and procedures, or, following a significant change to the business requiring an update to its internal capital adequacy
- Summary of how the firm links between pay and Individual advisers are rewarded based on their contribution to the overall strategy of the business. They are paid a percentage of any initial fees and commissions in a simple tiered structure which provides modest increases for higher levels of productivity. 'Trail' income is divided in proportions determined by the adviser/firm input to the client review process and on-going advice. It is interesting to note that the 'trail" split in respect of business transacted under our Discretionary service is actually significantly less than that of our non-discretionary services, as the firm performs the majority of the review work. This is fair and proportional.
We do not offer significant incentives over and above the tiered structure and any entertaining is proportional.
Other factors such as performance, reliability, effectiveness of controls, business development and contribution to the business are taken into account when assessing the performance of the adviser staff.
- In accordance with CRD III and CEBS guidance the Firm takes a proportionate approach to its Remuneration Code disclosures in line with the nature, scale and complexity of the Firm and as such has chosen not to disclose exact remuneration figures in regards to the remuneration of Key Furthermore, all discretionary remuneration is directly related to the performance of PAYE staff who are not holding CF30 functions, and as such staff interests are intrinsically aligned with the interest of the Firm and its Clients vis-a-vis remuneration and performance. The only member of staff likely to accrue Discretionary Bonuses is R Daniels, who does hold a CF Director function and is intrinsic to the performance and compliance of the business however he has no adviser/sales role.
We may omit required disclosures where we believe that the information could be regarded as prejudicial to the UK or other national transposition of Directive 95/46/EC of the European Parliament and of the Council of 24 October 1995 on the protection of individuals with regard to the processing of personal data and on the free movement of such data.
Business profits are distributed as Dividends to shareholders as appropriate and acknowledging the firm's Capital Adequacy Requirements. These are detailed in the firm's report and accounts.
We have made no omissions on the grounds of data protection
Martin Lamb Dip. PFS Certs CII (MP & ER)