Pillar 3 Disclosure

Pillar 3 Risk Disclosure Statement

Introduction

Cameron Hume Limited (“the Company”) is required to disclose information relating to the capital it holds and each category of risk it faces in order to assist users of its accounts and to encourage market discipline. These disclosures aim to provide information on the risk exposures faced by the Company and the risk assessment process it has put in place to monitor these. These disclosures are seen as complementary to the Company’s Capital Resources Requirement (CRR) calculation (Pillar 1) and the internal review of its capital adequacy (Pillar 2).

The Pillar 3 disclosure document has been prepared by the Company in accordance with the requirements of BIPRU 11 and is verified by the board of the Company (“the board”). All figures unless otherwise stated are as at 30 September 2019 and are based on the Company audited annual accounts to 30 September 2019.

This Pillar 3 disclosure will normally be updated on an annual basis after the 30 September year-end and published when the audited annual accounts are finalised.  Disclosures will be made at other dates if appropriate.

The Company has made no omissions on the grounds that information is immaterial, proprietary or confidential.

Capital Resources

The firm maintains capital resources as follows:

Capital30 September 2019/£’000
Tier 1 Capital2,045
Tier 2 Capital0
Tier 3 Capital0
Deductions from Tier 1 and 20
Total Capital Resources 2,045

The capital resources detailed above are considered adequate to continue to finance the Company. The Company continues to invest capital to grow the business further and will consider further capital injections as and when necessary.

Risk Management

The Company has established a risk management process to ensure that it has effective systems and controls in place to identify, monitor and manage risks arising in the business. The risk management process is overseen by the board. The Head of Compliance has responsibility for the implementation and enforcement of the Company’s risk principles. The Company has a comprehensive policy framework governing: enterprise risk management; liquidity risk; credit risk; information security; business continuity; customer relationship management; sourcing; regulatory and compliance risk; and all employment-related matters. These policies are formally approved and reviewed for effectiveness by the board and are maintained by the Head of Compliance. This system of internal control seeks to provide reasonable, and not absolute, assurance against material misstatement or loss.

The Company operates to a formal planning and review cycle which includes periodic formal reassessment of the risk control matrix, compliance with SYSC requirements and the ICAAP. Monthly management accounts are reviewed by the Company’s executive committee and the adequacy of the Company’s capital resources is reviewed periodically at no less than four monthly intervals. Budget re-forecasts are considered by the board twice annually and the Company’s strategic plan is updated and reviewed annually.

Updates on compliance monitoring and operational issues are made to the executive committee and the board on a periodic basis.

Credit Risk

The Company is an investment management company and will normally act as agent in all its dealings with clients and market counterparties. We do not plan to invest any of the assets of the firm in the financial markets, but rather to place them on short-term deposit with major deposit-taking institutions. Therefore, all of the assets of the firm will be in the non-Trading Book.

The main credit risk to which the Company is exposed is in respect of its debtors. The Company aims to deal with a small number of large institutional clients and undertakes know your customer (KYC) and credit control processes as part of its client take-on process.

The credit control process is monitored by the executive committee and any significant outstanding balances are identified and managed on a monthly basis as part of the review of management accounts.

The Company has limited credit exposures relating to its investment management business. Trade and other receivables are 100% risk weighted as per BIPRU 3.4.52 Cash and cash equivalent assets are zero risk weighted as per BIPRU 3.4.129.

The Company does not envisage having any other credit exposures and has no long-lived exposures.

Market Risk

The Company holds no trading book positions and is therefore not exposed to market risk.

Liquidity Risk

The Company does not fall within the scope of the liquidity risk requirements of COLL and the relevant risk is therefore that the Company, although solvent, either does not have available sufficient financial resources to enable it to meet its obligations as they fall due, or can secure such resources only at excessive cost.

Company policy is to maintain a positive cash balance at all times, taking into account the forecast future expenditure of the Company. Capital subscriptions are planned to allow maintenance of a positive cash balance[1].

The directors consider this general policy to be an effective method of managing liquidity risk.

[1] It is possible at any point that the requirement to hold capital in accordance with the Company’s ICAAP may become more onerous than the requirement to maintain liquid working capital. To date, the contribution of the value of illiquid assets to overall capital resources has meant that the preservation of liquid working capital has been the more onerous requirement.

Business Risk

The consideration of business risks and of enterprise risk management is embedded into the business planning process. Risks, their impacts, likelihoods and potential mitigants have been identified, discussed and reviewed by the directors and employees of the Company in the preparation of the business plan and this document.

Risks were identified via a risk identification workshop involving the employees of the Company. Identified risks were challenged and grouped into a comprehensive long list. This list is reviewed and challenged periodically.

For each risk scenario, revenue and capital financial impacts are assigned based on an assessment of the impact of the scenario over the next twelve-month period of business operations. Each scenario is then assessed as being Likely, Unlikely or Remote and impact and probability assessments are assigned. Scenarios which give rise to the same impact (e.g. there are various scenarios that are assigned to the risk that the Company fails to develop further external business) are clustered and the gross impact is allocated across the cluster, based on a subjective weighting.

Mitigating actions are identified and net risks are calculated after the application of mitigating actions. Professional Indemnity insurance is included as a separate mitigation if appropriate and only to the extent of the limits of loss  and deductibles of the Company’s PI policy.

The expected loss and standard deviation of each risk are then calculated, and the value at risk is calculated as the expected loss plus two standard deviations. The exposure weight to each risk is used to rank the risks by order of severity.

The risks identified and the analysis set out above are documented in the Company’s risk control matrix.

Operational Risk

The directors of the Company note the requirement of BIPRU 2.2.46 to hold additional capital to mitigate any weakness in the overall control environment. The directors do not consider that any additional capital needs to be held for this reason. With specific reference to BIPRU 2.2.46:

  1. The directors note the general obligation under SYSC to take appropriate practical responsibility for their Company’s arrangements and that the Company must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems, SYSC 1.2 (G). In particular the requirements to have: robust governance arrangements, SYSC 4.1.1 (R); business continuity provisions, SYSC 4.1.6 (R); personnel with the skills, knowledge and expertise necessary for the discharge of their responsibilities SYSC 5.1.1 (R); and to have effective processes to identify, manage, monitor and report the risks to which it is or might be exposed SYSC 7.1.1 (G). The Company performs and documents an annual review of compliance with all SYSC requirements.
  2. The financial results of the Company are properly monitored by the executive committee and the board in a timely fashion. The executive directors of the Company monitor the management accounts on a monthly basis.
  3. The Company always considers and where required acts on internal and external information on the business and control environment, including the outcomes of compliance monitoring reviews, external security reviews, all mandate compliance breaches and near misses, audit management letter points and the outcome of its own internal monitoring processes.A number of the Company’s policies relate specifically to operational matters and provide the framework for the management of operational risk: the employee handbook; compliance manual; information security policy; business continuity policy; health and safety and fire policies; and sourcing policy.

The Company has put in place a number of insurances to mitigate operational risks: professional indemnity and directors and officers liability cover (placed in the London market through JLT Specialty Ltd); and a comprehensive office policy.

The Company has a comprehensive business continuity framework and conducts on-going diligence on the business continuity arrangements of critical outsourcing partners.

Operational risks are covered in the preparation and review of the Company’s risk control matrix and to the extent that these can be identified as such, they are valued and reported separately. There are no net operational risks outside of the Company’s stated appetite.

Regulatory and Compliance Risk

Regulatory and compliance risk is the risk that a change in the laws and regulations will materially affect the firm’s business or markets in which it operates. The Company actively monitors and implements changes as required to enable it to meets its on-going regulatory obligations.

Fixed Overhead Requirement

The Company’s Pillar 1 capital resources requirement is determined by its Fixed Overhead Capital Requirement (FOR) determined in accordance with GENPRU 2.1.53.  The Company monitors the FOR on a monthly basis with reference to the three month forward rolling forecast of non-variable expenditure. The variable costs deducted when calculating the FOR are variable professional fees, marketing costs and discretionary staff bonuses[2].

[2] We assume for all calculations that 50% of professional fees and marketing spend is variable.

ICAAP

The Company’s ICAAP methodology is designed to capture the key risks faced by the Company under Pillar 2.  The ICAAP is reviewed at least every six months and the annual update is formally adopted by the board. The ICAAP also considers the Company’s longer term capital outlook across a range of scenarios and is integrated into the Company’s annual budgeting and financial planning process.

The findings of the most recent ICAAP analysis are:

  • the CRR for the financial year-ended 30 September 2020 is determined by the fixed overhead requirement (FOR) and is projected to be £900k;
  • after consideration of the risk matrix at and the projected costs of an orderly wind-down of the Company, the directors believe that the Company should aim to maintain Pillar 2 capital of £450k, leading to an overall ICAAP of £1,350k; and
  • the Company plans to maintain an adequate level of capital resources throughout the financial year-ended 30 September 2020.

Remuneration Code Disclosure

The Company is a BIPRU limited licence firm and as such falls under proportionality level three as defined by the FCA. Accordingly:

  • the board currently acts as the remuneration committee of the Company; and
  • disclosures are made under BIPRU 11.5.18R.

All remuneration decisions, including: initial salary; subsequent salary reviews; and incentive payments are determined by the board. Variable remuneration is subdivided into short- and long-term incentives with the absolute sum to be awarded and the considerations supporting such awards being at the sole discretion of the board.

Generally, the factors considered by the board in making remuneration decisions will be:

  • market rate, with reference to individuals previous employment and more general market data sourced from the Company’s HR and recruitment consultants;
  • Company performance;
  • investment performance (for portfolio management staff);
  • individual performance with respect to documented individual role descriptions, objectives and Company competencies;
  • compliance with Company policies and procedures; and
  • the Company’s capital resources with respect to both the capital resources requirement and the working capital requirements.

The Company has made provision for long term incentive payments that are deferred for a period of time (subject to satisfactory performance, conduct and on-going employment), thereby encouraging appropriate risk-taking and alignment to the strategy and long-term success of the business.

Quantitative Remuneration Data

Business AreaAggregate compensation expense year-ended 30/9/2019/£’000
Investment Management1,020
Operations/Sales & Marketing690
Code StaffAggregate compensation expense year-ended 30/9/2018/£’000
Code Staff1,461