This is the Pillar 3 disclosure made in accordance with the UK Financial Conduct Authority (FCA) Prudential Sourcebook for Banks, Building Societies and Investment Firms (‘BIPRU’).
The European Capital Requirements Directive (CRD) created a regulatory capital framework consisting of three ‘pillars’ namely;
- Pillar 1 – which sets out the minimum capital requirements that firms are required to meet;
- Pillar 2 – which requires firms to take a view on whether additional capital should be held against capital risks not covered by Pillar 1; and
- Pillar 3 – which requires firms to publish certain details of its risks, capital and risk management process.
The rules in BIPRU 11 provide that the firm may omit one or more of the required disclosures if it believes that the information is immaterial. Materiality is based on the criteria that the omission or misstatement of material information would be likely to change or influence the assessment or decision of a user relying on that information for the purposes of making economic decisions. Where the firm considers a disclosure to be immaterial, this will be stated in the relevant section.
The firm is also permitted to omit one or more of the required disclosures where it believes that the information is regarded as proprietary or confidential. Proprietary information is that which, if it were shared, would undermine the firm’s competitive position. Information is considered to be confidential where there are obligations binding the firm to confidentiality with its clients and counterparties.
Where the firm has omitted information for any of the above reasons, a statement explaining this will be provided in the relevant section.
Unless stated as otherwise, all figures contained in this disclosure are based on the firm’s audited annual reports for the year ending 31st March 2016.
These Pillar 3 Disclosures will be reviewed on an annual basis as a minimum. The disclosures will be published as soon as is practical following the finalisation of the firm’s Internal Capital Adequacy Assessment Process (ICAAP) and the publication of its annual reports.
The information contained in this disclosure has not been audited by our firm’s external auditors and does not constitute any form of financial statement.
Our firm’s Pillar 3 Disclosure reports are published on our website.
Scope and application of Directive requirements
The disclosures in this document are made in respect of Beaufort Investment Management Limited which provides discretionary investment management services.
The firm is a BIPRU 50K firm, but does NOT hold Client money or assets.
Risk management objectives and policies
The main areas of risk to which the Firm is exposed are set out below:
- Strategic risk as a result of the out-source of investment administration to external platform providers.
- The loss of a major client as a result of poor investment performance.
- The failure of the business to build a brand and win sufficient business in order to achieve the targets defined in the business plan
- A significant breach resulting in a regulatory fine or censure.
- Inadequate internal controls leading to operational risk.
The firm maintains a risk and control framework and carries out operational and compliance monitoring to help identify and mitigate weaknesses and potential failures.
Our risk management policy also reflects the FCA requirement that we must manage a number of different categories of risk in detail. These include: liquidity, credit, market, interest rate, insurance, business and operational risks.
1. Liquidity risk
The risk that the company, although solvent, does not have access to the financial resources necessary to meet its obligations. This risk is remote and the company proactively seeks to place funds with a variety of banks and building societies backed by the Financial Services Compensation Scheme (FSCS).
At March 31st 2016 cash at bank amounted to £313,799.
The firm manages cash to maximise potential interest income, whilst ensuring the firm has sufficient liquid resources to meet the continued operating needs of the business. Cash at bank is monitored weekly and supported by a robust annual budgeting and forecasting process which has the full involvement of the senior management team.
2. Credit risk
Beaufort Investment Management Limited offers portfolio management services via Advisers, whose clients wish to invest funds on platforms maintained by Standard Life, Transact, Seven Investment Management, Axa Elevate and Old Mutual.
The firm’s revenues include monthly service charges received from advisory companies, the receipt of which are subject to monthly credit control procedures. Adviser’s clients are charged, based on a percentage of their assets under management. These charges are made directly to the clients’ portfolios, and therefore the credit risk relating to this income is minimal.
3. Market risk
Not applicable as the firm does not directly hold assets of variable market value nor foreign-currency denominated assets.
4. Interest rate risk
The firm has no borrowings and no exposure to interest rate risk.
5. Insurance risk
PI insurance of £2 million is in place with Arch Insurance Company (Europe) Limited. Investment management is covered and the excess is £10,000.
6. Business risk
The firm’s Pillar 2 business risk assessment principally takes the form of a fall in assets under management following a market downturn that leads to lower management income, although other risks such as loss of advisers and systems failures are also considered. To mitigate our business risk, we analyse various different economic scenarios to model the impact of economic downturns on our financial position and at the 31st of March 2016 the capital reserve position was £614,351.
7. Operational risk
Operational risk is defined as the potential risk of financial loss or impairment to reputation resulting from inadequate or failed internal processes and systems, from the actions of people or from external events.
Major sources of operation risk include: outsourcing of operations, IT security, internal and external fraud, implementation of strategic change and regulatory non-compliance.
The firm operates a robust risk management process which is regularly reviewed and updated with details being provided to all staff. The firm’s Compliance Oversight is responsible for the periodic reviews and recommending any changes to the Board.
The most serious operational risks will be avoided, since the day to day operation of the management of funds will be overseen by the Operations Manager and the Head of Portfolio Construction.
The key internal risks relate to the firm’s management – e.g. failure to deliver trades on time, inadequate resources leading to failure to trade in a timely manner or in the best interest of the client.
Any such possible event would be identified daily by the Operations manager, monthly by the senior management team and quarterly by the Investment Governance committee which sits to assess trades, the markets and the resources available, also taking into account holidays and sickness.
In addition T&C assessments will take place on those holding key roles and responsibilities. This will involve each person detailing their knowledge and expertise in the market place.
Operational Risk is therefore kept to an absolute minimum by involving Operations Management on a daily basis, with Compliance monthly and the Investment Governance Committee on a quarterly basis.
All senior management will bear responsibility for internal controls and the management of business risk as part of their accountability to the board.
Individuals are responsible for identifying the risks surrounding their work, implementing controls over those risks and reporting areas of concern to their line manager.
The Compliance Oversight will provide the board with a monthly summary report on all significant risk issues.
8. Other risks
No other significant business risks have been identified and the firm operates a simple business model. Accordingly, some of the specific risks identified by the FCA do not apply.
Pillar 1 requirement
In accordance with GENPRU 2.1.45R (calculation of variable capital requirement for a BIPRU firm), our capital requirement has been determined as being our fixed overhead requirement and not the sum of our credit risk capital requirement and our market risk capital requirement.
The Pillar 1 capital requirement for Beaufort Investment Management Limited was £240,496 as at 31st March 2016.
Our overall approach to assessing the adequacy of our internal capital is set out in our ICAAP. The ICAAP process involves separate consideration of risks to our capital. The level of capital required to cover risks is a function of impact and probability. We assess impact by modelling the changes in our income and expenses caused by various potential risks over a 1-year time horizon. Probability is assessed subjectively.
Our Pillar 2 capital requirement, which is our own assessment of the minimum amount of capital that we believe is adequate against the risks identified, has been assessed as greater than the sum of our credit risk capital requirement and our market risk capital requirement.
There is a considerable surplus of reserves above the capital resource requirement deemed necessary to cover the risks identified.
The main features of Beaufort Investment Management Limited’s capital resources for regulatory purposes, as at 31st March 2016 are as follows:
Tier 1 capital (called up share capital, share premium account, profit and loss account, externally verified interim net profits)
Total of tier 2 and tier 3 capital (broadly long and short term subordinated loans)
Deductions from tier 1 and tier 2 capital
Total capital resources, net of deductions
The firm holds regulatory capital in accordance with the Capital Requirements Directive. All such capital is classified as Tier 1 capital and is therefore of the highest quality.
Remuneration Code Disclosure
The firm is subject to the BIPRU Remuneration Code. This section provides further information on our remuneration policy.
BIPRU Remuneration Code Staff
We have identified, and maintain a record of, ‘BIPRU Remuneration Code Staff’ – i.e. staff to whom the BIPRU Remuneration Code applies. This includes senior management and members of staff whose actions may have a material impact on a firm’s risk profile. All of our Code Staff fall into the “senior management” category of Code Staff (rather than the “risk taker” category) for the purposes of the BIPRU Remuneration Code.
Decision Making / Remuneration Committee
Beaufort Investment Management Limited has a Remuneration Committee. The Senior Non Executive Director is the Chair of the Remuneration Committee, who are collectively responsible for our remuneration policy including:
- Determining the framework and policy for remuneration and ensuring it does not encourage undue risk taking.
- Agreeing any major changes in remuneration structures.
- Reviewing the terms and conditions of any new incentive schemes and in particular, considering the appropriate targets for any performance related remuneration schemes.
- Considering and recommending the remuneration policy for the senior employees, taking into account the appropriate mix of salary, discretionary bonus and share based remuneration.
- In determining remuneration arrangements, the Remuneration Committee give due regard to best practice and any relevant legal or regulatory requirements including the BIPRU Remuneration Code.
Link Between Pay & Performance
Competitive salaries form the basis of our firm’s remuneration package. In addition there is an element of variable pay for all staff which is based on firm wide and individual performance. Whilst most of the variable reward components are awarded to employees across the firm, the structure, balance and amounts may differ. Variable remuneration is considerably reduced where subdued or negative financial performance of the firm occurs.
When assessing individual performance we use a robust performance review process, with reviews including qualitative criteria and, in the case of investment managers, long-term investment results are a factor in the assessment process.
Quantitative Information on Remuneration
The FCA rules require certain firms to disclose aggregate information on remuneration in respect of its BIPRU Remuneration Code Staff broken down by business area, senior management and other Code Staff, including “risk takers”. Beaufort Investment Management Limited does not have sufficient funds under management in order to require it to make these enhanced disclosures.
The firm only has one business area – investment management.
The firm has 4 Executive Directors but no “risk takers”.
Director’s remuneration is proposed by the Remuneration Committee and agreed formally at board meetings. The link between performance and pay is inevitable in a small firm, but the firm’s conservative risk strategy, Remuneration committee composed entirely of independent non executive directors and robust risk management systems mitigate any risks.
The aggregate remuneration of BIPRU Remuneration Code Staff was £369,874, audited accounts 31st March 2016.