Regulatory Context

 
The Capital Requirements Directive (‘CRD’) of the European Union establish 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 CRD has been implemented by the Financial Conduct Authority (‘FCA’) in its regulations through the General Prudential Sourcebook (‘GENPRU’), the Prudential Sourcebook for Banks, Building Societies and Investment Firms (‘BIPRU’), The Interim Prudential Sourcebook for Investment Business (“IPRU (INV)”).
 
The CRD 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; and

  • 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.
 

Verification

 
The Pillar 3 disclosure document has been prepared by Sanlam Investments UK Limited (‘The Firm’) in accordance with the requirements of BIPRU 11 and is approved by the board.

The information contained in this document has not been audited by the Firms’ external auditors and does not constitute any form of financial statement and must not be relied upon in making any judgement on the Firms.
Unless otherwise stated, all figures are as at the 31st December 2017 financial year-end.
 

Frequency

 
Pillar 3 disclosures will be issued on an annual basis after the year-end and published as soon as practical when the audited annual accounts are finalised. 
 

Omissions and Confidentiality

 
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 incorporated in the UK and is authorised and regulated by the FCA and as such is subject to minimum regulatory capital requirements. The Firm is categorised as a BIPRU Firm by the FCA for capital purposes.

Although part of a group, the Firm is managed on a “stand-alone” for liquidity purposes and we do not foresee any impediments to the prompt transfer of capital between group entities should the need arise.  There are no differences on the basis of consolidation for accounting and prudential purposes.
 

Risk management


The Firm adheres to the Sanlam Investment Holdings (UK) Limited (SIH) ERM Risk Policy and Framework.
 
The SIH Enterprise Risk Management (“ERM”) Framework is a high level over-arching framework aimed at ensuring that:

  • All risks which could jeopardise/enhance achievement of the Firm’s strategic goals are identified;

  • Appropriate structures, policies, procedures and practices are in place to manage these risks. ERM also requires the Group to take a portfolio view of risk;

  • Sufficient organisational resources are applied to, and corporate culture is fully supportive of, the effective implementation of these structures, policies, procedures and practices; and that

  • The organisation’s risks are indeed being managed in accordance with the foregoing.

The key objective of SIH’s Enterprise Risk Management approach is to support the Sanlam Group in achieving its primary objective of optimising the return on Group Equity Value and maximising shareholder value; and to protect the interest of Sanlam’s customers serviced by the SIH group of companies and ensure fair and responsible conduct towards clients of SIH’s subsidiary companies 
 
SIH’s Enterprise Risk Management framework aims to ensure that the company: 

  • Takes risks aligned with its strategy and its risk appetite;

  • Takes acceptable levels of risk to create and preserve value;

  • Takes improved decisions to deal with risk.  This could be risk avoidance, reduction, transfer or acceptance;

  • Considers the impact of risk management decisions on customers;

  • Has a tolerable level of operational surprises and losses;

  • Can take a holistic view and manage company-wide risks;

  • Can take opportunities when identified – the upside of risk; and,

  • Allocates risk capital effectively and efficiently.

The Firms Senior Management meets on a regular basis and discuss current projections for profitability, cash flow, regulatory capital management, business planning and risk management. Senior Management engages in the Firm’s risks through 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. Annually the Senior Management team formally review their risks, controls and other risk mitigation arrangements and assess their effectiveness.

A formal update on operational matters is provided to the Head of Operations on a monthly basis. Management accounts demonstrate continued adequacy of the firm’s regulatory capital and are reviewed on a monthly basis.

Appropriate action is taken where risks are identified which fall 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.  The escalation of particular risks to the Chief Risk Officer, SIH Assurance committee and to the Board are done in accordance with the Risk Escalation Matrix.

Specific risks applicable to the Firm come under the headings of business and operational risks.
 

Business risk


The Firm’s revenue is reliant on the performance of the existing funds under management and its ability to launch new funds/obtain new mandates. As such, the risk posed to the firm relates to underperformance resulting in a decline in revenue and adverse market conditions hindering the launch of new funds and ultimately the risk of redemptions from the funds managed by the firm. This risk is mitigated by e.g.

  • Providing Investment management services to a diversified range of funds;

  • the continued support of the firm by its parent; and

  • significant levels of capital held by the firm which will continue to cover all the expenses of the business 

Operational risk


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 technology, business process, people and data management risks.  Appropriate policies are in place to mitigate against these risks, which includes taking out adequate professional indemnity insurance.
 

Market Risk


Market risk arises from movements in the value of assets held by the Group due to changes in price, interest rate or exchange rate.

The Firm is an agency investment management firm and as such has Non-Trading Book potential exposure only (BIPRU 7.4, 7.5).  Its market risk is limited to foreign exchange risk on cash balances held within its bank accounts. The Firm follows the standardised approach for calculating market risk.
 

Credit Risk


Credit risk is the risk that the counterparty to a financial obligation will default.

The status of the counterparties is monitored in light of any relevant market developments and formally on a quarterly basis by the Firm’s ExCo.

The Firms credit risk exposure is limited to the non-receipt of management fees receivable from the funds under its management.  The Firm follows the standardised approach to credit risk.
 

Outsourcing Risk


Outsourcing risk considered here is in the broader business meaning of the term. Risk quantification considers the cost of disruption / switching to alternative suppliers. Due diligence is conducted on each outsource provider both at the initiation of the contract and ongoing with a frequency dependent upon the perceived risk of the provider.

The Firm adheres to the SUK Outsourcing framework.
 
 

Financial Crime (including Bribery) Risk


The FCA has a statutory responsibility to reduce the extent to which the financial system is used for financial crime.

The Firm, its staff and Directors all adopt a positive approach to combating financial crime. All members of staff receive an appropriate briefing when they join the Group on what is expected of them in relation to the prevention and detection of money laundering and other financial crime and the consequences for the Firm if they fall short of that expectation. Employees who are ‘client-facing’ and who handle transactions (and their line managers) receive detailed training. In addition, internal refresher training sessions are provided regularly.

The Firm has a dedicated compliance consultant who specialises in operations and financial crime.
 

Capital Resources


The Firm is a Limited Liability Company and its capital arrangements are established in its Articles.  Its capital is summarised as follows:

The main features of the Firm’s capital resources for regulatory purposes are as follows:
 

 

31st December 2018
£’000

Tier 1 capital*

£5,453

Tier 2 capital

£0

Tier 3 capital

£0

Deductions from Tiers 1 and 2

£1,012

Total capital resources

£4,440

*No hybrid tier one capital is held

 
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 BIPRU Firm and as such its capital requirements are the higher of:

  • €50,000; and

  • The sum of the market & credit risk requirements; or

  • The fixed overheads requirement (‘FOR’) which is essentially 25% of the firm’s operating expenses less certain variable costs.

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.  The firm is not subject to an operational risk requirement.

It is the Firm’s experience that the Fixed Overhead Requirement establishes its capital requirements. 
 

Capital requirement


The Firm’s Pillar 1 capital requirement has been determined by reference to the Firm’s Fixed Overheads Requirement (‘FOR’) and calculated in accordance with Article 95. The requirement is based on the FOR since this exceeds the total of the credit and market risk capital requirements it faces and also exceeds its base capital requirement of €50,000.

The FOR is based on annual expenses net of variable costs deducted, which include discretionary bonuses paid to staff which have been deducted. The Firm monitors its expenditure on a monthly basis and takes into account any material fluctuations in order to determine whether the FOR remains appropriate to the size and nature of the business or whether any adjustment needs to be made intra-year.

This is monitored by the Head of Finance and reported to senior management on a monthly basis.
 

UK Financial Reporting Council’s Stewardship Code


FCA COBS Rule 2.2.3R requires FCA authorised firms to disclose whether they conform to the requirements of the UK Financial Reporting Council’s Stewardship Code (the ‘Code’). Adherence to the Code is voluntary. The Firm is an investment manager based in the United Kingdom and authorised and regulated by the Financial Conduct Authority. We endeavour to apply our approach on stewardship to all companies that we invest in on behalf of our clients. Our approach is consistent with the Firm’s overall aims, which are to provide good long-term performance to our clients, and keeping clients’ interests paramount.    

The Firm monitors all investee companies as part of its general investment policy and approach. The Firm takes action in line with its investment objectives where its research of publically available information warrants such action.  Given the nature of our chosen investment strategy, this approach does not include active engagement with UK listed investee companies, nor do we consider that our clients would expect such engagement.

Where we have a right to vote in relation to investee companies, we will take decisions in the best interest of our investors and their long-term interests and record what decisions we have taken in this respect. We do not normally make those decisions public. If our investment strategy changes in such a manner that the provisions of the Code become relevant, the Firm will amend this disclosure accordingly. We have a Proxy Voting Policy to control these activities.
 

Remuneration disclosure


The Firm is authorised and regulated by the Financial Conduct Authority as a BIPRU Firm and, so, it is subject to FCA Rules on remuneration.  These are contained in the FCA's Remuneration Codes located in the SYSC Sourcebook of the FCA’s Handbook.

The Remuneration Code (‘the RemCode’) cover(s) an individual’s total remuneration, fixed and variable. The Firm incentivises staff through a combination of the two.

The Firm's business is to provide portfolio management services to its clients and funds.  Our policy is designed to ensure that we comply with the RemCode and our compensation arrangements: 

  1. are consistent with and promotes sound and effective risk management;

  2. do not encourage excessive risk-taking;

  3. include measures to avoid conflicts of interest; and

  4. are in line with the Firm's business strategy, objectives, values and long-term interests.

Proportionality


Enshrined in the European remuneration provisions is the principle of proportionality. The FCA has sought to apply proportionality in the first instance by instituting two tests. Firstly, a firm that is significant in terms of its size must disclose quantitative information referred to in BIPRU 11.5.18R at the level of senior personnel. Secondly, that a firm must make a disclosure that is appropriate to the size, internal organisation and the nature, scope and complexity of their activities. 

The firm is not ‘significant’, that is to say has relevant total assets <£50bn* and so makes this disclosure in accordance with the second test (BIPRU 11.5.20R(2)).

* average total assets on the last three accounting dates. 
 

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 organization and the nature, scope and complexity of our activities.   

  1. Summary of information on the decision-making process used for determining the firm’s remuneration policy including use of external benchmarking consultants where relevant. 

  • The Firm’s policy has been agreed by the Board in line with the Remuneration principles laid down by the FCA.

  • The Firm has appointed 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 assessment.

  • The Firm’s ability to pay variable remuneration is based on the Firm’s audited profits, unless otherwise agreed by the Board. 

  1. Summary of how the firm links between pay and performance (SEE REM CODE).

  • Individuals are rewarded based on their contribution to the overall strategy of the business.

    1. Investment Generation

    2. Investment Trading

    3. Sales & Marketing

    4. Operations

  • 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 senior staff responsible for the infrastructure of the firm.

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.
 
We have made no omissions on the grounds of data protection.

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