Our Policies: Rowan Dartington & Co Ltd (‘the Firm’)
Pillar 3 Disclosures 31 December 2014

Rowan Dartington & Co Ltd (‘the Firm’)
Pillar 3 Disclosures 31 December 2014

Overview

The Capital Requirements Directive (“CRD”) of the European Union created a revised regulatory capital framework across Europe governing how much capital financial services firms must retain. The rules are set out in the CRD under three pillars:

Pillar 1 sets out the minimum capital resource requirement firms are required to maintain to meet credit, market and operational risks.

Pillar 2 requires firms to assess firm-specific risks not covered by Pillar 1 and, where necessary, maintain additional capital.

Pillar 3 requires firms to disclose information regarding their risk assessment process and capital resources with the aim to encourage market discipline by allowing market participants to assess key information on risk exposure and the risk assessment process.

The rules in the FCA Prudential Sourcebook for Banks, Building Societies and Investment Firms (“BIPRU”) set out the provision for Pillar 3 disclosure. This document is designed to meet our Pillar 3 disclosure obligations.

Verification

These disclosures have been prepared in order to comply with regulatory requirements and provide information on risk management policies and certain capital requirements. They do not constitute financial statements and are based on unaudited financial positions and should not be relied upon in making judgements about the Firm.

Scope and application of the requirements

The Firm is authorised and regulated by the Financial Conduct Authority (“FCA”) to conduct investment business, with permission to hold and control client money.

Risk appetite and management

The Firm is exposed to a variety of risks, as analysed and quantified below. However, the Board has adopted a conservative approach to risk, resulting in a low risk profile for the Firm, for the following reasons:

  • The business model is straightforward stockbroking and investment management. As principal positions are not taken, the Firm’s risk exposure is limited to counterparty risk and the impact on income;
  • The recruitment of experienced personnel throughout the Firm;
  • Limited exposure to credit risk;
  • The corporate governance structure ensures that responsibilities within the Firm are apportioned correctly within ‘oversight’ functions staffed by experienced personnel with access to Senior Management;
  • Comprehensive insurance arrangements which provide higher levels of cover than historic loss data would indicate is required.

Risk management is a fundamental part of the day to day management of the Firm, both within operational procedures to ensure that the risks associated with the provision of investment management and stockbroking services are mitigated by appropriate controls and processes and also within our fundamental approach to stock selection and daily management of the client investment portfolios, supported by our proprietary Portfolio Management System (PMS).

The Board meets Monthly, or as and when necessary, and has primary responsibility for governance and oversight of the Firm. The Director of Compliance & Risk provides independent oversight over the Firm’s risk management process and controls, and has overseen the development of the Risk Management Policy. This sets out the Firm’s processes for the management of internal and external risks arising from Market, Credit, Operational, Liquidity and other relevant risk categories, which form the basis for the risk management procedures. The Risk Management Policy is reviewed regularly.

Operational, market, credit and regulatory risks are reviewed monthly by the Risk Committee and monitored via a risk management system. A monthly management pack is produced by Compliance & Risk and reviewed by the Risk Committee, and a Board Pack is presented to the Board each month. The pack includes key risk metrics.

Capital adequacy and ICAAP

As at 31st December 2014, the Firm held regulatory capital resources that far exceeds its current requirements.

As the Firm is an IFPRU €125K firm, its capital requirements are the greatest of:

  • its base capital requirement of €125k;
  • the sum of the market risk and credit risk capital requirements; or
  • its fixed overhead requirement

The Firm’s Pillar 1 Capital requirement for the year 2015 has been determined by reference to the Firm’s fixed overhead requirement and calculated in accordance with the FCA’s General Prudential Sourcebook (“GENPRU”). The fixed overhead capital requirement exceeded both the base capital requirement and the sum of the market risk and credit risk capital requirement.

The Firm’s overall approach to assessing the adequacy of its internal capital is set out in our Internal Capital Adequacy Assessment Process (ICAAP).

The ICAAP process involves separate consideration of risks to the Firm’s capital combined with stress testing analysis to determine whether any additional capital is required for Pillar 2.

The Firm has calculated its capital requirement in accordance with the relevant FCA rules and the final level of capital is calculated as the base capital requirement. On completion of the ICAAP process it was concluded that no additional Pillar 2 operational risk capital is required.

Material risks

The material risks for the Firm are as follows:

Credit & Settlement Risk

Credit risk is the risk that unexpected losses may arise as a result of the Firm’s clients and counterparties failing to meet their obligations to settle transactions.

The Firm’s Credit risk is limited. The only material credit exposures are amounts receivable from market and client counterparties, including bank deposits. Since the great majority of business is carried out on a delivery verses payment basis, exposure to unsettled market and client positions is limited to the extent of market movements between trade date and settlement date. UK market counterparties are members of the London Stock Exchange and / or are FCA regulated, hence credit risk is significantly reduced. The Firm has a small number of overseas market counterparties which are reviewed on a regular basis.

Capital is set aside to mitigate the risk in accordance with the Pillar 1 Counterparty Credit Risk Requirement.

Liquidity Risk

Liquidity risk is the risk that the Firm will not be able to meet its financial obligations as they fall due.

Working capital ratios are considered adequate given the nature of trade settlement and the stable nature of administrative expenses.

The Firm operates and reviews its Liquidity Risk Framework to ensure the Liquidity Position is acceptable. This is reviewed on a regular basis, and at times of material change in the business. The Board is satisfied that there is no specific risk arising from liquidity and, in the unlikely event of requiring additional capital, the Firm has contingency funding arrangement in place with the major shareholders.

Business Risk

The key business risk is a reduction in funds under management, following a market downturn or loss of clients, resulting in lower management fees and trade commission. Management carry out stress-testing in order to assess the impact on profit and loss from various scenarios where funds under management fall.

Market Risk

The Firm has a small exposure to foreign exchange risk through its foreign currency trade receivables and payables. Foreign exchange positions are held on an intra-day basis only and purely for settlement purposes. In the opinion of the Directors, the residual foreign exchange risk is adequately addressed through the Pillar 1 market risk capital requirement for this risk.

Operational Risk

Operational risk is the risk of loss to the Firm resulting from failed or inappropriate internal procedures, people and systems, or from external events.

The Directors consider the Firm’s arrangements for monitoring, recording and mitigating operational risk to be appropriate to the size, nature and complexity of the business. Extensive management information is prepared on a monthly basis by the Finance and Compliance & Risk departments and there are clear lines of escalation within the Firm.

The Firm employs experienced staff in the management of operational risk, together with clear segregation of duties and robust documented operational procedures.

The management and monitoring of outsourcing relationships is a key control. The Firm monitors qualitative performance of functions outsourced to third party service providers to ensure adherence to contractual obligations.

Business continuity risk is the risk of interruption to the business due to the unavailability of systems or office space. The Firm has a comprehensive business continuity strategy.

The Firm also mitigates its operational risk by means of a comprehensive Professional Indemnity insurance policy providing cover of up to £10m per annum.

The Board of Directors recognise that not all of the risks to which the Firm is exposed can be mitigated by the addition of incremental capital, hence those other risks, such as reputation and legal risks, are managed by internal policies and procedures and monitored by management on an on-going basis.

Additional risks identified within the overall Pillar 2 rule have been assessed and evaluated by the Directors, and are not considered to be material to the Firm.

Remuneration

The Firm has been subject to the Remuneration Code (the “Code”) since 1 January 2011. The Code governs the remuneration policies of regulated firms and aims to ensure that firms establish, implement and maintain remuneration policies, procedures and practices that promote effective risk management.

The Firm provides discretionary, advisory and execution only services on an agency basis and does not trade on its own account. It is conservative in its approach to risk taking and has a comprehensive framework of systems and controls in place.

The remuneration policies of the Firm are managed and reviewed by the Remuneration Committee which has established and implemented policies which meet the requirements of the Code as applicable to a Tier 4 firm and are considered to be appropriate given the nature and scope of the business.

Overall remuneration in terms of salaries costs and bonus levels are reviewed annually by the Board.

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