Pillar 3 Disclosure

PILLAR 3 MINIMUM DISCLOSURE REQUIREMENTS

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

This sets out the minimum capital amount that meets the firm’s credit, market and operational risk;

Pillar 2

Requires the firm to assess whether its Pillar 1 capital is adequate to meet its risks and is subject to annual review by the FCA; and

Pillar 3

Requires disclosure of specified information about the underlying risk management controls and capital position.

The rules in BIPRU 11 set out the provision for Pillar 3 disclosure.  This disclosure is designed to meet our Pillar 3 obligations.

The Pillar 3 disclosure document has been prepared by Harwood Private Capital LLP (“The Firm”) in accordance with the requirements of BIPRU 11 and is verified by its partners (“the Principals”). 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 as soon as practical 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.

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

Harwood Private Capital LLP (“the Firm”) is authorised and regulated by the Financial Conduct Authority and as such is subject to minimum regulatory capital requirements.  The Firm is categorised as a limited licence firm by the FCA for capital purposes.  It is an investment management firm and as such has no trading book exposures.

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 in the basis of consolidation for accounting and prudential purposes.

GOVERNANCE ARRANGEMENTS, THE MANAGEMENT BODY AND COMPETENCE

The senior management within the Firm meet on a regular basis and at least quarterly. Such meetings have a formal agenda which countenances enterprise wide issues and the risk appetite of the business. The meetings demonstrate how the Firm oversees and is accountable for the implementation of governance arrangements, thereby ensuring the effective and prudent management of the Firm in line with the FCA rules. Due consideration is given to the appropriate and proportionate segregation of duties and the prevention of conflicts of interest.

The Firm considers that appropriate policies are in place to ensure the fitness and properness of all staff, including the members of the senior management body. Senior management are experienced industry professionals. Any senior appointments are subject to the approval of the management body with due consideration to the reputation, fitness and experience of the candidate as well as the long term strategic goals targets of the business.

All members of the senior management and have disclosed any outside business interests.

Staff competence is assessed on an initial and ongoing basis. All members of senior management other FCA approved persons are required to attest to their ongoing compliance with the fitness and properness obligations of the FCA approved persons’ process.

All staff including senior management undergo training on a variety of regulatory topics on an annual basis

Risk management

This section explains the risk management objective and policies for each separate category of risk including:

  • Strategies and processes to manage risks;

  • Structure and organisation of risk management function;

  • Scope and nature of risk reporting and measurement systems; and

  • Policies for hedging and mitigating risk.

The Firm is governed by its Principals who determine its business strategy and risk appetite.  They are also responsible for establishing and maintaining the Firm’s governance arrangements along with designing and implementing a risk management framework that recognises the risks that the business faces. 

The Principals also determine how the risks our business faces may be mitigated and assess on an ongoing basis the arrangements to manage those risks.  The Principals meet on a regular basis and discuss current projections for profitability, cash flow, regulatory capital management, and business planning and risk management.  The Principals manage the Firm’s risks business though a framework of policy and procedures having regard to 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 Principals have identified that business, operational, market and credit risks are the main areas of risk to which the Firm is exposed.  Annually the Principals formally review their risks, controls and other risk mitigation arrangements and assess their effectiveness.  Where the Principals identify material risks they consider the financial impact of these risks as part of our business planning and capital management and conclude whether the amount of regulatory capital is adequate. 

Regulatory capital

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

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

Capital item                                                                             £’000

Tier 1 capital less innovative tier 1 capital                              £505

Total tier 2, innovative tier 1 and tier 3 capital                         £0

Deductions from tier 1 and tier 2 capital                                 £26

Total capital resources, net of deductions                              £479

Our Firm is small with a simple operational infrastructure.  Its market risk is limited to foreign exchange risk on its accounts receivable in foreign currency, and credit risk from management and performance fees receivable from the funds under its management.  The Firm follows the standardised approach to market risk and the simplified standard approach to credit risk.  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 licence firm and as such its capital requirements are the greater of:

  • Its base capital requirement of €50,000; or

  • The sum of its market and credit risk requirements; or

  • Its Fixed Overhead Requirement.

We have not identified credit risk exposure classes or the minimum capital requirements for market risk as we believe that they are immaterial.

It is the Firm’s experience that the Fixed Overhead Requirement establishes its capital requirements and hence market and credit risks are considered not to be material.

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 the FCA’s General Prudential Sourcebook (“GENPRU”) at GENPRU 2.1.53. 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. 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 Finance Director and reported to senior management on a monthly basis.

CODE STAFF REMUNERATION DISCLOSURE FOR THE YEAR ENDED 31 December 2020

Given the LLP’s size and relatively low complexity there is no separate remuneration committee within the Firm. Decisions regarding remuneration are undertaken by the Chief Executive and Chief Operating Officer, with input from other members of the Management Committee.

The Firm is a Limited Liability Partnership in which many staff are partners, necessitating SMF27 approval and making them a significant influence function. The Firm has decided to treat all partners as Code Staff, on the basis that they impact the risk profile of the Firm. In addition to the partners, the Chief Operating Officer and the Compliance Officer (who is also the MLRO), is also treated as Code Staff.

The Firm has defined itself as a Proportionality Tier Four investment firm and adopted a proportioned approach to remuneration policy, dis-applying certain provisions where appropriate, in accordance with FCA guidance.

Remuneration policy

The Firm is authorised and regulated by the Financial Conduct Authority as an IFPRU Limited Licence 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 Firm's overall policy is that the remuneration of senior managers and other staff whose actions have a material impact on the firm's risk profile ("Code Staff") should comply with the FCA's Remuneration Code, with an appropriate balance being struck between financial performance and risk management. In particular:

A significant portion of the remuneration of Code Staff is variable based primarily on the Firm’s financial and service performance (on behalf of its clients). In addition, the Firm considers each individual’s overall performance, using applicable criteria to motivate and reward success. However, the proportion of variable pay is limited, to ensure that it is feasible for no bonus to be paid in years where business performance does not merit this;

Personal reviews of Code Staff are carried out at least annually to assess their performance in meeting individual and strategic objectives. These reviews are reflected in compensation adjustments which take effect from 1 April each year as well as in awards of variable pay; and

No member of Code Staff is involved in deciding his or her own remuneration.

The policy in relation to the various elements of remuneration structures for Code Staff is set out below:

 

(a) Basic salary

Basic pay for all employees is market related thus ensuring a competitive salary that fairly reflects the market rate, skill, experience and expertise for the role. Individual development and progression is reflected through the annual salary and personal review processes.

 

(b) Variable pay

Variable pay is comprised of year-end bonuses and/or a share of performance fees. Year-end bonuses are awarded on the basis of overall job related performance and the attainment of established goals. Management gives significant weight to the Firm’s revenues and overall investment performance (on behalf of its clients) when determining the amount of such year-end bonus awards. Conversely, such policies are designed so that key investment personnel are paid lower compensation levels in years when the Firm does not perform as well on behalf of its clients.

 

External disclosure and data protection

Recital (21) of CRD III – States: good governance structures, transparency and disclosure are essential for sound remuneration policies. Firm’s must ensure adequate transparency to the market of their remuneration structures and the associated risk. Firms should disclose detailed information on their remuneration policies practices and, for reasons of confidentiality, aggregated amounts for those members of staff whose professional activities have a material impact on the risk profile of the institution.

That information should be made available to all stakeholders (shareholders, employees and the general public). However, this obligation should be without prejudice to Directive 95/46/EC of the European Parliament and of the Council of 24 October 1995 on the protection of individuals with the regard to the processing of personal data and the free movement of such data.

In preparing this Statement, we have made no omissions on the grounds of data protection.

 

Materiality, proprietary nature or confidentiality

 

The SYSC sourcebook of the FCA handbook also exempts certain types of information on grounds of materiality, proprietary nature or confidentiality:

 

  1. information is material if its omission or misstatement could change or influence the assessment or decision of a user relying on that information for the purpose of making economic decisions;

 

  1. information is proprietary if sharing that information with the public would undermine the firm’s competitive position; and

 

  1. information is confidential if there are obligations to customers or other counterparty relationships binding the firm to confidentiality.

 

The Firm shall regard information as Material, proprietary nature or confidentiality if its disclosure with the public would undermine its competitive position in the market place.