Pillar 3 disclosure under The European Union Capital Requirements Directive

Background:

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’).

Wellian Investment Solutions Limited (“the Firm” or ‘’Wellian’’ or ‘’WIS’’) is authorised and regulated by the Financial Conduct Authority and as such is subject to minimum regulatory capital requirements.  The Firm is an investment firm and is categorised as a BIPRU investment firm by the FCA for capital purposes.

The Firm is part of the Harwood Wealth Management Group PLC (HWMG) which is not a FCA regulated entity therefore the Firm is not required to prepare consolidated reporting for prudential purposes.

The FCA framework consists of three ‘Pillars’:

  • Pillar 1 sets out the minimum capital requirements as prescribed by the FCA that meets the firm’s credit, market and operational risk;
  • Pillar 2 is a supervisory assessment requiring firms to assess whether additional capital is required against capital risks not covered by Pillar 1; and
  • Pillar 3 requires public disclosure of specified information about the underlying risk management controls and regulatory capital position.

Disclosure Policy:

The rules in BIPRU 11 set out the provision for Pillar 3 disclosure.

Wellian Investment Solutions is required to carry out an Internal Capital Adequacy Assessment Process (‘ICAAP’) to assess the company’s risks and how it intends to mitigate those risks and how much current and future capital is necessary having considered the mitigating factors.

This disclosure document has been prepared in accordance with the requirements of Pillar 3 as set out in BIPRU 11. Unless otherwise stated, all figures are based upon our last audited financials as at 31 October 2017, our financial year end. Future disclosures will be issued on an annual basis.

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.

These disclosures are published on the Firm’s corporate website. The Disclosures are not subject to external audit except where they are equivalent to those prepared under accounting requirements for inclusion in the Company’s Financial Statements.

Frequency:

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.

Verification:

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.

Publication:

Our firm’s Pillar 3 Disclosure reports are published on our website and/or our annual report and accounts.

Risk Management Policies:

The Wellian Board is responsible for setting and monitoring the Firm’s risk appetite and is responsible for oversight of the risk management function. The Firm’s objective is to have a comprehensive and timely control and disclosure of key risk measures and exposures with regular reports being made available to senior management. There have been no significant changes in the objectives, policies and processes for managing risk since the previous year.

Market Risk: Is the risk that Wellian’s revenue and/or operations might be damaged by adverse market conditions.

Credit Risk: Is the risk of a client or other counterpart defaulting on their obligations. The Firm has some appetite for credit risk. However, the Firm’s exposure to credit risk is low, given that it mainly has exposures only to the group and to reputable financial institutions.

Cash: Cash balances are held with investment grade banks and limits are placed on the total holdings with these institutions. The Company regularly assesses the creditworthiness of these institutions to ensure there are no indicators that would challenge the credit worthiness.

Counterparty Risk: Exposure is managed by a formal credit management policy, limit setting (both volume and credit limits for all accounts), exposure monitoring and exception reporting.

Liquidity Risk: Wellian deems liquidity risk as the failure to have sufficient financial resources to meet its day to day capital and cash flow requirements. To manage this risk the Company seeks to maintain sufficient liquid assets to meet its liabilities as they fall due. The majority of assets are both current and highly liquid – in cash.

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.

Individuals are responsible for identifying the risks surrounding their work, implementing controls over those risks and reporting areas of concern to their line manager.

Operational risk also represents the risk of loss arising from inadequate or failed internal processes, people and systems or from external events. Wellian has a very low tolerance for operational risk. This assessment is based on the following criteria:

  • Corporate Governance. The directors control the operation of the firm by holding frequent (quarterly) Board meetings.
  • Management Information. Directors receive extensive management information including management accounts packs, credit, market and liquidity risk and error reports.
  • People. Due to the small size of the organisation, trends or abnormalities in the resource profile are immediately apparent.
  • Processes. All manual procedures are documented in risk-based procedures.
  • Business Continuity. Wellian has a detailed business continuity plan.
  • Risk Mitigation. Wellian has insurance policies covering: Public and Employers Liability and Directors and Officers Liability.

Capital Resources:

The Company’s objectives for managing capital are as follows:

  • To comply with the capital requirements set by the financial market regulators – FCA;
  • To ensure Wellian is able to operate as a going concern and satisfy any minimum externally imposed capital requirements; and
  • To ensure that the Firm maintains a strong capital base to support the development of its business.

The Firm’s capital adequacy position is managed and monitored in accordance with the prudential requirements of the EU Capital Requirements Directive (CRD IV). Wellian must at all times meet the relevant minimum capital requirements of the Directive. The Firm is required to maintain a prescribed excess of total capital resources over its capital resources requirements. Wellian has established processes and controls in place to monitor and manage its capital adequacy position including a Wind-down Plan. There have been no changes in the capital management policy since the previous year.

Pillar 1 requirement:

In accordance with GENPRU 2.1.45R, our capital requirement has been determined as being the higher of our fixed overhead requirement or the sum of our credit risk capital requirement and our market risk capital requirement. Wellian’s Base Capital Requirement as an IFPRU firm is €125k. Our Fixed Overhead Requirement is calculated at £149k and our Pillar 1 requirement at £149k, these figures are from the latest ICAAP using the audited 31 October 2017 accounts.

Pillar 2:

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 combined with stress testing using scenario analysis. 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.

In addition, we have reviewed the outputs of our risk reviews to quantify any risks identified. This has identified a number of key business risks which we have classified against the risk categories contained in GENPRU 1.2.30R and reviewed the guidance in BIPRU 2.2.61-65.

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 our Pillar 1 requirement. There is a considerable surplus of reserves above the capital resource requirement deemed necessary to cover the risks identified.

Wellian undertakes an internal assessment of capital requirements via the ICAAP on a quarterly basis. The soundness, effectiveness and comprehensiveness of the ICAAP are challenged and approved by the Board. The ICAAP is the process of identification, measurement, management and monitoring of the adequacy and allocation of internal capital.

Financial figures:

The computation of the firm’s ICAAP capital as per latest audited financials as at 31 October 2017 is as below:

Capital and Reserves                                     WIS (£)                                

Called up share capital                                   630,000

Profit and loss account                                   62,507

Total capital resources                                  692,507                                

Remuneration Code:

Wellian falls under the scope of the Remuneration Code set out in SYSC 19A of the FCA Handbook, the aim of which is to ensure that WIS has risk-focused remuneration policies, which are consistent with and promote effective risk management and do not expose WIS to excessive risk. SYSC 19A expands on the general organisational requirements set out in SYSC 4.

Wellian is subject to the BIPRU Remuneration Code. This section provides further information on Wellian’s remuneration policy.

Remuneration Code Staff:

Wellian have in place a Remuneration Policy which identifies the Remuneration Code Staff and maintain a record of staff to whom the BIPRU Remuneration Code applies. This includes the senior management team (Directors) whose actions may have a material impact on a firm’s risk profile. All of Wellian’s 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:

Wellian does not have a Remuneration Committee. The Wellian Board are responsible for the 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 Board will give due regard to best practice and any relevant legal or regulatory requirements including the BIPRU Remuneration Code.

Link Between Pay & Performance:

WIS’s policy on remuneration is designed to attract, retain and motivate high quality employees consistent with delivering high levels of service for all stakeholders. WIS attempts to keep fixed remuneration costs at market levels. The fixed remunerations are reviewed by the Directors each year in line with the setting of the WIS budget and takes into account, inter alia, general wage inflation, remuneration offered by competing roles, the demands of the business, the profitability of the business and changes in individual responsibilities during the year. Competitive salaries form the basis of our firm’s remuneration package.

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”.

The firm only has one business area – investment management.

The firm has 5 Directors but has classified no “risk takers”.

Director remuneration is agreed formally at board meetings and signed off by Harwood Wealth Management Group PLC (HWMG). The CEO and CFO, as part of the HWMG EOB, do not receive any fixed or variable remuneration from Wellian. The Directors believe that this acts as an important risk control as the CEO and CFO are not incentivised to act in a way that recklessly seeks increased revenue or reduced cost for personal reasons. The CEO and CFO are however considered ‘in scope’ in terms of the remuneration policy; this approach was endorsed by the auditors in December 2017 as they are considered ‘employees’ under the definition of SYSC 19.A.3.4.

Wellian have calculated the firm’s aggregate quantitative information on remuneration inclusive of all elements of remuneration. The aggregate quantitative remuneration for Wellian’s Remuneration Code Staff for 31 October 2017 is as follows:

(£)

Fixed                     217,000

Variable               12,000

Total                      229,000

The aggregate remuneration of Remuneration Code Staff was £229,000 as per the audited accounts dated 31 October 2017.