Pillar 3 Disclosures
The 2006 Capital Requirements Directive (‘the Directive’) of the European Union established a revised regulatory capital framework across Europe based on the provisions of the Basel 2 Capital Accord 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’). Margetts is authorised and regulated by the Financial Conduct Authority, register number 208565 and is subject to these regulations.
The new framework consists of three ‘Pillars’:
- Pillar 1 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 document is designed to meet our Pillar 3 obligations and is updated annually shortly after its accounting reference date of 30th September.
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.
No omissions have been made on the grounds that it is immaterial, proprietary or confidential.
Further information on the company, its accounts and remuneration policy can be found on its website or by contacting us on:
Tel: 0121 236 2380
Margetts Fund Management Ltd (Margetts) is controlled by Margetts Holdings Ltd which owns a controlling interest.
Margetts provides investment management, authorised corporate director (ACD) and operator services to a range of OEICs and unit trusts. Margetts also provide discretionary management services to private clients and institutional investors.
The Firm has Risk Management Framework is managed by the Risk Committee (RiCo). The committee and its sub committees identify, assess, manage and monitor risks that the Firm is exposed to.
The committee’s assessment of residual risk should meet the Firm’s risk appetite.
The BoD have established a Risk Appetite for each area of risk that has been defined on the Risk Matrix. There are currently four distinct areas of risk which are each broken down into sub-risk categories. Of these four areas, three have been awarded an appetite of ‘Medium’ and the other an appetite of ‘Low’ (see risk matrix in Appendix 1). Overall the Firm therefore has been deemed to have a Medium Risk Appetite.
The rationale for the scores is recorded in the minutes of the BoD and is reassessed at least annually, or sooner if a material change occurs.
Definitions of Risk Appetite Categories
The firm has established four thresholds within its Risk Appetite to allow the Risk Matrix scores to be mapped.
|Low Appetite||The firm actively seeks to avoid the risk, unless it is incurred through the normal course of business. Controls are used to minimise the exposure where possible.|
|Medium Appetite||The firm accepts the risk as necessary but would expect it to be short-term. It should be supported with the appropriate controls and reporting.|
|High Appetite||The firm accepts the risk in order to achieve its strategic objectives whilst acknowledging the increased threat. Consideration should be given to additional resources and oversight.|
|Very High Appetite||The firm accepts the risk in order to achieve its strategic objectives whilst acknowledging the increased threat, but would expect this to be a short-term arrangement. Consideration should be given to additional resources and oversight.|
The Risk Matrix Process
The firm has established a Risk Committee that oversees all areas of risk. Oversight of the risks is documented in the Risk Matrix which is designed to capture a summary of all key risks faced by the business. It looks at the systems and controls in place to mitigate them and quantifies the residual risk that the firm remains exposed to.
This matrix is reviewed at the quarterly Risk Committee meetings where reports from each of the sub-Risk Committees are considered. Following this review the risk scores in the matrix are reviewed and updated where necessary.
The RiCo have responsibility for quantifying the risks and comparing them to the Firm’s Risk Appetite. A report to the BoD is produced at each meeting which highlights any inconsistencies between the stated Risk Appetite and the quantified Risk exposure. Any material variances are escalated to the BoD without delay.
The areas of Risk that have been identified in the Risk Matrix have been summarised into the following groups:
Business Model Risk
The firm’s main focus is on the intermediary market and therefore, the main risk to the business model comes from anything that detracts from the demand of the intermediary market for its investment products.
Regulatory changes since the financial crisis have led to a significant number of intermediaries consolidating and creating central investment propositions, leading to new investment trends.
The firm manages this risk through an experienced board that drive business strategy by focusing on client needs and investment trends. Demand for fund of fund products has reduced in recent years as intermediaries focus on low cost products and model portfolio strategies. However, opportunities to offer new ACD products and delegated investment schemes has increased.
The firm puts the client at the centre of everything that it does, which has led to a strong reputation for delivering services and products that operate as they are designed to do. This focus on the client reduces the risk that our business model becomes unpopular with intermediaries. The governance and risk frameworks help to manage business model risk.
The Risk Committee have carefully considered the challenges posed by Brexit and concluded that there are no direct risks as the firm operates exclusively within the United Kingdom and has not registered any products or services for sale outside of the United Kingdom. There are significant indirect risks which cannot be mitigated relating to the performance of UK equity, bond and currency markets which could be either detrimental or beneficial depending on the ultimate Brexit outcome. The mandates are considered to be diverse both in asset classes and geographical spread, which will reduce the investment risk from a single or concentrated mix of strategies. The Risk Committee have not been able to reach a consensus regarding the expected outcome of Brexit and therefore no further mitigation strategies have been identified.
Investment Risk is one of the most significant risks faced by the business. The firm’s source of revenue is almost entirely linked to the funds under management. If there is an external shock to the economic system then this can have a detrimental effect on the revenue received. The firm mitigates unsystematic risk through diversification of holdings within each scheme. In addition, some Investment Risk exposure is reduced by diversifying portfolios in different asset classes and currencies, which can help to reduce the risk to the firm of a systematic fall in any one asset class or currency.
Active Management Risk comes from the management of schemes and the opportunity for fund managers to make investment decisions which detract value or make losses. The impact of this risk is likely to be small relative to market risk in the short term, but could cause reputational damage or lead to outflows in the medium to long term. Active management risk is managed in accordance with the Scheme Risk Management Policy, with the main controls being around limits on active positions and constant monitoring of portfolios. The oversight of Investment Risk has been delegated to the IRC.
This area has been separated into the seven Basel II categories which cover the risks created by the day to day activity within the firm. As this area covers such as wide remit, the Risk Committee has delegated oversight of the risks to the IRC, ITCo, CRC, CIA, ManCom and the HSC.
The IRC focus on risks that stem from the investment operations of the Firm, such as NAV Construction and Mandate Adherence.
The ITCo focus on risk from information and systems such as Data Protection, Cyber Security and failure of infrastructure.
The CRC focus on risks that stem from the Transfer Agency role, such as maintaining the investor register, Financial Crime and financial promotions.
The CIA focus on regulatory risks and the effectiveness of the firm’s systems and controls.
The ManCom is charged with considering the impact of business change on all areas of the firm’s operations as well as ensuring that resource levels and ongoing training remain appropriate as the firm grows.
The HSC have been delegated responsibility under the third BASEL II risk of Workplace Safety.
The firm is exposed to both Principle and Agency liquidity risk. The main source of Principle liquidity risk comes via the mechanism for settling client dealing in the funds. All of the current funds have a T+4 settlement period and on settlement date the firm makes payment to the schemes’ depositary. Where there are unsettled client deals the firm takes on the Credit Risk position. Should any deals subsequently require cancelling the money is not returned to the firm until the end of the settlement cycle.
The firm maintains a credit facility of £1m that is available to cover short-term credit positions. It is anticipated that this would only be used where investments were cancelled and the money is being returned from the schemes.
The internal capital to be held against Capital Resource Requirements (CRR) pillar 1 and 2 calculation is £1,737,000. This is the capital resource requirement, is higher than the fixed overhead requirement (FOR), and is the figure that the board has decided should be held as a capital resource and is believed to be sufficient to cover all risks identified.
The company held capital and reserves of £4,669,000 as at 30th September 2019 and this is summarised as follows (‘000s):
|Permanent share capital||273|
|Profit and loss reserves||4,335|
|Deductions for intangibles||–|
|Total core tier 1||4,669|
|Capital resource requirements||1,737|
There is a surplus of reserves above the regulatory capital resource requirements.