Mountains

Pillar 3 Disclosures

Capital Requirements Directive
Margetts Fund Management Ltd

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

e-mail: sales@margetts.com

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.

 

Risk Management

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.

Risk Appetite

The company is considered to be generally risk-averse, which is evidenced by the historically high levels of reserves that have been built up over the life of the business and which are considerably in excess of the Pillar 1 & 2 requirements. The risk appetite for individual risks is summarised in the table below.

Definitions

High Appetite the Firm accepts the risk in order to achieve its strategic objectives
Medium Appetite the Firm accepts the risk as necessary, and it is supported with the appropriate controls
Low Appetite the Firm actively seeks to avoid the risk, other than the risk incurred through the normal course of business. Controls are used to minimise the risk

 

Risk Risk Appetite
Business Model
  • No appetite for conduct risk
  • Low appetite for key person and ability to retain high quality staff risk
  • Medium appetite for business risk taken in order to increase assets under management and achieve strategic objectives
Investment
  • Medium appetite, active managers take investment risk in order to generate returns that meet or exceed client expectations
Operational
  • Medium appetite for operational risk taken to expand the business
  • Low appetite for fraud, EDP, workplace safety, information and IT risk
  • Low appetite for regulatory risk
Liquidity
  • Low appetite for principal liquidity risk
  • Low appetite for agency credit risk

 

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.

For risks that represent a capital requirement consideration is given to the Firm’s ability to accommodate the risks with the available capital resources.

The areas of Risk that have been identified 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 center 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 that want to offer their customers. 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 Risk Committee have not been able to reach a consensus regarding the expected outcome of Brexit and therefore no mitigation strategies have been identified.

Investment Risk

Investment risk is one of the most significant risks faced by the business. Investment risk is broken down into two distinct sources.

Market Risk is one of the main risks that the Firm is exposed to and the most difficult to mitigate. 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 mitigate unsystematic risk through diversification of holdings within each scheme. In addition, some Market 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 Investment Risk Committee.

Operational Risk

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 various sub committees.

The Investment Risk Committee focuses on risks that stem from the investment operations of the Firm, such as Net Asset Value Construction and Mandate Adherence.

The Information Technology Committee focuses on risk from information and systems such as Data Protection, Cyber Security and failure of infrastructure.

The Customer Risk Committee focuses on risks that stem from the Transfer Agency role, such as maintaining the investor register, Financial Crime and financial promotions.

The Compliance and Internal Audit Committee focuses on regulatory risks and the effectiveness of the Firm’s systems and controls.

The Management Committee 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 Health & Safety Committee have been delegated responsibility under the third BASEL II risk of Workplace Safety.

Liquidity Risk

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 internal capital to be held against Capital Resource Requirements (CRR) pillar 1 and 2 calculation is £1,380,000.  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 Firm held capital and reserves of £3,568,000 as at 30th September 2018 and this is summarised as follows ('000s):

Permanent share capital

273

Share premium

61

Profit and loss reserves

3,329

Sub total

3,663

Deductions for intangibles

95

Total core tier 1

3,568

Capital resource requirements

1,380

Surplus

2,188

 

There is a surplus of reserves above the regulatory capital resource requirements.