Pillar 3 disclosures
Simply Ethical Financial Services Ltd is authorised and regulated by the Financial Conduct Authority (FCA). Simply Ethical is subject to the FCA’s prudential rules for banks, building societies and investment firms. The rules, which are designed to increase investor protection, require Simply Ethical to assess the adequacy of its capital resources given its risks.
The prudential framework for firms consists of ‘three pillars’:
- Pillar 1 sets out the minimum capital requirements for the firm to cover credit, market and operational risk.
- Pillar 2 requires firms to undertake an overall assessment of their capital adequacy, taking into account the risks to which they are exposed and whether additional capital should be held to cover risks not adequately covered by Pillar 1 requirements. Through an Internal Capital Adequacy Assessment Process (ICAAP), a firm links its risk to capital for internal capital management purposes.
- Pillar 3 compliments Pillars 1 and 2 by requiring firms to disclose information on their capital resources and requirements, governance and risk management framework. It also requires disclosure of a firm’s remuneration policy for certain categories of staff.
This document is designed to meet Simply Ethical’s Pillar 3 obligations. Firms are permitted to omit disclosures if they believe the information is either immaterial or if the information could be regarded as proprietary or confidential.
- BASIS OF DISCLOSURES
Simply Ethical is a discretionary investment manager based in London and incorporated in England and Wales as a private limited company. It provides discretionary investment management services to private clients and financial advisers.
The Firm is a ‘Limited Licence’ firm with a requirement to hold capital of at least €50,000. It is not authorised to hold customers’ assets, including client monies, and does not trade on its own account.
The Pillar 3 disclosures are based on Simply Ethical’s financial position at 31 March 2017.
The disclosure will be published on Simply Ethical website.
The Pillar 3 disclosure is reviewed at least on an annual basis and is approved by the Firm’s Board of Directors. The Firm has considered the need for more frequent publication and has decided this is not necessary in light of the nature and size of the business.
This disclosure is made to explain the risk profile of the Firm. The information included in this document is unaudited and has been produced solely to meet the Pillar 3 disclosure requirements. This disclosure should not be relied upon in making investment decisions in relation to the Firm.
The rules in BIPRU require the disclosure of material information but recognise that certain information must be excluded from the public disclosure document due to it being proprietary or confidential in nature.
The Firm regards information as material in disclosures 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. If the Firm deems certain information to be immaterial, it may be omitted from this disclosure.
The Firm regards information as proprietary if sharing that information with the public would undermine its competitive position. Proprietary information may include information on products or systems which, if shared with competitors, would render the Firm’s investments therein less valuable. Furthermore, the Firm must regard information as confidential if there are obligations to investors or other counterparty relationships binding the Firm to confidentiality.
3. RISK MANAGEMENT FRAMEWORK
Simply Ethical’s management team determines the business strategy and risk appetite. They are also responsible for the design and implementation of a risk management framework.
The management team is composed of the following members:
- Faizal Karbani
- Wasim Khan
- Stuart Hutton
The management team ensures that the company has implemented an effective, ongoing process to identify risks, to measure potential impact and to ensure that those risks are actively managed. Simply Ethical has a cautious attitude to risk and accepts certain risks inherent to the business model. These risks are mitigated and managed through systems and controls. Simply Ethical has established a risk management framework appropriate for the size and nature of its business.
As a general risk management objective, Simply Ethical seeks to limit any adverse effects of risks by developing appropriate policies and processes and to ensure that adequate capital resources are held at all times.
The main risks to which Simply Ethical is exposed are set out below.
Credit risk refers to the likelihood that clients fail to meet their obligations as they fall due. Simply Ethical has limited credit risk from the non-payment of investment management fees because all clients have their fees deducted from their underlying portfolios.
Simply Ethical is not authorised to trade own its account and therefore is not directly exposed to market risk. However, Simply Ethical’s revenue is exposed to market movements and, therefore, market risk. If the assets under management (AUM) fall, the ongoing management fees earned from those AUM will reduce.
Simply Ethical has mitigated some market risk by broadening its client base. Simply Ethical’s revenue also includes initial advisory fees that is not always dependent on the level of AUM.
Operational risk is the risk of loss arising from failed or inadequate internal processes or systems, human error or other factors. The risk is managed by the senior management, who have responsibility for implementing appropriate controls for the business. The compliance function reviews the operation of these controls.
Liquidity risk is the risk that the group may be unable to meet its payment obligations as they fall due. Simply Ethical’s liquidity policy is to maintain sufficient liquid resources to cover any cash flow imbalances in fees received or receivable. Simply Ethical continually monitors income and spending levels to ensure there is always enough liquidity.
A significant loss of large clients would result in reduced fund management revenue. Simply Ethical has mitigated this risk by diversifying its client base and by concentrating on delivering investment performance and client service.
Investment performance risk
Investment performance risk is the risk that clients’ investment portfolios or accounts underperform. Underperformance could result in reduced revenue and redemptions by clients and could also adversely affect the growth of the business. Simply Ethical mitigates this risk by having a robust investment process that also considers investment and market risk as part of investment consideration.
Key personnel risk
Key personnel risk is the risk of losing one of the main partners. This could have an adverse effect on the growth of the business and/or the retention of existing business. Simply Ethical’s ethos and reward structure helps to recruit, develop and retain key personnel. As is common with most small businesses, Simply Ethical does depend on a few key personnel.
Regulatory risk is the risk that a change in the regulations or the interpretation of them will affect Simply Ethical’s business significantly. Regulatory developments are monitored by compliance and the implications of changes are considered and dealt with.
Any risk arising from changes in its business, due to an acute change in business environment such as prolonged economic downturn or significant financial loss arising from changes to the Firm’s business model or strategy. The Firm's long term business plan has been developed with a view to withstand such pressures.
4. REGULATORY CAPITAL
The Firm is a BIPRU limited licence firm and therefore is required to calculate a capital requirement as the higher of:
- The base capital resources requirement (€50,000)
- The variable capital requirement – which is defined as the higher of:
§ The sum of credit risk capital requirement and market risk capital requirement (£0k); and
§ The Fixed Overhead Requirement (£4k).
Simply Ethical’s base capital resource requirement is higher than the variable capital requirement. Simply Ethical’s Pillar 1 capital requirement has, therefore, been determined to be £44,000 (€50,000).
Simply Ethical’s capital position at 31 March 2018 is summarised as follows:
Total capital resources
Total capital requirement
5. REMUNERATION DISCLOSURE
All of Simply Ethical’s key personnel are also shareholders of the company. They benefit from Simply Ethical’s long-term growth. Moreover, they benefit from variable performance related pay that recognise their individual performances. Such rewards take into account a number of different factors including the promotion of sound and effective risk management, the level of risk taking, compliance and building a long-term business. The remuneration policy of Simply Ethical is set by the Board.