Pillar 3 Disclosure
and Policy 2018

Introduction

The Capital Requirements Directive (“CRD”) created a regulatory capital framework across Europe governing how much capital financial services firms must hold. In the United Kingdom, CRD 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: sets out the minimum capital requirements that a firm needs to hold
  • Pillar 2: requires the firm to express a view on whether additional capital needs to be held by the firm for risks not covered by Pillar 1. All regulated firms are required to carry out this review as part of the Internal Capital Adequacy Assessment Process (“ICAAP”)
  • Pillar 3: requires a firm to publish details of the risk management, risk exposures and capital position of the firm

Frequency of disclosure

CLAM will make an annual Pillar 3 disclosure. This disclosure is not subject to audit and has been produced solely for the purpose of satisfying Pillar 3 requirement. The disclosure is based on the Company’s position as at 31 December each year. The Board of Directors feel that disclosure on an annual basis is appropriate based on CLAM’s current risk exposures and will review the need to disclose more frequently as part of its internal review process.

BACKGROUND TO THE FIRM

CLAM is a subsidiary of The Canada Life Group (UK) Limited and is part of Great-West Lifeco. CLAM is authorised and regulated by the FCA as an Investment Management Firm. The firm’s activities give it the BIPRU categorisation of a “Limited Licence” and a “BIPRU €50k” firm. CLAM is the appointed investment manager of a number of collective investment funds and manages portfolios on behalf of other companies in the Great-West Lifeco group.

ENTERPRISE Risk management

Enterprise Risk Management (“ERM”) is a framework, implemented by the Board, management, and other personnel, applied in conducting business, making business decisions and establishing risk strategy and appetite across all areas of the business.

The process is designed to articulate and monitor adherence to risk appetite and risk limits, identify, measure, manage, monitor and report risks, identify potential events or emerging issues that may affect CLAM, and provide reasonable assurance regarding the risk consequences of achievement and successful delivery of CLAM’s strategic business objectives.

ERM encompasses aligning risk appetite and strategy, enhancing risk informed decisions, reducing operational surprises and losses, identifying and managing multiple and cross-enterprise risks, seizing appropriate business opportunities and improving deployment of capital.

Governance

CLAM is governed by a Board of Directors. The Board is comprised of directors who have the necessary skill and experience to lead and control the Company. There is a Board Risk Committee which has responsibility for monitoring risk and reporting to the Board. The Executive Management Committee reviews all aspects of CLAM’s business including business strategy, planning, financial results and risk and compliance matters.

A key component of an effective ERM Framework is the Three Lines of Defence model. This introduces a clear delineation of responsibilities for risk management between the business areas, Risk Function and Internal Audit. Such delineation allows appropriate ownership, oversight and assurance. The three separate lines of defence provide the Board with greater comfort that the risk framework is comprehensive, suitable and reliable.

Central to risk management within CLAM is the Risk Function. The Risk Function, headed by the Chief Risk Officer, is responsible for the effective implementation, embedding, monitoring and reporting of all activities within the ERM Framework.

Strategic & Business Risk

CLAM is exposed to strategic and business risk through its business planning and execution of the strategy. Changes to the business environment and the introduction of new regulations will give rise to the need for further planning. CLAM operates in a competitive industry, downturns in the economy and capital markets can lead to a reduction in assets under management and fee income. As part of the strategic planning process the Board assesses the impact of various economic scenarios on the performance of the Company.

The main business risk CLAM faces is expense risk as development of CLAM continues and the services it offers are enhanced. Whilst expenses are controlled through detailed planning and regular monitoring, there is an on-going risk that developing the business and the changes required implementing new initiatives and regulations cost more than anticipated.

CLAM does not employ any staff but utilises staff from CLFIS Limited, a group services company. The staff pension scheme liabilities are recognised at the UK divisional level. On a look through basis CLAM would be responsible for its portion of the pension scheme risk.

Credit risk

CLAM is exposed to credit risk through non-receipt of fee income from clients and exposure to bank deposits and Money Market Funds (“MMFs”). Strong internal controls exist to ensure clients pay within the agreed credit terms. The majority of surplus cash is moved to MMFs, including an internal CLAM managed Liquidity Fund, and bank deposits to provide a greater spread of credit risk and an enhanced return. The external MMFs used are regulated AAA rated funds which under money market fund regulations have to hold a wide spread of underlying investments with limited positions in any one counterparty. Bank deposits can only be placed with regulated credit institutions that are on the group approved list with a minimum credit rating of “A”.

Market risk

CLAM does not hold any investments in its own name other than MMFs which are operated as collective investment funds. Therefore the assets held by CLAM do not directly face market risk.

CLAM is however potentially at risk from a general fall in the market or any specific asset class as this affects the level of fee income that can be earned. The risk is to future earnings rather than a direct loss and therefore is capable of partial mitigation through a reduction in the operating cost base over the longer term. The impact of changes in market value on income levels have been reviewed and are considered not to reduce CLAM’s current capital position.

CLAM manages some portfolios of foreign currency denominated assets where its investment management fee is received in the same currency. The amount received in respect of these fees is therefore exposed to fluctuations in exchange rates.

CLAM consistently maintains sufficient liquid resources to meet its obligations for financial liabilities. CLAM’s liquidity risk is considered to be limited. Cash flow and capital adequacy forecasts are carried out on a regular basis. Surplus cash is placed on short term deposits with approved credit institutions or MMFs to ensure liquidity.

Operational Risk

Operational risk can result from inadequate or failed internal processes, people and systems, from external events or changes in regulations which may adversely affect CLAM. CLAM’s Operational Risk Universe is made up of fraud, infrastructure, legal & regulatory, outsourcing, people and process risks.

CLAM has in place a Risk & Control Self-Assessment process to assure itself that all key operational risks to which it is exposed are effectively identified, assessed and controlled to the appropriate level. The Board, as part of its internal control and governance procedures, regularly review operational risks and their impact.

Conduct risk

CLAM has developed a range of collective investment funds that it actively markets to IFAs, institutional investors and fund management houses. CLAM is therefore exposed to a number of conduct risks such as funds are misrepresented in the sales process, target markets are not clearly defined, products’ designed do not cater for the needs of customers, business decisions are made without consideration for the impact on the customer and misrepresentation or negative social media.

CLAM has an extensive review process before any fund is launched. Investment Governance personnel review the details of the fund, how it will be managed, the documentation and marketing material and are required to provide sign off that all conduct aspects have been appropriately considered. In addition Link Asset Services, as the appointed Authorised Corporate Director of the funds, has its own extensive review and authorisation processes as do the funds epositaries.

Capital resources

As at the 31st December 2018, the capital position of CLAM in relation to its regulatory requirement is as follows:

 

Pillar 1 capital requirement is the greater of
2018
base capital requirement of €50,000
       or
£45,000
the sum of the market risk and the credit risk
       or
£485,000
the fixed overhead requirement £2,788,000
   
Pillar 1 capital requirement (fixed overhead requirement) £2,788,000
Capital Resources  
Share Capital £2,250,000
Audited Reserves £11,088,000
Total Capital resources (All Tier 1) £13,338,000
   
Surplus Capital £10,550,000

 

Remuneration disclosure year ending 31 Dec 2018 View PDF

 

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