Pillar 3 & Remuneration Code Disclosures
This is the Pillar 3 disclosure made in accordance with the UK Financial Conduct Authority (FCA) Prudential Sourcebook for Banks, Building Societies and Investment Firms (‘BIPRU’).
The European Capital Requirements Directive (CRD) created a regulatory capital framework consisting of three ‘pillars’ namely;
Pillar 1 – which sets out the minimum capital requirements that firms are required to meet for;
Pillar 2 – which requires firms to take a view on whether additional capital should be held against capital risks not covered by Pillar 1; and
Pillar 3 - which requires firms to publish certain details of its risks, capital and risk management process.
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.
Unless stated as otherwise, all figures contained in this disclosure are based on the firm’s audited annual reports for the year ending 31st March 2021.
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.
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.
Our firm’s Pillar 3 Disclosure reports are published on our website.
Scope and application of Directive requirements
The disclosures in this document are made in respect of A&J Wealth Management Ltd. which provides financial advice and discretionary investment management services.
The firm is a BIPRU firm.
Risk management objectives and policies
Our risk management policy reflects the FCA requirement that we must manage a number of different categories of risk. These include: liquidity, credit, market, interest rate, business and operational risks.
The firm manages all cash and borrowing requirements to maximise potential interest income whilst ensuring the firm has sufficient liquid resources to meet the continued operating needs of the business. This is supported by a robust budgeting and forecasting process which has the full involvement of the senior management team.
The main credit risk for the firm relates to advisory fees, being the risk that a client does not pay amounts due for services provided. This risk is mitigated by the low number of clients in respect of which amounts are due at any one time. The risk of non payment is also reduced due to the nature of the clients as they i.e. they are typically wealthy individuals.
The firm’s revenues include annual management charges received from clients based on a percentage of client assets under management. These charges are made directly to the clients’ portfolios, and therefore the credit risk relating to this income is minimal.
Interest rate risk
The firm does not have any bank loans.
The firm’s Pillar 2 business risk assessment principally takes the form of a fall in assets under management following a market downturn that leads to lower management fees, although other risks such as loss of advisers and systems failures are also considered. To mitigate our business risk, we regularly analyse various different economic scenarios to model the impact of economic downturns on our financial position.
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.
All senior management will bear responsibility for internal controls and the management of business risk as part of their accountability 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.
The Compliance Oversight will provide the board with regular reports on all significant risk issues.
The firm operates a simple business model. Accordingly, many of the specific risks identified by the FCA do not apply.
Pillar 1 requirement
In accordance with GENPRU 2.1.45R (calculation of variable capital requirement for a BIPRU firm), our capital requirement has been determined as being our fixed overhead requirement and not the sum of our credit risk capital requirement and our market risk capital requirement.
The Pillar 1 capital requirement for A&J Wealth Management was £503,280 as at 31st March 2021.
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.
The main features of A&J Wealth Management Limited’s capital resources for regulatory purposes, as at 31st March 2021 are as follows:
Tier 1 capital (called up share capital, share premium account, profit and loss account, externally verified interim net profits)
Total of tier 2 and tier 3 capital (broadly long and short term subordinated loans)
Deductions from tier 1 and tier 2 capital
Total capital resources, net of deductions
The firm holds regulatory capital in accordance with the Capital Requirements Directive. All such capital is classified as Tier 1 capital and is therefore of the highest quality.
Remuneration Code Disclosure
The firm is subject to the BIPRU Remuneration Code. This section provides further information on our remuneration policy.
BIPRU Remuneration Code Staff
We have identified, and maintain a record of, 'BIPRU Remuneration Code Staff' – i.e. staff to whom the BIPRU Remuneration Code applies. This includes senior management and members of staff whose actions may have a material impact on a firm's risk profile. All of our 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
A&J Wealth Management Ltd. has not a Remuneration Committee and is therefore responsible for our 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 Directors/Partners will give due regard to best practice and any relevant legal or regulatory requirements including the BIPRU Remuneration Code.
Link Between Pay & Performance
Competitive salaries form the basis of our firm’s remuneration package. In addition there is an element of variable pay for all staff which is based on firm wide and individual performance. Whilst most of the variable reward components are awarded to employees across the firm, the structure, balance and amounts may differ. Variable remuneration is considerably reduced where subdued or negative financial performance of the firm occurs.
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 BIPRU Remuneration Code requires certain disclosures to be made about the remuneration of BIPRU Remuneration Code Staff’ broken down by business area, senior management and other Code Staff, risk takers” – ie. Staff whose professional activities have a material impact on a firm’s risk profile”. The firm’s core business is the provision of financial advice and discretionary investment management services. The firm has four Directors but no risk takers.
The link between performance and pay is inevitable in a small/medium sized firm but the firm’s risk averse strategy and robust risk management systems mitigate any risk.