Capital Requirements Directive

Pillar 3 Disclosures
Clarion Investment Management Ltd
July 2018

Background

The 2006 Capital Requirements Directive (‘the Directive’) of the European Union establishes 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’). Clarion Investment Management Ltd is authorised and regulated by the Financial Conduct Authority, register number 584493 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 April.

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.

Scope and application of the requirements

Clarion Investment Management Ltd (Clarion) is an independent limited company

Clarion provides investment management services to a range of collective investment schemes.

Governance and risk appetite statement

Clarion seeks to achieve a sustainable profitability that is consistent with its operations and business model. The company accepts that a level of risk must be taken to achieve this goal but recognises that this must be within acceptable parameters and compatible with the skills of its people and its financial strength.

Clarion is governed by a board of Directors which determines the business strategy and associated risks of the company. Each Director has a set of clear responsibilities and the company is organised to allow for the effective control of its activities. The board is tasked with designing and implementing risk controls that recognise the risks being taken so that they can be effectively evaluated, managed and mitigated where possible. Whilst the board of Directors retains this oversight, there are a number of management boards, chaired by a Director, that have responsibility for specific areas of risk. Day-to-day responsibility for managing risk is delegated to the Risk Function within Clarion.

The board meets frequently to consider market conditions, profitability, cash flow, level of reserves and business planning. Risks are managed through policies and procedures, principles and rules (including FCA principles and rules) which are updated as required. Monthly reviews to monitor these risks are carried out and reported to the board on a monthly basis. In addition, the Compliance Officer provides a written report to the board annually. No significant failings or weaknesses were identified during the period in question.

The board has identified that strategic, business, key people, liquidity, reputational (including compliance and legal), operational, market, interest rate and credit risks are the main areas of risk to consider and manage.

The board formally reviews risks and controls annually and this includes the level of capital deemed adequate to cover the risks identified.

Credit risk

Clarion’s bank deposits are held in sterling with UK regulated banks. These banks are reviewed annually to ensure they maintain a sufficiently high credit rating.

The provision for non-payment of fees is governed by our agreement with clients. The only exposure to credit risk would be unpaid income, and the platforms used being unable to settle outstanding fees. Due diligence is conducted and reviewed on these platforms and any possible risks are minimal. Clarion does not operate a debtor book with clients and therefore there is no credit risk in this area.

Liquidity risk

This risk relates to the company being unable to meet its obligations as they fall due.

Clarion finances its activities from its own resources whilst maintaining adequate buffers to cover negative cashflows during periods of stress. It also operates a conservative balance sheet.

Interest rate risk

Clarion is not geared and is not exposed to borrowings. Therefore, the risk from interest rates increasing is immaterial.

Key people risk

The recruitment, loyalty and retention of key individuals is vital to the continued success of Clarion.

The company offers competitive remuneration packages that are appropriate to the individual and recognises and rewards their contributions.

Other benchmarks are also measured, such as staff turnover and morale, and consideration is given to succession planning to ensure that there is cover for key roles.

Operational risk

The majority of our risk management efforts are focused in this area. This considers the entire operation of the business including administrative errors, procedures, functionality of our premises, reliance on third party providers such as IT systems and competency of our employees.

All operational risks which can be identified are logged and categorised on an annual basis. The strategy for dealing with these risks is reviewed and approved by the board of Clarion.

Clarion continuously evaluates its internal controls to ensure that they are operating as designed and are effective in preventing losses or errors. This is achieved by internal checks and monitoring and by the use of third parties to undertake independent reviews.

Business risk

The company avoids high risks and mitigates other risks by effective controls and monitoring.

The risks from a loss of profitability during periods of stress are, in the opinion of the board, covered by adequate reserves to ensure that the company can continue to trade. This is supported by the stress tests that are carried out annually.

Strategic risk

The strategic risk to the company is that it will be unable to execute its chosen strategy, or has the wrong strategy, due to external changes in the business environment or ineffective implementation.

This is monitored on an on-going basis and formally reviewed by the board regularly.

Market and investment performance risk

This risk is the risk that investment markets fail to achieve the required performance.

Clarion is not exposed to any significant market risk in respect of its own funds as its reserves are held in cash with UK regulated banks.

Clarion manages investments on behalf of clients and there is a risk that if performance does not meet expectations, clients may redeem their investments to the detriment of fees and revenues earned by the company. This risk is managed by a robust investment function which conducts detailed research and analyses into investments, including the use of benchmarking before reaching any recommendations. The risk is further mitigated as Clarion manages a number of funds, exposed to more than one market and with different objectives and risk profiles.

The selection and review of investments is overseen by a committee that reports to the board and which meets at least monthly.

Reputational, compliance and legal risk

Compliance to an ethical and sustainable set of principles and rules is at the core of Clarion. These go beyond the current regulatory requirements and involve all our staff to ensure that the reputation of Clarion is enhanced and its name encourages trust.

The company’s governance and risk management starts at board level with the Compliance Officer being a Director.

Capital resources

The internal capital to be held against Capital Resource Requirements (CRR) pillar 1 calculation is £115,000 which represents the fixed overhead requirement (FOR). This 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 figure of £44,000 has been calculated as risk based capital. This is lower than the FOR.

The company held capital and reserves of £713,000 as at 30th April 2017 and this is summarised as follows:

Permanent share capital 75,000
Profit and loss reserves 792,000
Total 867,000
Deductions from intangibles 39,000
Total core tier 1 capital 828,000
Capital resource requirement 115,000
Surplus 713,000