Pillar 3 and BIPRU Remuneration Code Disclosures

Background

This is the Pillar 3 disclosure of Pier Financial Investments Ltd (‘the Firm’) 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 ;

·       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.

Disclosure Policy

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 mis-statement 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 financial statements for the year ended 31^st May 2021.

Frequency

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 financial statements.

Verification

The information contained in this disclosure has not been audited by the Firm’s external auditors and does not constitute any form of financial statement.

Publication

The Firm’s Pillar 3 disclosures are published on its website.

Scope and application of Directive requirements

The disclosures in this document are made in respect of Pier Financial Investments Ltd, a BIPRU firm,

 which provides  discretionary investment management services.

Risk management objectives and policies

The Firm’s risk management policy reflects the FCA requirement that a number of different categories of risk must be managed. These include: liquidity, credit, interest rate, business and operational risks.

1.     Liquidity risk

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.

2.     Credit risk

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 clients is minimal. Credit risk could arise where clients withdraw their funds from a platform, but this is also considered minimal.

The main credit risk for the Firm relates to the failure of platforms, being the risk that a platform does not pay to the Firm the amounts collected on its behalf from clients’ portfolios.  This type of credit risk is mitigated by the following:

·       initial and ongoing due diligence on outsourced suppliers;

·       client agreements are clear on the roles and responsibilities of different parties and as such the Firm is not responsible for matters that are the responsibility of a counterparty;

·       the finance team actively monitors the credit position monthly;

·       the Firm does not tolerate more than one delayed or missed payment before taking formal action to recover.

3.     Interest rate risk

The Firm currently has no exposure to interest rate risk.

4.     Business risk

The Firm’s Pillar 2 business risk principally relates to a potential fall in the value of clients’ assets under management following a market downturn, which would in turn lead to lower management fees, although other risks such as loss of advisers and systems failures are also considered.

To mitigate business risk, various different economic scenarios are regularly analysed to model the impact of economic downturns on the Firm’s financial position. The Firm continuously monitors income and expenditure levels, adjusting its plans accordingly.

5.     Operational risk

Operational risk is defined as the potential risk of financial loss or impairment to reputation resulting from:

·       inadequate or failed internal processes and systems,

·       the actions of people, or

·       external events.

Major sources of operational risk include:

·       outsourcing of operations,

·       IT security,

·       internal and external fraud,

·       implementation of strategic change and

·       regulatory non-compliance.

Operational risk scenarios include:

·       failure of third party platform systems,

·       failure of back office client database system,

·       fraud / financial crime (internal & external),

·       IT failure or cyber-attack,

·       compliance failure eg incorrect asset allocation or portfolio rebalance error,

·       data breach, or

·       a significant business interruption event e.g. the main office cannot be used.

The Firm operates a robust risk management process which is regularly reviewed and updated with details being provided to all staff. The Firm’s Governance Committee is responsible for    periodic reviews and recommending any changes to the Board.

All senior management 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 Governance Committee provides the Board with a half-yearly summary report on all significant risk issues.

6.     Other risks

The Firm operates a simple business model.  Accordingly, many of the specific risks identified by the FCA do not apply.    

Capital resources

Pillar 1 requirement

In accordance with GENPRU 2.1.45R (calculation of variable capital requirement for a BIPRU Firm), the Firm’s Capital Requirement is the higher of the base capital requirement of EUR50,000, the Fixed Overhead Requirement and  the sum of the Credit Risk Capital Requirement and the Market Risk Capital Requirement.

The Fixed Overhead Requirement is the highest of these three requirements and therefore the Pillar 1 capital requirement for Pier Financial Investments Ltd has been assessed to be £130,000 as at 31^st May 2021.

Pillar 2 requirement

The Firm’s overall approach to assessing the adequacy of its internal capital is set out in its ICAAP. The ICAAP process involves separate consideration of risks to its capital combined with stress testing using scenario analysis. The outputs of the risk analysis are reviewed to quantify any risks identified.

The most recent ICAAP review was undertaken as at 31^st May  2021 and  identified a number of key business risks which have been classified against the risk categories contained in GENPRU 1.2.30R and  reviewed with the guidance in BIPRU 2.2.61-65.

Risks were identified and assessed using the following process:

1.     a short list of the most significant risks to which PFI is exposed (primarily operational and reputational risks) was prepared together with the mitigation processes already in place;

2.     consideration was given as to how PFI  would act, and the amount of capital that would be absorbed, in the event that each of the risks identified were to materialise;

3.     consideration was given as to how PFI’s Capital Resource Requirement might alter under the scenarios in (2), and how it might alter in line with  financial projections for the next 3 years;

4.     the ranges of capital required in the scenarios identified was documented and an overall view was formed on the amount and quality of capital which PFI should hold;

5.     in order to determine the amount of capital that would be absorbed in the circumstances detailed in (2), PFI also analysed the impact of a shift in the key risk parameters identified in (1) on their earnings; and

6.     the impact of an economic or industry downturn on PFI’s future earnings taking into account their business plans was also considered.

The level of capital required to cover risks is a function of impact and probability. Impact is assessed by modelling the changes in the income and expenses caused by various potential risks over a 3-year time horizon. Probability is assessed subjectively.

The ICAAP process considers whether additional capital is required to meet the risks which the Firm identifies including the potential cost of closing the Firm down in the unlikely event that this might happen. The Firm’s Pillar 2 capital requirement, which is its own assessment of the minimum amount of capital which it regards as adequate against the risks identified, has been assessed as less than its Pillar 1 requirement; in addition there is a considerable surplus of reserves above the Capital Resource Requirement.

The directors are aware that for the purposes of GENPRU 2.1.9 R, a firm should have systems in place to enable it to be certain whether it has adequate capital resources to comply with the main BIPRU firm Pillar 1 rules at all times.

PFI’s operating philosophy on capital management is to review the position monthly; if a monthly operating loss arises, there would be an immediate assessment of whether this is likely to continue and the extent to which the minimum capital levels are at risk. At that point appropriate steps would be taken to ensure that capital levels are increased if needed, with the first step to be considered being a shareholder capital raising event.

Regulatory capital

The main features of the Firm’s capital resources for regulatory purposes as at 31^st May 2021 are as follows:

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 and this section provides further information on its remuneration policy. In accordance with the FCA’s proportionality rule the Firm is able to apply the Remuneration Code in a way and to the extent which is appropriate to its size, internal organisation and the nature, scope and complexity of its activities.

BIPRU Remuneration Code Staff

The Firm has identified, and maintains 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 the Firm’s risk profile.  All of the Firm’s 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

In view of the proportionality rule the Firm does not need to appoint a Remuneration Committee. The Directors are responsible for remuneration policy including:

·       determining the framework and policy for remuneration and ensuring it does not encourage undue risk-taking and addresses any potential conflicts of interest;

·       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;

·       giving due regard to best practice and any relevant legal or regulatory requirements including the BIPRU Remuneration Code; and

·       reviewing the policy at least annually to take into account any external or internal changes

Link between Pay and Performance

Director and senior management remuneration is agreed formally at board meetings. The link between pay and performance is inevitable in a small firm, but the Firm’s risk averse strategy and  risk management systems aim to mitigate any risks.

Quantitative Information on Remuneration

The FCA rules require certain Firms to disclose aggregate information on remuneration in respect of its BIPRU Remuneration Code Staff broken down by business area, senior management and other Code Staff, including “risk takers”. 

The Firm only has one business area – investment management.

The Firm had 5 Directors including a Non-Executive Director as at the 31^st May 2021, but no “risk takers”.

The Firm has concluded that it is not required to publish quantitative remuneration data relating to Code Staff on grounds of proportionality in view of its size and the complexity of its activities and internal organisation.

Dated 31^st August 2021