FCA Pillar 3 Disclosures

for the year ended 31 December 2016

Introduction

The Capital Requirements Directive (‘the Directive’) of the European Union establishes a revised regulatory capital framework across Europe 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’).

The FCA framework consists of three ‘Pillars’:

  • Pillar 1 sets out the minimum capital amount that meets the firm’s credit, market and operational risk capital requirement.
  • Pillar 2 requires the firm to assess whether its capital reserves, processes, strategies and systems are adequate to meet pillar 1 requirements and further determine whether it should apply additional capital, processes, strategies or systems to cover any other risks that it may be exposed to.
  • Pillar 3 requires disclosure of specified information about the underlying risk management controls and capital position to encourage market discipline.

The rules in BIPRU 11 set out the provision for Pillar 3 disclosure. This document is designed to meet our Pillar 3 obligations.

The Pillar 3 disclosure document has been prepared by Global Systematic Investors LLP (“The Firm”) in accordance withthe requirements of BIPRU 11 and is verified by the Management Committee. Unless otherwise stated, all figures are as at the financial year-end.

Pillar 3 disclosures will be issued on an annual basis after the year end and published as soon as practical with the annual accounts.

We (as the designated members of the Firm) 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 for the purpose of making economic decisions about the firm.

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.

We have made no omissions on the grounds that it is immaterial, proprietary or confidential.

Scope and application of the requirements

Global Systematic Investors LLP is authorised and regulated by the FCA and as such is subject to minimum regulatory capital requirements. The Firm is categorised as a “Limited Licence Firm” by the FCA for capital purposes.

It is an investment management firm and as such has no trading book exposures.

The Firm is not a member of a group and so is not required to prepare consolidated reporting for prudential purposes.

Risk management

The Firm has established a risk management process in order to ensure that it has effective systems and controls in place to identify, monitor and manage risks arising in the business. The risk management process is overseen by the Compliance Officer, with the Management Committee taking overall responsibility for this process and the fundamental risk appetite of the firm. The Compliance officer has responsibility for the implementation and enforcement of the Firm’s risk principles.

Senior Management meet on a regular basis and discuss current projections for profitability, cash flow, regulatory capital management, business planning and risk management. Senior Management engage in the Firm’s risks though a framework of policy and procedures having regard to the relevant laws, standards, principles and rules (including FCA principles and rules) with the aim to operate a defined and transparent risk management framework. These policies and procedures are updated as required.

The Senior Management team has identified that business, operational, market and credit risks are the main areas of risk to which the Firm is exposed. Annually the Senior Management team formally review the risks, controls and other risk mitigation arrangements and assess their effectiveness.

A formal update on operational matters is provided to the Management Committee on a regular basis. Management accounts demonstrate continued adequacy of the firm’s regulatory capital are reviewed on a regular basis.

Appropriate action is taken where risks are identified which fall outside of the Firm’s tolerance levels or where the need for remedial action is required in respect of identified weaknesses in the firm’s mitigating controls.

Business Risks

Specific risks applicable to the Firm come under the headings of business, operational, credit and market risks.

Business risk

The Firm’s revenue is reliant on the performance of the existing funds under management and its ability to launch new funds/obtain new mandates. As such, the risk posed to the firm relates to underperformance resulting in a decline in revenue and adverse market conditions hindering the launch of new funds and ultimately the risk of redemptions from the funds managed by the firm. This risk is mitigated by ensuring that the firm maintains appropriate levels of capital which will continue to cover all the expenses of the business.

Operational risk

The Firm places strong reliance on the operational procedures and controls that it has in place in order to mitigate risk and seeks to ensure that all personnel are aware of their responsibilities in this respect.

The Firm has identified a number of key operational risks to manage. These relate to e.g. systems failure, failure of a third party provider, key man, potential for serious regulatory breaches, market abuse. Appropriate polices are in place to mitigate these risks.

Credit risk

The Firm is exposed to credit risk in respect of its debtors, commissions, investment management fees billed and cash held on deposit.

The number of credit exposures relating to the Firm’s investment management clients is limited. The Firm considers that there is little risk of default by its clients. All bank accounts are held with large international credit institutions.

Given the nature of the Firm’s exposures, no specific policy for hedging and mitigating credit risk is in place. The Firm uses the simplified standardised approach detailed in BIPRU 3.5.5 of the FCA Handbook when calculating risk weighted exposures of 1.6% (Cash in Bank) and 8% in respect of its other assets.

Credit risk summary

Credit risk exposure Risk weighting Risk weighted
exposure
Cash in the bank 1.6% or 8% subject to institution
and FCA rules
£1,595
Inter-company 8% £-
Trade debtor 8% £-
Prepayments and accrued income 8% £3,399
Other debtors (<1 year) 8% £38,835
Other debtors (>1 year) 8% £176
Other assets 8% £168

Market risk

The Firm takes no market risk other than foreign exchange risk in respect of its accounts receivable and cash balances held in currencies other than GBP.

Since the Firm takes no trading book positions on its balance sheet, it has only indirect market risk exposure. The Firm’s foreign exchange risk therefore would only arise in respect of its accounts receivable and cash balances held in currencies other than GBP.

No specific strategies are adopted in order to mitigate the risk of currency fluctuations.

Positions in foreign currencies are monitored on a regular basis and reported to senior management via the management accounts.

The Firm calculates its foreign exchange risk by reference to the rules in BIPRU 7.5.1 of the FCA Handbook and applies an 8% risk factor to its foreign exchange exposure.

Market risk summary

Credit risk exposure Risk weighting Risk weighted
exposure
Cash in the bank 1.6% or 8% subject to institution
and FCA rules
£1,595

Liquidity risk

The Firm is required to maintain sufficient liquidity to ensure that there is no significant risk that its liabilities cannot be met as they fall due or to ensure that it can secure additional financial resources in the event of a stress scenario.

The Firm retains an amount it considers suitable for providing sufficient liquidity to meet the working capital requirements under normal business conditions. The firm has always had sufficient liquidity within the business to meet its obligations and there are no perceived threats to this given the cash deposits its holds. The cash position of the firm is monitored by the Management Committee on a regular basis, and the Firm would be able to call on its partners for further capital as required.

Regulatory capital

The Firm is a Limited Liability Partnership and its capital arrangements are established in its Partnership deed. Its capital is summarised as follows:

31/12/2016
£
Members’ capital classified as equity 759,639
Total capital 759,639

The main features of the Firm’s capital resources for regulatory purposes are as follows:

31/12/2016
£
Tier 1 capital* 759,639
Tier 2 capital
Tier 3 capital**
Deductions from Tiers 1 and 2 (165,781)
Total capital resources 593,858
*No hybrid tier one capital is held
**Note: Tier 3 capital is to be removed under the CRD IV

Our Firm is small with a simple operational infrastructure. Its market risk is limited to foreign exchange risk on its accounts receivable in foreign currency, and credit risk from management fees receivable from the funds under its management. The Firm follows the standardised approach to market risk and the simplified standard approach to credit risk.
Limited Licence – The Firm is subject to the Fixed Overhead Requirement and is not required to calculate an operational risk capital charge though it considers this as part of its process to identify the level of risk based capital required.

As discussed above the firm is a limited licence firm and as such its capital requirements are:

  • For a limited licence firm that is a UCITS Investment Firm:
    €50,000; and
  • The sum of the market & credit risk requirements; or
  • The fixed overheads requirement (‘FOR’) which is essentially 25% of the firm’s operating expenses less certain variable costs.

We have not identified credit risk exposure classes or the minimum capital requirements for market risk as we believe that they are immaterial.

The FOR is calculated, in accordance with FCA rules, based on the firm’s previous years audited expenditure. The firm has adopted the simplified standardised approach to credit and market risk and the above figures have been produced on that basis. The firm is not subject to an operational risk requirement.

It is the Firm’s policy that the Fixed Overhead Requirement establishes its capital requirements. The Firm’s FOR of £41,105 was calculated based on 25% of the annual fixed expenditure as per the audited accounts for the year ended 31 December 2015. This is not expected to materially change in the future and the Firm has adequate resources as at 31 December 2016 to meet this requirement.

Capital requirement

The Firm’s Pillar 1 capital requirement has been determined by reference to the sum of the credit and market risk capital requirements. This is calculated in accordance with the FCA’s General Prudential Sourcebook (“GENPRU”) at GENPRU 2.1.51 and 2.1.52. The requirement is based on the sum of market and credit risk since this exceeds the total of the FOR capital requirement it faces and also exceeds its base capital requirement of €50,000.

The FOR is based on annual expenses net of variable costs deducted, which include discretionary bonuses paid to staff, allowable commission and fees and other variable expenditure which has been deducted. The Firm monitors its expenditure on a quarterly basis and takes into account any material fluctuations in order to determine whether the FOR remains appropriate to the size and nature of the business or whether any adjustment needs to be made intra-year.

This is monitored by the Management Committee on a quarterly basis.

UK Financial Reporting Council’s Stewardship Code

Under Rule 2.2 of the FCA’s Conduct of Business Sourcebook (COBS), Global Systematic Investors LLP is required to include on this website a disclosure about the nature of its commitment to the UK Financial Reporting Council’s Stewardship Code (the “Code”) or, where it does not commit to the Code, its alternative investment strategy.

Global Systematic Investors LLP’s investment strategy is to deliver highly diversified exposure to broad factors in equity markets with a focus on mid-small cap stocks. Therefore the Firm will generally have small positions in a very large number of securities across the regions it invests in. The individual stakes that the Firm has in a given company will therefore be small and not significant. Consequently, while the Firm supports the objectives that underlie the Code, the provisions of the Code are not relevant to the type of trading currently undertaken by the Firm.

If the Firm’s investment strategy changes in such a manner that the provisions of the Code become relevant, the Firm will amend this disclosure accordingly.

Remuneration Code disclosure

Global Systematic Investors LLP (“the Firm”) is authorised and regulated by the Financial Conduct Authority as a Limited Licence Firm and so, it is subject to FCA Rules on remuneration. These are contained in the FCA’s Remuneration Code located in the SYSC Sourcebook of the FCA’s Handbook. The Remuneration Code (“the RemCode”) covers an individual’s total remuneration, fixed and variable. The Firm incentivises staff through a combination of the two.

The Firm’s business is to provide investment management services to its clients.

  1. Our policy is designed to ensure that we comply with the RemCode and our compensation arrangements: are consistent with and promote sound and effective risk management;
  2. do not encourage excessive risk taking;
  3. include measures to avoid conflicts of interest; and
  4. are in line with the Firm’s business strategy, objectives, values and long-term interests.

Proportionality

Enshrined in the European remuneration provisions is the principle of proportionality. The FCA have sought to apply proportionality in the first instance by categorising firms into 4 tiers. The Firm falls within the FCA’s fourth proportionality tier and as such this disclosure is made in line with the requirements for a Tier 3/4 Firm.

Application of the requirements

We are required to disclose certain information on at least an annual basis regarding our Remuneration policy and practices for those staff whose professional activities have a material impact on the risk profile of the firm. Our disclosure is made in accordance with our size, internal organisation and the nature, scope and complexity of our activities.

1. Summary of information on the decision-making process used for determining the firm’s remuneration policy including use of external benchmarking consultants where relevant.

  • The Firm’s policy has been agreed by the Management Committee in line with the RemCode principles laid down by the FCA.
  • Due to the size, nature and complexity of the Firm, we are not required to appoint an independent remuneration committee.
  • The Firm’s policy will be reviewed as part of annual process and procedures, or following a significant change to the business requiring an update to its internal capital adequacy assessment.
    o Investment Management Firm – The Firm’s ability to pay bonus is based on the performance of the Firm overall and derived after its fund’s managed returns have been calculated by third party administrators.
  • There is no involvement of the Firm in deriving asset prices as the majority of assets held are in liquid securities and prices in funds managed by the Firm are independently provided by the Administrator.

2. Summary of how the firm links between pay and performance (see Remuneration Code).

  • Individuals are rewarded based on their contribution to the overall strategy of the business.
    a. Investment Strategy and Research
    b. Investment Trading
    c. Sales & Marketing
    d. Operations
  • Other factors such as performance, reliability, effectiveness of controls, business development and contribution to the business are taken into account when assessing the performance of the senior staff responsible for the infrastructure of the firm.

3. Aggregate quantitative information on remuneration broken down by significant business division

Business Area Aggregate compensation expense for prior fiscal year
Investment Management and Trading NA
Non-Trading NA

4. Aggregate quantitative information on remuneration, for staff whose actions have a material impact on the risk profile of the firm.

Code Staff Aggregate compensation expense in 2016
Senior Management: NA
Others (If applicable) NA

5. Amounts of remuneration for the financial year and the number of beneficiaries (Tier 3 only)

Code Staff (Number) 3
Total amounts of remuneration
Fixed Remuneration Nil
Variable Remuneration Nil

We may omit required disclosures where we believe that the information could be regarded as prejudicial to the UK or other national transposition of Directive 95/46/EC of the European Parliament and of the Council of 24 October 1995 on the protection of individuals with regard to the processing of personal data and on the free movement of such data.

We have made no omissions on the grounds of data protection.

A note on materiality

A firm must regard 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 purposes of making economic decisions.

A firm must regard information as proprietary information if the sharing of 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 investment in them less valuable.

A firm must regard information as confidential if there are obligations to customers or other counterparty relationships binding the firm to confidentiality.

CEBS has stated that it is unlikely that the disclosure of information relating to remuneration would be confidential or proprietary for firms that have been allowed to aggregate the information due to proportionality. Where there is a limited number of Code Staff then the firm may consider such omissions.

See FCA Templates on Remuneration Code and FAQ for further consideration.

 

This page does not form part of the statutory financial statements