Pillar 3 Disclosures

Epworth Investment Management Limited (“Epworth” or “the firm”)
Pillar 3 disclosures as at 31 August 2017

The following information is provided pursuant to Pillar 3 disclosure rules as laid out by the Financial Conduct Authority (“FCA”) in section 11 of the Prudential Sourcebook for Banks, Building Societies and Investment Firms (“BIPRU”).

Background

The FCA has implemented a prudential framework for investment firms through changes to the FSA Handbook of Rules and Guidance (specifically in BIPRU). The framework consists of three “Pillars”:

Pillar 1 sets out the minimum capital requirements;

Pillar 2 is an assessment of whether additional capital is needed over and above that determined under Pillar 1; and

Pillar 3 requires the Firm to publish its objectives and policies in relation to risk management, and information on its risk exposures and capital resources as well as disclosures with respect to FCA’s “Remuneration Code”.

The rules provide that disclosures are only required where the information would be considered material to a user relying on that information to make economic decisions. Epworth as a CPMI Firm is a “BIPRU €125,000 Limited Licence Firm”, has permission to deal with retail and professional clients but is not authorised to hold client money or assets. The Firm has permissions to provide advisory, arranging services as well as managing a UCITs, an authorised AIF and portfolios (as part of its MiFID business). As a consequence the main risks facing the Firm relate to its operations and its business environment. Whilst the Firm does have some exposure to credit and market risk, this is in relation to client assets rather than the Firm’s own capital.

The disclosures below are the required Pillar 3 disclosures and apply solely to the Firm.

Although the Senior Management of Epworth believes that the risk management framework outlined herein is appropriate for the size and complexity of the Firm and that the Firm’s capital is adequate to meet the risks assessed, it can not guarantee that this will actually be the case in the event any particular risk arises. There will always be some unlikely risks with unusually high impact which may require additional capital should they arise.

Risk management

The Firm operates a risk management framework that sets out the responsibilities and escalation procedures for the identification, monitoring, and management of operational and business risks. Capital planning takes these identified risks into account.

As part of its control and corporate governance arrangements, the Board is responsible to collectively consider the individual risks and mitigating controls as identified via the Firm’s “Risk Assessment Statement” and to ensure that all identified risks are adequately mitigated. Specific personnel are assigned responsibility for the risks across the Firm.

Where risks are identified which fall outside of the Firm’s risk tolerance levels, or where the need for remedial action is identified in respect of identified weaknesses in the Firm’s mitigating controls, then actions are taken to improve the control framework.

Senior Management of Epworth has determined that the Firm’s business strategy and risk appetite together with the design and implementation of a risk management framework are adequate for the Firm’s business model.

The Firm’s Chief Executive Officer takes overall responsibility, with the assistance of all the other Directors for identifying material risks to the Firm and putting appropriate mitigating controls in place.

The specific types of risks faced by the Firm are;

  • Strategic risk
  • Regulatory risk
  • Governance & Management risk
  • Operational risk
  • IT/systems risk
  • Financial risk
  • Investment risk (including counter-party, credit & market risk)
  • Reputational risk
  • Key person risk
  • Health & Safety

The Firm has embarked on a new 5 year plan requiring investment, resource acquisition and new product development. Strategic risk reflects the potential for the failure of the Firm’s strategic plan leaving accelerated costs and incomplete execution. Governance & Management risk highlight communication and planning challenges to the execution of this strategic plan as well as potential failings in the controls surrounding the day to day conduct of the Firm.

Regulatory risks reflect the rapidly changing framework in which the Firm operates as it strives to meet the structuring, conduct and reporting changes that are driven by domestic and European legislation. Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events, including legal risk. The Firm seeks to minimise operational risk through a controls framework, particularly when engaging in new business ventures or trading new products. With the expansion demanded by the Firm’s strategic plan the mitigation of Operational risk has become a key focus of the Directors. The Firm considers risks which may impact the Firm directly or indirectly.

IT & Systems risks reflect the consequences of both hardware and software failure and the need for the Firm to have appropriate back up arrangements. Financial risks contemplate poor accounting controls, inadequate insurance arrangements and cash flow and funding issues to meet the Firm’s long-term commitments. Investment risk arises from external sources such as changes to the economic environment or one-off economic shocks, and also from internal sources such as poor decisions or suboptimal allocation of capital resulting in poor performance and damage to the Firm’s reputation. A key Investment risk is the loss of one or more significant clients or unit holders.

An extreme scenario has been modelled in order to assess the impact of adverse economic conditions combined with client loss on our financial position. This enables the Firm to monitor its investment risk and to assist in its capital planning.

The Firm is not exposed to credit risk other than in respect of fees receivable and cash held on deposit at large international credit and regulated institutions. Fees are drawn down monthly on activity in the month, received by the Firm in arrears. Consequently the Firm has a limited number of credit exposures in respect of which it uses the simplified standardised approach when calculating risk weighted exposures, in accordance with the provisions of BIPRU 3.5. Credit risk is not considered to be material for the purposes of this disclosure. Counterparty risk is largely substitution risk as all market transactions are against payment.

Market risk is confined to the value of client assets. There is market risk as client assets tend to have a high beta correlation but it is controlled by the lack of any leverage, short-selling or stock lending in client portfolios. For its own account the Firm is not exposed to market risk other than foreign exchange risk in respect of its accounts receivable and cash balances held in currencies other than GBP. The Firm calculates its foreign exchange risk by reference to the provisions of BIPRU 7.5. Foreign exchange risk is not considered to be material for the purposes of this disclosure.

The Firm arguably has a higher Reputational risk than our peers as its business strategy is based around our Christian ethics approach. An inadvertent breach of our ethical investment restrictions or poor conduct by a member of the Executive could have a disproportionate response from our clients and suppliers

Key person risk has recently been mitigated by the appointment of a new Chief Executive Officer and more overt use of the Executive committee. There have also been several senior level hires. This Executive is also very aware of its responsibilities for the Health & Safety of the Firm’s staff and has taken appropriate steps to mitigate these risks.

Capital adequacy

As at 31 August 2017, the Firm’s regulatory capital resources of £353K were made up as follows:

 £,000
Permanent share capital25
Capital redemption reserve75
Audited reserves263
Unaudited reserves7
Tier 1 regulatory capital370

Epworth’s Pillar 1 capital requirement is calculated in accordance with the General Prudential Sourcebook (“GENPRU”) as the higher of the Fixed Overheads Requirement (“FOR”), the aggregate of market and credit risk requirements, or the base capital requirement of €125,000. The Firm’s credit risk is calculated as per the “Standardised Approach (BIPRU 3.4)” and market risk in line with BIPRU 7.5. As at 31 August 2017 the Firm’s Pillar 1 requirement was £151K.

The Firm takes a prudent approach to the management of its capital base and monitors its expenditure on a monthly basis in order to take account of any material fluctuations which may require it’s FOR to be reassessed. The Firm ensures that at all times it has sufficient capital to meet its FOR and formally verifies this on a quarterly basis.

Under Pillar 2 of the FSA’s capital requirements, Epworth has undertaken an assessment of the adequacy of capital based upon all the risks to which the business is exposed (“ICAAP”). This analysis concluded that the Firm required no additional capital against the identified key residual risks.

The Firm has concluded that as at 31 August 2017, the applicable internal regulatory capital required was the higher of its FOR and the Pillar 2 (NIL) calculation and that its financial resources are more than adequate to support its operations over the next year, and no additional capital injections are necessary.

Code Staff remuneration

Epworth is required under Chapter 11 of BIPRU to disclose, inter-alia, its approach vis-à-vis linking remuneration to risk. By virtue of its status as a BIPRU €125K limited licence firm under the Capital Requirements Directive the Firm is considered to be a ‘Proportionality Tier 3′ firm and consequently is permitted to apply the rules set out BIPRU 11 on a proportionate basis.

Epworth does not maintain a Remuneration Committee and all remuneration decisions are taken by the Epworth Board, the Firm’s governing body. Salaries are benchmarked against the industry practice. Epworth’s compensation arrangements are designed to keep key investment professionals’ interests aligned with those of investors, encourage long term planning and minimise staff turnover. Remuneration of the Firm’s employees comprises a basic salary and an annual discretionary bonus. The bonus process involves annual staff reviews with clearly documented objectives and performance appraisals for each employee.

Risk is considered when setting goals and objectives for staff and the Board when making decisions on individual remuneration and policy in general. Any variable remuneration arrangements are very much linked to performance. The firm does not make any guaranteed bonus commitments.

The Firm’s board has identified 12 persons as ‘Code staff’, being persons holding significant influence roles, investment and other senior managers whose actions could have a material impact on the risk profile of the Firm.

All salaries are paid through the Central Finance Board of the Methodist Church (“CFB”) and a proportion of these are recharged to Epworth. The recharge is based on a formula based on relative funds under management of CFB and Epworth. Currently, about 17% of the overall payroll cost is recharged from CFB to Epworth.

In the year to 31 August 2017, the aggregate fixed remuneration paid through CFB for Epworth Code Staff was £1,234K of which £210K was recharged to Epworth. There were no payments for variable remuneration.
This disclosure was approved by the Epworth Board on 14 November 2017.