Capital Requirements & Risk Management

1 Introduction and Overview

The Capital Requirements Directive ensures consistency in the way in which certain financial firms trading within the European Union must monitor and report on their capital, liquidity, risk management processes and remuneration policies.

Under these requirements, Murray Asset Management (MAM) is required to disclose certain key information and this disclosure document is prepared in accordance with the Capital Requirement Regulation (CRR) Part Eight Disclosure requirements.

2 Scope of disclosures

The CRR rules allow firms to omit certain types of disclosure provided that they are not ‘material’ in nature. Similarly, firms may also omit information that is proprietary or confidential. MAM has made no such omissions in this disclosure document.

3 Basis and frequency of disclosures

The Executive Board of MAM undertakes regular reviews of the firm’s capital position, risk universe and business risk appetite, and the relevant records are updated following each review. Where there are no material changes to the firm’s capital position, risk universe or business risk appetite, this disclosure document will be updated and published at least annually. Should a material change occur, this disclosure document will be updated and published as soon as practicable after the material change has been approved by the Executive Board.

Disclosures will only be subject to ‘external verification’ in terms of the capital information that is taken from the firm’s annual audited accounts in order to provide the information in Part 5 Own Funds – Capital Resources of this disclosure.

4 Risk management

MAM has in place a comprehensive risk management framework which includes reporting, monitoring policies and procedures to identify, assess, manage and mitigate all risks to the business. The following explains this process at a high level.

4.1 MAM’s business risk appetite

MAM has defined its business risk appetite as the level and nature of risks it is prepared to seek, accept or tolerate in the course of achieving its business objectives. The following table illustrates the firm’s current risk appetite, existing status and degree of tolerance in relation to the seven key business risks that it has identified.

Risk-Appetite-table-smaller

 

4.2 Risk identification, management and mitigation

MAM has in place a comprehensive Control Risk Self- Assessment (CRSA) framework by which it identifies, assesses, manages and mitigates all risks to the business. Senior management from the main business areas of the Firm identify, manage and monitor the risks inherent to their activities. This information is captured in a comprehensive Risk Universe document. Oversight and ultimate responsibility for risk management lies with the Executive Board, however the day to day management and oversight is allocated amongst the following senior managers:

  • Chief Investment Officer
  • Operations Director
  • Compliance Director

4.2.1 The Risk Universe

The Risk Universe is a comprehensive document detailing the following:

  • all identified risks to the firm,
  • the position/person responsible for day to day management and oversight of each documented risk,
    a rating for each risk (red, amber, green) used to determine the current status of the mitigating controls and the likelihood of a control failure based upon the controls in place,
  • the controls in place to mitigate the documented risks and where evidence of these controls can be found.

The Risk Universe is reviewed quarterly by the senior managers with day to day management and oversight responsibilities and the results of the review are submitted to the Executive Board for review, challenge and approval.

4.2.2 The risk rating process

Risks are individually rated by assessing the following factors:

  • the strength of existing mitigating controls,
  • the likelihood of a control failure,
  • the regulatory, financial and reputational impact on MAM in the event of a control failure.

Based on these factors, the risks are coded Red, Amber or Green.

Rating Control Strength Description
Red 0% to 25% effective Total control failure has occurred during the review period, or will occur in the future leading to the crystallisation of the risk
Amber 25% to 75% effective There has been a partial control failure, or this is likely based upon the current controls in place but the risk has not fully crystallised.
Green 75% to 100% effective There is little likelihood of a control failure.

4.2.3 The risk reporting and management process

Rating Significance Reporting frequency and focus % Capital set aside
Red Category A – Significant, a control failure has, or is about to, occur. Monthly to Executive Board. Regular progress reports to the Chief Executive. 5% +
Amber Category B – Serious, likelihood of a control failure. Monthly to Executive Board. Regular progress reports to the Chief Executive. 1% – 5%
Green Category C – Control failure unlikely Not reported (outside of the CRSA report) <1%

4.2.4 Senior Management Arrangements

MAM is a ‘non-complex’ firm in regulatory terms. The Chief Executive Officer has overall responsibility for the effective operation of the firm’s business and the risk management policy. The firm’s risk appetite and Risk Universe are reviewed by the Board once approved by the Executive Board.

The Board meets quarterly and is made up of the following individuals:

Role Board Member
Chief Executive Ruthven Gemmell
Director Simon Lloyd
Non-executive Director Hugh Younger
Non-executive Director Carole Hope
Non-executive Director John Scott Moncrieff

The Executive Board meets monthly and is made up of the following individuals:

Role Board Member
Chief Executive Ruthven Gemmell
Director Simon Lloyd
Operations Director Kevin Armstrong
Compliance Director Lisa Hamer

5 Own Funds – Capital Resources

The FCA requires firms to maintain a certain level of capital in accordance with its Capital Requirements. The table below shows a breakdown of the firm’s total available capital for the past two accounting year end dates. Retained earnings and other reserves may only be included where these are from ‘audited profits’ so this does not include any additional funds that have yet to be audited.

Tier 1 Capital resources Total @ 31 March 2015 Total @ 31 March 2014
Core Tier 1 Capital
Ordinary share capital £8,300 £8,000
Share premium £88,250 £75,050
Retained earnings £1,450,802 £1,179,038
Other reserves £40,000 £40,000
Sub-total £1,587,352 £1,302,088
Regulatory deductions (Not incorporated into MAMs balance sheet)
Intangible assets £0 £0
Goodwill £0 £0
Total Tier 1 Capital £1,587,352 £1,302,088

5.1 Capital requirements

In accordance with CRR, MAM is required to continually assess its risks and re-calculate its minimum capital requirement annually after the most recent audited accounts. This is required to ensure that MAM is able to manage its risks effectively and hold sufficient liquid capital in case of a market downturn, unexpected losses or unforeseen costs.

MAM’s minimum capital requirement is the greater of:

  • the Fixed Overhead Requirement and
  • the sum of credit risk, market risk and settlement risk capital requirements.

MAM is subject to the Fixed Overhead Requirement as it is not exposed to the regulatory definition of credit, market or settlement risk.

In addition to the minimum capital requirement, MAM must also quantify additional risks and potential costs to the business via the Internal Capital Adequacy Assessment Process (ICAAP)

The table below details MAM’s own funds (Pillar 1) and ICAAP (Pillar 2) minimum requirements as at the two most recent financial years

Overall capital position 2015 2014
Own Funds Fixed Overheads Requirement (Pillar1) £395,000 £358,000
ICAAP (Pillar 2) Requirement £342,434 £291,068
Total Capital requirement £737,434 £649,068
Total Capital £1,587,352 £1,302,088
Capital Surplus (after Pillar 1 and Pillar 2 deductions) £849,918 £653,020
Liquidity Ratio 215% 200%

5.1.1 ICAAP Pillar 2 requirement

The ICAAP Pillar 2 requirement has been calculated by assessing the amount of funds that should be readily available to cover the cost of the materialisation of key risks to the business. A detailed calculation is retained and must be made available to the FCA on request in the form of an ICAAP Submission Document.

5.2 Approach to calculation of risk exposures

The FCA Rules require that certain key risks are assessed and the costs of mitigation are quantified. MAM is an IFPRU Limited Licence firm and is not subject to the full scope of risk assessment. The following is a summary of the key risks that apply to MAM.

  • Market Risk. Under the Pillar 1 capital calculation, Market Risk does not apply to MAM as it does not trade as principal. The firm’s fee income is linked to market performance and so Market Risk does apply to the ICAAP requirement under Pillar 2. The level of capital deemed to be appropriate to mitigate market risk is determined by stress testing against adverse market conditions.
  • Operational Risk. Under the Pillar 1 capital calculation this does not apply as MAM has adopted the Fixed Overheads Requirement. However, in relation to the ICAAP Pillar 2 requirement, this is considered to be a key risk as it is the risk of loss resulting from inadequate or failed processes, people or systems either internally or externally. The Executive Board of MAM review operational risks on a regular basis and determine an appropriate level of capital to be held in accordance with the outcome of the assessment.
  • Credit risk and dilution risk. MAM holds both its own funds and client money with UK Approved banks Banks (that is, a bank which is supervised by the central bank or other banking regulator of a member state of the Organisation for Economic Co-operation and Development) and considers the risk of failure of the institution to be minimal.

6 Remuneration code disclosure

Remuneration is agreed by the Board and is reviewed annually following completion of the financial year end audit. The Board adheres to the applicable principles of the FCA Remuneration Code.

6.1 Remuneration policy

The firm’s remuneration policy is based on the following key principles:

  • Employees are rewarded on the basis of their performance assessed against agreed objectives. Objectives are set taking into account the firm’s obligations under the FCA’s high level Principles for Business, Conduct Risk and Treating Customers Fairly requirements.
  • In setting remuneration levels and in determining any discretionary bonuses, the firm has regard to its risk appetite and risk management processes to ensure that remuneration structures are consistent with these.
  • Remuneration structures include measures to avoid conflicts of interests between employees and clients.
  • The basis of remuneration is to offer a fair overall package that is in broadly in line with the market. Such remuneration may consist of the following elements:
    • Fixed remuneration – a basic salary plus other benefits, such as pension contributions, death in service and health cover which generally do not vary as a result of the firm or the individual’s performance against objectives.
    • Variable remuneration – discretionary bonuses may be awarded based upon a combination of the firm’s and individual’s performance against agreed objectives.
    • Equity based remuneration – certain key employees may be given the option to buy shares. Eligibility is based upon the individual’s role and their performance as per the scheme rules.

6.2 Code staff

Only employees deemed Code Staff as per the FCAs definition are formally subject to the principles of their Remuneration Code. However, MAM structures remuneration policies for all roles in a suitably proportionate manner to meet the key principles of the Code.

6.3 Control function staff

Variable remuneration for employees in a FCA Controlled Function, such as advisers, investment managers and compliance staff must be linked to both individual and firm objectives and structured so as to avoid conflict with clients and discourage risk taking in any form.

In accordance with Article 450(1)(i) of CRD IV, no individuals received remuneration in excess of 1 million Euro in the last financial year.

7 Conclusion

This document has been prepared in accordance with the CRR disclosure requirements as they apply to MAM.

3 Glenfinlas Street,
Edinburgh
EH3 6AQ T

0131 220 8888

0131 225 7307

[email protected]

murrayasset.co.uk

MAM and Murray Asset Management are trading names of Murray Asset Management UK Ltd which is registered in England
Registered Office: 50 Jermyn Street, London, SW1Y 6LX Registered Number: 09447298
Authorised and regulated by the Financial Conduct Authority