Pillar 3 Disclosure: 31 December 2011
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 companies must maintain. In the United Kingdom, the Directive has been implemented by the Financial Services Authority (‘FSA’) in its regulations through the General Prudential Sourcebook (‘GENPRU’) and the Prudential Sourcebook for Banks, Building Societies and Investment Firms (‘BIPRU’).
The FSA framework consists of three ‘Pillars’:
- Pillar 1 sets out the minimum capital amount that meets the Company’s credit, market and operational risk;
- Pillar 2 requires the Company to assess whether its Pillar 1 capital is adequate to meet its risks and is subject to annual review by the FSA; 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.
Note that, 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.
We have made no omissions on the grounds that it is immaterial, proprietary or confidential.
Scope and application of the requirements
Frontier Investment Management LLP (“the Company”) is authorised and regulated by the Financial Services Authority and as such is subject to minimum regulatory capital requirements. The Company is categorised as a limited licence Company by the FSA for capital purposes. It is an investment management company and as such has no trading book exposures.
Whilst the Company is a member of a group it is not required to prepare consolidated reporting for prudential purposes. The Company is a subsidiary undertaking of Frontier Investment Services Ltd which in turn is a subsidiary undertaking of Frontier Capital Management (Jersey) Ltd. At the present time substantially all of the trading activity of the group is performed by the Company, and neither of the other companies listed hold material interests, assets or liabilities with third parties. We foresee no impediments to the prompt transfer of capital between group entities should the need arise
The Company is governed by its members (“Principals”) who determine its business strategy and risk appetite. They are also responsible for establishing and maintaining the Company’s governance arrangements along with designing and implementing a risk management framework that recognises the risks that the business faces.
The Principals also determine how the risk our business faces may be mitigated and assess on an ongoing basis the arrangements to manage those risks. The Principals meet on a regular basis and discuss current projections for profitability, cash flow, regulatory capital management, and business planning and risk management. The Principals manage the Company’s risks and business though a framework of policy and procedures having regard to relevant laws, standards, principles and rules (including FSA principles and rules) with the aim to operate a defined and transparent risk management framework. These policies and procedures are updated as required.
The Principals have identified that business, operational, market and credit risks are the main areas of risk to which the Company is exposed. Annually the Principals formally review their risks, controls and other risk mitigation arrangements and assess their effectiveness. Where the Principals identify material risks they consider the financial impact of these risks as part of our business planning and capital management and conclude whether the amount of regulatory capital is adequate.
The Company is a Limited Liability Partnership and its capital arrangements are established in its Partnership deed. Its capital at 31 December 2011 is summarised as follows:
Total Members Interests: £1,304,995
The main features of the Company’s capital resources for regulatory purposes are as follows:
Tier 1 capital less innovative tier 1 capital
Total tier 2, innovative tier 1 and tier 3 capital
Deductions from tier 1 and tier 2 capital
Total capital resources, net of deductions
The Company is entrepreneurial with a simple, efficient and effective operational infrastructure. Its market risk is limited to foreign exchange risk on its accounts receivable and payable in foreign currency, and credit risk from management and performance fees receivable from the funds under its management. The Company follows the standardised approach to market risk and the simplified standard approach to credit risk. The Company is subject to the FixedOverhead 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 described above the Company is a limited licence company and as such its capital requirements are the greater of:
- Its base capital requirement of €50,000; or
- The sum of its market and credit risk requirements; or
- Its Fixed Overhead Requirement.
We have not identified credit risk exposure classes or the minimum capital requirements for market risk as we believe that they are immaterial.
It is the Company’s experience that the Fixed Overhead Requirement establishes its capital requirements and hence market and credit risks are considered not to be material.
At 31 December 2011 the Company’s capital requirement (representing the Fixed Overhead Requirement) was £398k. As such the Company’s total capital resources, net of deductions, of £1,014k (as shown above) was comfortably surplus to requirements.
Pillar 3 Remuneration Disclosure
The EU Capital Requirements Directive (“the Directive”) establishes a regulatory capital framework across Europe governing the amount and nature of capital credit institutions and investment firms must maintain, and includes provisions relating to compensation. In the United Kingdom, the Directive has been implemented by the Financial Services Authority (“FSA”) in regulations within the General Prudential Sourcebook (“GENPRU”), the Prudential Sourcebook for Banks, Building Societies and Investment Firms (“BIPRU”), and the Senior Management Systems and Controls Sourcebook (“SYSC”).
Frontier Investment Management LLP (“Frontier”) is authorized and regulated by the Financial Services Authority as a Limited License Firm. It is therefore subject to FSA rules on remuneration within Tier 4 (SYSC Chapter 19A). Pillar 3 disclosure provisions are set out in BIPRU 11.
Frontier has adopted a Remuneration Policy which is designed to ensure that that Frontier complies with SYSC Chapter 19A, with remuneration arrangements designed to (i) be consistent with and promote sound and effective risk management, (ii) not encourage excessive risk taking, (iii) include measures to avoid conflicts of interest and (iv) be in line with the Frontier business strategy, objectives, values and long term interests. The Remuneration Policy will be reviewed annually, or following a significant change to the business requiring an update to its Internal Capital Adequacy Assessment.
Disclosure is made in accordance with Frontier’s size and internal organization, and with the nature, scope and complexity of Frontier’s activities. Fixed and variable remuneration is set subjectively by the Frontier Executive Committee based on, among other things, individual performance and the performance of Frontier, as a whole. Financial as well as non-financial criteria are taken into account as per the recommendations of FSA Remuneration Principle 12(b).
The only “business area” of Frontier is the provision of investment management services to both UCIS and UK authorised collective investment schemes. The Frontier Code staff are categorized as such under SYSC 19A.3.6. All of Frontier’s Code staff perform a significant influence function and/or are senior managers of Frontier as described in SYSC 19A.3.6(b) (as opposed to being categorized as “risk takers”). The total remuneration (as defined in FSA rules) awarded to the Frontier Code staff during the financial year ending on the 31st December 2011 was GBP £329,127