The Pillar III disclosures in this document are in relation to Lothbury Investment Management Limited (Lothbury).
The Basel II Accord, implemented in the European Union through the Capital Requirements Directive (CRD) requires firms to implement a framework which relates capital to risks. In the United Kingdom CRD 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 CRD framework consists of 3 pillars:
- Pillar I sets out the minimum capital that a financial services firm is required to maintain to support the business
- Pillar II requires the firm to assess whether any additional capital should be maintained against any risks not adequately covered under Pillar I, and the FCA then to supervise this process
- Pillar III specifies the disclosures which the firm is required to make about its capital, its risk exposures and its risk assessment procedures.
Frequency of Publication
These disclosures will be reviewed on an annual basis as a minimum and, if appropriate, more frequently. This is considered appropriate given the nature and scale of Lothbury’s activities.
Corporate Governance Processes
Lothbury is governed by its Board of Directors, who oversee an ongoing capital assessment process in order to ensure the continuing capital adequacy of Lothbury. The overall governance of the firm is based upon the high level decision making and control framework, key controls and strategic and capital planning.
Risk Management and Internal Controls
There is an ongoing process for identifying, evaluating and managing the significant risks faced by the Firm. The processes are designed to manage rather than eliminate the risk. As such, they can provide only reasonable, not absolute assurance against material mis-statement or loss.
The Board is responsible for determining the Firm’s risk appetite and for ensuring that the Firm’s risk management processes are appropriate and operating effectively. Management of risk is delegated to the Risk, Compliance, Audit and Oversight Committee which meets quarterly and reports to the Board.
Principal Risks and Controls
Lothbury has taken the approach to be risk averse and the firm takes reasonable steps to manage its risks. This is reflected in their low appetite for taking on risk in any of its activities. Lothbury has little to no tolerance for engaging in activity that adversely influences its risk profile. All risks of any significance are identified, assessed and controlled on an ongoing basis. Lothbury does not trade on its own account and therefore is not exposed to principal market risk.
The critical material capital adequacy risks for Lothbury are operational, reputational and business risk, relating to a significant decrease in revenue arising from a decrease in the value of assets under management.
The key risks arising in Lothbury’s business include:
- Poor investment performance
- Damage to reputation
- Loss of key staff
- Business disruption
- Regulatory breaches/failures
- Legal action
Processes and procedures are in place to monitor, manage and reduce these risks as appropriate and the Risk and Compliance Committee reviews these procedures regularly.
Lothbury manage and mitigate counterparty risk by dealing with reputable counterparties and actively managing relationships with material counterparties.
Lothbury’s credit risk arises mainly from management fees. Lothbury manage and mitigate this risk by ensuring that fees are invoiced and collected promptly. There is no history of losses on third party debtors, as they are carefully monitored and are low risk by nature. A capital buffer is maintained against credit risk.
Lothbury monitors liquidity risk on an ongoing basis. Monthly management accounts, containing cash flow forecasts, are prepared and circulated to the Board. Lothbury holds excess cash to cover at least three months overheads and the company is cash generative.
Lothbury is defined by the Rules of the FCA as a Limited Licence Firm. The fixed overhead requirement forms the basis for the Pillar I capital requirement for Lothbury, being significantly in excess of market and credit risks requirements.
A summary of Lothbury’s capital resources at 31 December 2019 is presented below.
Total Tier One £7,929,470
|TIER 1||As at 31/12/2019|
|Share premium at 31/12/2019||£693,000|
|Audited reserves at 31/12/2019||£7,224,470|
Internal Capital Adequacy Assessment
Lothbury perform an internal capital adequacy assessment (ICAAP) annually and this is reviewed and signed off by the Board. The ICAAP is an ongoing assessment of the types and magnitude of risks faced by Lothbury and the amount of current and future capital which the Firm believes is appropriate to hold to mitigate those risks. Stress and scenario testing has been developed in order to test the robustness of Lothbury’s regulatory capital against a variety of events and changes both to Lothbury and the financial markets as a whole. The ICAAP is challenged and approved by the Lothbury Board.
Lothbury’s senior management is responsible for determining the remuneration policy of the firm and reviews the policy at least annually.
Lothbury’s senior management have determined that variable remuneration is to be paid on the basis of performance. Due to its size and nature Lothbury does not operate a share or other non-cash scheme.
Remuneration by Business Area
|To 31st December 2019|
|Directors and Senior Management||£1,340,473|
Senior Management and Material Staff
|To 31st December 2019|
|Number of Beneficiaries||Three|