FCA Pillar 3 Disclosure

Introduction

The Pillar 3 disclosure of GCW Global Customised Wealth LLP (“GCW” or the “Firm”) is set out as required by the Financial Conduct Authority’s (“FCA”) “Prudential Sourcebook for Banks, Building Societies and Investment Firms” (“BIPRU”).  The regulatory aim of the disclosure is to improve market discipline and reflect the Capital Requirements Directive of the European Union, which sets forth the regulatory capital framework for the financial services industry in the EU.  The framework consists of three pillars:

•          Pillar 1 specifies the minimum capital requirements that firms must meet in order to meet their credit, market and operational risk;

•          Pillar 2 sets out the supervisory risk review process to be used to determine whether additional capital should be maintained against any other risks not covered under Pillar 1; and

•          Pillar 3 specifies the disclosure requirements that firms are required to make with respect to capital, risk exposures and risk management processes.

The FCA regulations for the disclosures required under Pillar 3 are contained in the Prudential Sourcebook for Banks, Building Societies and Investment Firms (“BIPRU”).  Further, information on BIPRU can be found on the FCA’s website (www.fca.org.uk). 

GCW is authorised and regulated by the FCA as an investment management firm and is categorized as a BIPRU 50K limited licence firm.  In accordance with Chapter 11 of BIPRU, the Firm is required to make Pillar 3 disclosures.

Disclosure Overview

The Firm will make Pillar 3 disclosures annually.  The disclosures will be published at https://www.gcwpartners.com and will be as at the Accounting Reference Date (31 March).  It is anticipated that the Firm’s Pillar 3 disclosures will be updated as soon as practicable after completion of the Firm’s financial statements.

The information contained herein has not been audited and does not constitute any form of financial statement.

GCW is permitted to exclude disclosures where the information is regarded as immaterial, proprietary or confidential.  Disclosures herein have been made in compliance with BIPRU11. 

The Firm

GCW is a privately held firm that is controlled by partners (individuals) (the “Members”) that are active in its business. 

The Firm’s audited financial statements are prepared in accordance with FRS102 on a solo basis and there are no other affiliates for audit and regulatory capital purposes.

Risk Management

The Firm seeks to mitigate risk by implementing sound systems and controls and considers risk management to be a continuous process.   In assessing the risk appetite of the Firm, consideration has been given to identifying the material risks facing GCW operations.   As an asset manager that engages in fund management activities, GCW is mainly exposed to credit and market risks.  Additionally, there is some exposure to business risk and certain other risks described below.  Each of these risk exposures is regarded as typical for a business engaged in the activity of asset management.  GCW’s Compliance Officer, in conjunction with senior management, monitors and manages the risk exposures of the business.  The current nature, scale and complexity of the business does not warrant an independent risk management function.

Material risks include those risks at both the client (fund) level and at the firm level, taking the form of loss of revenue, loss of assets or higher costs of operating the business.  These risks are detailed in GCW’s Internal Capital Adequacy Assessment Process (“ICAAP”) and are periodically reviewed by compliance, finance and senior management.  Two specific factors have been considered in defining GCW’s risk appetite: firstly, the likelihood of occurrence of an event, and secondly, the impact level of that event. 

Credit Risk

As an asset management firm, GCW is subject to credit risk to the extent the Firm’s counterparties do not meet their obligations as they become due.  The Firm’s most significant counterparties are its fund investors and most of the Firm’s receivables are related to receipt of investment management fees on a periodic basis, computed based on the value of each underlying investor’s holdings in the investment funds managed by the Firm and  a percentage of net profit allocated to the Firm based on investment performance.  Because the Firm’s revenue is ultimately related its investment management activities, the Firm believes its credit risk exposure is limited.

Other credit risk exposure relates to GCW’s free cash flow placed on deposit at financial institutions.  Most of the deposits are placed with the Firm’s main corporate banking relationship.  Depending on amounts involved, other financial institutions may be used to manage the liquidity of the business.  Eligible financial institutions are approved by senior management.  The credit rating and financial strength of each such institution is subject to an annual re-appraisal and senior management periodically monitors credit ratings.  GCW does not utilise risk mitigation techniques (i.e., credit default swaps) to minimise financial exposure to deposits at financial institutions.

Market Risk

As a BIPRU Firm, GCW does not have on balance sheet trading risk.  The only potential exposures are non balance sheet trading exposures, i.e., to foreign currency held on deposit and assets or liabilities held in foreign currency, such as receivables, on the Firm’s balance sheet.

GCW’s core regulatory capital, surplus capital and free cash flow are primarily invested in cash deposits.  To mitigate against market risk, GCW does not invest capital that is (i) needed to meet its core regulatory requirements, or (ii) needed to fund the operations of the business.

Liquidity Risk

The FCA have set forth in BIPRU 12.3 and 12.4 liquidity provisions for investment firms in order to promote and maintain (1) systemic stability, (2) the soundness of financial institutions and (3) consumer protection.  GCW is categorised as a “non-ILAS Firm,” and, therefore, is not subject to the Individual Liquidity Adequacy Standards.   The Firm, however, is subject to the systems and control requirements of BIPRU 12.3 and 12.4

Given the Firm’s small size and limited scope, it does not believe it poses systemic risk.   In addition, the Firm does not deal with retail clients, who are afforded a higher level of protection by the FCA.  The ICAAP assesses the capital adequacy of the Firm on an annual basis and takes into consideration that the Firm’s continued operations are dependent on the stability of its investor base and the continued performance of the funds it manages.  Significant investor redemptions would result in a shut down of operations and a return of capital to investors.

Operational Risk

Operational risk refers to the risk of a direct or indirect loss resulting from inadequate or failed internal processes, people and systems, or from external events.  GCW’s attempts to mitigate the impact of operational risks by (i) maintaining adequate capital, (ii) aligning the interests of staff members through remuneration tied to the success of the firm, (iii) maintaining key operating procedures, (iv) periodically reviewing the operations of all material business groups, and (v) keeping GCW’s business, structure and operational requirements relatively simple.

Concentration Risk

The Firm’s business could suffer if institutional investors shift their asset allocations to other funds or other types of investments.  There is little GCW can do to minimise this risk, except to continue to align the Firm’s interests with those of its investors.  In addition, ongoing marketing efforts attempt to bring in new investors and diversity to the investor base of the Firm.

Concentration risk at the fund level is the risk that exposures to specific sectors or asset concentration could result in losses to GCW. Funds managed by the Firm follow certain investment guidelines to mitigate concentration risk.

Business Risk

Business risk arises from changes in the core structure of the business that would prevent GCW carrying out its business plan and desired strategy.  GCW is a small, closely held organisation, where the Members are closely involved in the day-to-day operations of the business.  All material structural changes to its business are subject to discussion by the Members.

Insurance Risk

GCW maintains fiduciary liability (also referred to as professional indemnity) and criminal liability (also referred to as errors and omissions) insurance policies which are set at a limit which GCW considers appropriate for its business and subject to a deductible which GCW can reasonably afford to meet if called upon.  GCW would be exposed to potential losses in the event that an error occurred and its insurer was unable to recover anticipated insurance settlement proceeds.  In order to minimise the risk of loss arising from insurance risk, GCW attempts to obtain insurance solely from well- capitalised insurance firms.

Capital Resource Requirements

The Firm’s Pillar 1 requirement is calculated as the higher of:

  1. The Base Capital Requirement (€50k);

or

Credit Risk Capital Requirement; and

Market Risk Capital Requirement;

or

Risk £000
Credit Risk £75
Market Risk £0
Fixed Overhead Requirement £163

As of March 31, 2021, the highest of these was calculated to be the third measure, the fixed overhead requirement, totalling  £163,000.

GCW  has calculated its capital needs in accordance with the relevant FCA regulations and has a surplus of regulatory capital over its Pillar 1 capital on a solo basis.


Pillar 2

The approach of the business to assessing the adequacy of its internal capital in order to support current and future activities is contained in GCW’s ICAAP.  This process includes an assessment of the specific operational, business, credit, market and other risks to the Firm’s business and the internal controls in place to mitigate those risks.  As a limited license firm, additional capital does not typically mitigate the risks to which GCW is exposed. These risks are tested under different scenarios in order to provide a robust picture of exposures for the business.  Finally, an assessment is made of the probability of occurrence and the potential impact, in order to arrive at a level of required capital.

As a result of this process, the Firm has concluded that it will hold sufficient regulatory capital to meet its requirements under Pillar 2.

Remuneration

GCW has classified two of its Members (who serve as the Firm’s portfolio managers) and its Compliance Officer as “Code Staff”.  The aggregate level of remuneration earned by Code Staff is disclosed in the annual audited financial statements. 

GCW has determined that it is a “Tier 3” firm and has applied proportionately and, where relevant, has disapplied various provisions of the FCA Remuneration Code.  As a Tier 3 asset manager, GCW has set the risk parameters of its investment strategy independent of any remuneration considerations.