Introduction
This document sets out the Investment Firm Prudential Regime (“IFPR”) disclosures for the Firm in accordance with the FCA Prudential Sourcebook for Investment Firms chapter 8 (“MIFIDPRU 8”). This includes transitional provisions relating to disclosures as outlined in MIFIRDPRU TP12. The Firm has opted to make voluntary disclosures in some areas.
Basis of Disclosure
Under the IFPR a MIFIDPRU investment firm is required to publish disclosures in accordance with the rules set out in MIFIDPRU 8. Mainspring Nominees Limited as an individual MIFIDPRU Investment Firm, meets the level of application as defined in MIFIDPRU 8.1.7.
Mainspring Fund Services Limited was established in 2010 and is an independent fund administrator for small and medium sized private equity and venture capital managers in the UK. Mainspring Nominees Limited (“Mainspring Nominees” or “MNL”) was established in 2012 and is a 100% owned subsidiary of Mainspring Fund Services Limited.
Mainspring Fund Services acts as a dynamic extension to the back office of its clients and provides funds and related non-fund entities with support services such as fund and management accounting, investor reporting, banking support, corporate services and the administration of related co-investment schemes. Mainspring Nominees offers clients custodian services including the administration and safeguarding of their clients’ assets and client money.
This disclosure for Mainspring is published on an annual basis and is based on the published financial position as at the Firm’s year end, 31 March and the Firms interim audit results reviewed by the company’s auditors and approved for CET by the FCA via the Firm’s external website [https://www.mainspringfs.com/important-information/MIFIDPRU 8]
The disclosures are required to be published in conjunction with the date of publication of the Annual Report and Accounts.
Scope of Permission
Mainspring Nominees is incorporated in the UK and is authorised and regulated by the FCA as a Non-SNI MIFIDPRU investment firm with a permanent minimum capital requirement of £150K and permissions to undertake certain regulated investment activities. As such the Firm will apply the rules applicable as set out in the FCA handbook. The rules in MIFIDPRU 8 apply to a MIFIDPRU investment firm on an individual basis, therefore these disclosures are prepared for MNL on a solo basis only. This document has been prepared using audited numbers used as at 31 March 2022 which is the Firm’s most recent fiscal year end and interim results for the fiscal period 1 April 2022 to 31 October 2022 which have been reviewed by the company’s auditors and approved for CET purposes by the FCA.
The regulated activities of Mainspring Nominees are:
- Arranging (bringing about deals in investments)
- Making arrangements with a view to transactions in investments
- Arranging safeguarding and administration of assets
- Safeguarding and administration of assets (without arranging)
- Dealing in investments as agent
Mainspring Nominees does not make investments on its own behalf and does not operate its own trading book. As a custodian, Mainspring is authorised to hold client money.
Transitional Provisions
The Firm has adopted the transitional provisions as set out in MIFIDPRU TP12, and as such has included public disclosure information relating to its governance arrangements, own funds and own funds requirements only, the remaining disclosures are voluntary.
Validation & Approval
The disclosures have not been audited by Mainspring’s external auditors, do not constitute any form of the audited financial statement and have been produced solely for the purposes of this public disclosure requirement and are not used by management for any other purpose. The disclosures should not be relied upon in making judgements about Mainspring.
These disclosures have been subject to internal review and oversight as part of Mainspring’s governance.
Governance
Mainspring Fund Services was created in 2010 by Stephen Geddes, who had been Chief Operating Officer at Private Investor Capital Limited. He was joined in 2011 by Damian Simmons, an experienced fund accountant and administrator, who has worked at a senior level within several fund administration providers. In 2015, Neil Clark joined the business as COO and became a director in February 2018, and in early 2020 Bridget Barker, joined the Firm as director and Chair to assist in developing Mainspring’s approach to the broader market and to enhance corporate governance (together the ‘Directors’ or the “Board”).
The Board of Directors are experienced industry professionals.
The Board is responsible for providing oversight and management of the profitable development of the Firm, in accordance with current strategic plans and objectives. The Board is also responsible for managing the Firm’s risks and setting the tone and influence of culture and conduct within the Firm.
The Firm also operates a recently established Risk Committee with delegated authority from the Board on specific matters as set out in its terms of reference.
The Firm itself has a strong governance structure in place. The Board and Senior Management are well versed in terms of their responsibilities under the FCA Senior Management and Certification Regime with clear Statements of Responsibility assigned to each SMF holder and Certificates for Certified Staff. Senior Managers and stakeholders of the Firm, speak regularly and formally meet on a quarterly basis to discuss material operational, financial, technology & cyber, sales and regulatory issues / risks pertaining to the day to day running of the business to ensure all material potential harm is kept at bay from the ongoing operations of the business. The Firm is also well supported by its legal advisors.
Mainspring appointed Sabina Rizvi in January 2022, as a full-time Chief Compliance Officer, MLRO and Legal Counsel to support the senior management team. Sabina Rizvi, is a lawyer by her training and also the FCA register SMF16 and SMF17 function for the business. The remit of Sabina’s role is to advise the board on all regulatory and compliance matters pertaining to the business. In addition, Mainspring retains the services of its external Legal and Compliance Advisors. Both firms have a long-standing relationship with the business.
New appointments for senior positions are subject to the approval of the Board, considering the reputation, fitness and experience of the candidate as well as the long-term strategic goals targets of the business at that time.
Risk Management
The Board of Directors take responsibility for setting the strategy of the Firm, as well as its Risk Appetite in agreement with the recently formed Risk Committee.
The Risk Committee
The Risk Committee has delegated authority from the Board to oversee the management of risks throughout the Firm via the Enterprise Risk Map (ERM) and guidance to the Risk Committee as to how to assess risk categorises identified. The Risk Committee comprises of a broad cross-section of Mainspring’s directors, executives and senior managers.
Adequacy of Risk Management Framework
Risk management, including ensuring compliance with regulatory requirements, is critical to the success of the Firm. Understanding and managing risk is essential for making fully informed business decisions and meet the Firms objectives, whilst meeting the needs of our customers and market.
Risk is defined in Mainspring as any unexpected future event or set of events that could damage the Firm’s ability to achieve its strategic, financial or overall business objectives. This includes damage to the reputation of the Firm, its ability to undertake regulated activities, its clients, earnings capacity or capital.
It is measured by considering both the probability of a perceived threat or event occurring and the magnitude of its impact on objectives. To ensure that all appropriate risks are captured and understood. Mainspring via the Risk Committee maintains an Enterprise-wide Risk Map (“ERM”)
The ERM describes the overarching framework for clear and effective risk management across the Firm. It describes the different elements that contribute to the holistic approach towards risk management, as well as clarifying the roles of responsibilities of each risk owner in protecting the Firm by mitigating the risk.
In their role in managing risk, the Risk Committee, with delegated authority from the Board ensure the following:
- Identification of the top 10 risks quarterly;
- Monitors on-going risks for any changes;
- Reviews any additional risks identified;
- Consider mitigants to these additional risks/ changes to ensure any changes required are implemented;
- Ensures that appropriate plans are in place to manage risks that unexpectedly fall outside the risk appetite of the Firm; and
- Reviews the adequacy and effectiveness of the internal controls and risk management processes.
The ERM is reviewed and updated at least quarterly by the Chief Compliance Officer & CEO, however, will now be the role of the newly formed Risk Committee from April 2023. The ERM may be reviewed more often if needed, for example during a period of significant change or stress to the business.
The Board is confident that the Firm’s risk management framework and strategies are appropriate, adequate and proportionate to manage the risks faced by the Firm that stem from its business strategy and activities.
Risk Appetite Statement
The Board and Senior Management of Mainspring have a medium to low appetite for risk. This means that the Board will look to mitigate all controllable risks to a low-risk score, while recognising that there are certain risks which currently sit at a medium level.
Where controllable risks are currently mitigated to medium, rather than low, the Board will ensure such risks are monitored regularly and will ensure a plan of action is in place to mitigate the risk to a lower level.
The Board acknowledges that there are risks outside of its control that cannot be mitigated to this level and it will continue to monitor these risks closely – these include for example, the risk to the Firm from changing economic and regulatory conditions. These risks are considered within the Firm’s Wind Down Planning, to ensure that it understands the risk these factors pose to the business and can wind down in an orderly manner if needed.
Key Risks
Mainspring assesses all risks facing the Firm including specific areas of risk prescribed by the FCA. Not all the areas of risk prescribed by the FCA for review are relevant to the Firm and are therefore not included here.
Operational Risk
Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. These failures can be deliberate, accidental or natural.
Operational risk is one of the most significant risks for the Firm as people and systems play a major role in our operations. In assessing operational risk, we consider legal and regulatory risk, financial and reputational loss, business disruption, key person risk, inappropriate staff management, errors, system outages, cyber, contractual risk and/or risk from third party service providers.
The Firms key operational risks are:
Key Person Risks
Mainspring is a small firm and there are three key executive directors. There is a risk that one or more of the directors of the business will be unavailable due to ill health or may exit unexpectedly.
The Firm endeavours to mitigate this by ensuring its key processes and critical information are documented in such a way that in the event one (or more) of the directors of the business were to become unavailable, there would be a structure in place to support a transition to a new management team.
Compliance and regulatory risk
As Mainspring is regulated by the FCA, it must ensure that it adheres to the relevant rules and regulations to maintain its permission to engage in investment business activity with clients. If Mainspring fails to meet the FCA’s requirements it may not be able to continue operating its business.
Appointment of a new full-time Compliance Officer has mitigated this risk. Mainspring also works closely with both legal and compliance experts to ensure that it is fully compliant with the rules and regulations applicable to it. It further undertakes annual compliance monitoring, and any notifiable findings are reported to the Board.
Business risk
Business risk is defined as the risk that Mainspring is not able to carry out its business plan or desired strategy due to internal or external changes to its environment.
There is a risk that due to current events, a change in the economic climate will substantially impact upon the demand for investment and associated services, thus reducing demand for the Firm’s services.
The Board believes, however, that their clients have extensive experience required to continue to succeed in what is a challenging economic climate. The Funds being administered typically have multi-year lives; investments are held for significant periods of time (5-7 years) and investors are therefore committed for the long-term and administration of those assets will be required for many years regardless of the economic climate. Mainspring’s business model is robust with high fixed recurring revenues and the Board will continue to monitor regulatory capital, profitability, cash flows and forecasts monthly. It maintains a disciplined control over costs.
Cyber risk
This is the risk that Mainspring will be subject to a cyber-attack putting the data of clients and the reputation of Mainspring at risk.
Post the recent exposure in this regard, Mainspring considers its existing preventative risk measures/ mitigants were effective in cushioning the business from material harm. IT management is outsourced to a highly accredited third party which provides expert support for the various measures in place. Preventative measures include a number of solutions at different risk points through the business. And now the business has further intensified these by adding an additional third-party end to end provider of managed security services and an Information Security consultant.
In terms of impact on the need to enhance own funds and or liquidity assets, the business has been able to lean on its insurance policy for harm identified from this incident to date.
The Board are comfortable that given the mitigants in place and from considering the results of the stress testing, that these risks are adequately covered by its Tier 1 capital.
Credit risk
Credit risk is the risk of financial loss if a client or counterparty fails to meet their financial obligations. The Firm has limited counterparty credit risk, as it does not trade securities on its own account. The key counterparty risk is from banking counterparties and short-term debtor balances. This risk is adequately managed by the Firm’s Tier 1 Own Fund requirements.
Market risk
Market Risk is defined as the risks that arise from fluctuations in values of, or income from, assets or in interest or exchange rates. The Firm does not trade on its own account and does not hold material foreign currency balances in its own name. It has negligible market risk that is adequately covered by its Tier 1 capital.
Capital Adequacy
The Firm is required to maintain sufficient capital resources at all times. Own funds describes the available capital resources of the Firm while own funds requirement describes the capital funds required as a result of the business activities of the Firm.
A fuller breakdown of regulatory own funds, a reconciliation of own funds to the balance sheet can be found in the Firm’s audited financial statements.
The table below shows the Tier 1 capital, specifically Common Equity Tier 1 (CET1) capital and Tier 2 capital held by the Firm as at 31 October 2022 (interim audit). The Firm does not hold any Additional Tier 1 or Tier 2 Capital.
Own Fund Requirements
The Firm’s own funds requirement is calculated in accordance with MIFIDPRU 4.3, which states that the Firm’s own funds requirement is the highest of:
- its permanent minimum capital requirement under MIFIDPRU 4.4;
- its fixed overheads requirement under MIFIDPRU 4.5;
- its K-factor requirement under MIFIDPRU 4.6
The Firm’s Own Funds Requirement were as follows as at 31 March 2022:
| Own Funds Requirements Calculation £ | ||
| K-Factor Requirements | ||
| Sum of | K-AUM | – |
| K-ASA | 1,099,615 | |
| K-CMH | 1,369,081 | |
| K-COH | 3,010 | |
| Total K-Factor Requirement | 2,471,706 | |
| Permanent Minimum Capital Requirement | 150,000 | |
| Fixed Overheads Requirement | 806,765 | |
| Own Funds Requirement (A)* | 1,613,530 | |
| Own Funds to address risks from ongoing activities (B) | – | |
| Own Funds necessary for orderly wind-down (C)
(as per Wind-down Plan) |
150,000 | |
| Own Funds Threshold Requirement (OFTR) – higher of A,B or C | 1,613,530 | |
| Excess own funds over requirement | 858,176 | |
| % of the OFTR covered by CET1 Capital | 100% | |
| % of the OFTR covered by Tier 1 Capital | 100% | |
‘* The Own Funds Requirement is the higher of the PMR, FOR and the K-Factor Requirement. However, the Firm makes use of the transitionary provision in MIFIDPRU TP2.7 (3)(a), which allows it to substitute this value for twice the value of its FOR under the prior IFPRU regime – it is noted that the calculation of the FOR under the previous regime and the current regime has not changed for the Firm. This transitionary provision is in force until 1 January 2027 unless the Firm applies for a variation of permission which would change it’s PMR. In this case the ability to use the transitionary provision falls away.
Assessing the adequacy of own funds
The Firm assesses the adequacy of its own funds in accordance with the prescribed permanent minimum capital, fixed overheads and applicable K-factor requirements. In addition, the Firm undertakes an assessment of own funds requirements through its internal processes to identify additional own funds requirements of the Firm as necessary, as a result of (i) the material risks associated with ongoing business operations and (ii) those required to facilitate an orderly wind-down of the business. Own funds requirement will be formally reviewed, challenged and approved by the Board.
Based on the table above, the Firm confirm it has calculated the own funds threshold requirement in line with the FCA requirements and that it determines that it has sufficient capital to operate the business.
Remuneration Arrangements and Policy
Firm’s remuneration policies and practices are designed to ensure compliance with the FCA Remuneration Code and to ensure that Mainspring has a risk-focused remuneration policy, which is consistent with and promotes effective risk management and does not expose Mainspring to excessive risk.
The Board of Mainspring does not consider it appropriate to have a separate remuneration committee due to the size and the nature of the Firm’s business activities. The Mainspring Board therefore reviews the packages and remuneration for compliance with the Remuneration Code. The Firm’s remuneration arrangements represent a combination of fixed remuneration and variable remuneration. It is designed to ensure the long-term sustainability of the Firm and to align the interest of the Firm and its employees with those of its clients.
As per the guidance set by the FCA those employees subject to the Remuneration Code are those categories of staff including senior management, staff engaged in certified functions and any employee, whose professional activities have a material impact on the firm’s risk profile.
Executive Directors
The Executive Directors of the Firm are remunerated through fixed remuneration. Total fixed remuneration to March 2022 was £522K and no variable remuneration was paid to Directors in the year to March 2022.
Other Material Employees
The Firm classifies those staff whose professional activities have a material impact on its risk profile as Code Staff in line with the FCA’s Remuneration Code. The Firm classifies 5 employees as material as of March 2022. The aggregate remuneration paid to the Firm’s Material Staff in the financial year ending March 2022 was £285K and was at the rate equivalent to approximately £450K at March 2022 on an annualised basis.
Total fixed remuneration in respect of all staff to March 2022 was £2,585K and total variable remuneration was £113K. No employee earned over EUR 1 million.
Link between Variable Remuneration and Performance
Mainspring is dedicated to ensuring that individuals are not remunerated for exceeding the risk tolerances of the Firm. For this reason, it takes account of financial as well as non-financial criteria when assessing performance. The remuneration and incentives are not solely based on quantitative commercial criteria and will take account of appropriate qualitative criteria, including compliance with applicable regulations, interactions with customers and adherence with the culture of the Firm. The Firm only pays variable renumeration on sales commission.