Pillar 3 Disclosures

Introduction

The purpose of this document is to outline the Pillar 3 disclosures on risk management and capital for Mainspring Nominees Limited (“Mainspring”, “the Firm”, “we”).

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 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 full custodian services including the administration and safeguarding of their clients’ assets and client money.

Scope of Permission

Mainspring is incorporated in the UK and is authorised and regulated by the FCA as an IFPRU Limited Licence €125K Firm with permissions to undertake certain regulated investment activities. The Pillar 3 disclosures are made by the Firm on a solo basis.

The regulated activities of Mainspring 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 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.

Basis of Disclosure

The Capital Requirements Directive (CRD) establishes a regulatory capital framework across Europe governing the amount and nature of capital investment firms must maintain. In the United Kingdom, the CRD has been implemented by the Financial Conduct Authority (FCA) in its regulations through the General Prudential Sourcebook (GENPRU), Prudential Sourcebook for Banks, Building Societies and Investment Firms (BIPRU) and the Prudential Sourcebook for Investment Firms (IFPRU).

The FCA framework consists of three Pillars:

  • Pillar 1 sets out the minimum capital amount that meets the Firm’s credit, market and operational risk;
  • Pillar 2 requires the Firm to assess whether its Pillar 1 capital is adequate to meet its risks and is subject to review by the FCA; and
  • Pillar 3 requires disclosure of specified information about the underlying risk management controls, capital position and remuneration.

The Capital Requirements Regulations Articles 431 to 455 set out the relevant information required under Pillar 3. Certain exceptions are allowed where the information is believed to be immaterial, proprietary or confidential. The disclosures cover both the qualitative and quantitative requirements. The disclosures in this document are made in respect of Mainspring in accordance with these rules, to set out the key risks facing the Firm, how it manages those risks, and how it has satisfied itself that it has sufficient capital in respect of those risks.

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’).

The Board of Directors are experienced industry professionals. New appointments 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 Management Framework and Risk Appetite.  The Firm does not operate an independent risk committee; the Board is however supported by external audit and compliance firms.

The Board is confident that the Firm’s risk management framework and strategies are appropriate and adequate to manage the risks faced by the Firm due its business strategy and activities.

Risk Management Framework

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 maintains a Risk Map.

In their role in managing risk, the Board:

  • 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 map is updated by the Compliance Officer as our risk profile changes.  It is reviewed by the Board annually or more often if needed, for example during a period of significant change or stress.

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 can’t 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, contractual risk and/or risk from third party service providers.

They 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 endeavors 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.

Mainspring 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.

Mainspring has a multiple pronged approach to managing cyber risk in the business. This is built from prevention, proactive measures and recovery. This is embedded into the business by a proactive cyber training programme for staff.  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.

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 Pillar 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 Pillar 1 capital.

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 foreign currency balances. It has negligible market risk that is adequately covered by its Pillar 1 capital.

Capital

As at 30 September 2020, the Firm’s Pillar 1 and Core Equity Tier 1 Capital was £408,627, represented by £375,001 of ordinary share capital and £33,626 of reserves. The Firm has no Additional Tier 1 Capital or Tier 2 Capital. The Firm has a CET Tier 1, Tier 1 Capital and Total Capital ratio of 9.26%.

The Firm has reviewed the risks, mitigants and potential stressors to the business and believe that the risks faced by the Firm are adequately covered by Pillar 1 capital. The Board will continue to monitor the situation in line with the ICAAP process.

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 control 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 a mixture of fixed and variable remuneration. Variable remuneration is not guaranteed and is only paid if the Firm meets certain targets regarding the long-term sustainable performance of the Firm. This variable remuneration is not directly linked to short- or long-term sales targets.  No variable remuneration was paid to Directors in the year to March 2020.

Total fixed remuneration to March 2020 was £830K and total variable remuneration was £37K. No employee earned over EUR 1 million.

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 2020.  The aggregate remuneration paid to the Firm’s Material Staff in the financial year ending March 2020 was £353K.

Variable remuneration

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.  It does not pay any variable remuneration to employees linked to monthly or annual sales or growth targets.