Capital Requirements Directive Pillar 3 Disclosures
The European Union Capital Requirements Regulation (CRR) establishes a regulatory framework based on capital. This is implemented in the United Kingdom through the Capital Requirements Directive (CRD IV) and by The Financial Conduct Authority (FCA) through its Prudential Sourcebook for Investment Firms (IFPRU).
The FCA capital framework is based upon 3 pillars:
Pillar 1: sets out the minimum capital requirement
Pillar 2: requires firms to determine whether enough capital is held for firm specific risks not covered against Pillar 1. This is measured through the Internal Capital Adequacy Assessment Process (“ICAAP”) by firms and through the subsequent Supervisory Review (“SREP”) undertaken by the FCA.
Pillar 3: requirement to publish risks, capital and risk management processes
Pillar 1 Requirement
Mainspring Nominees Limited (Mainspring) is classified for regulatory purposes as an IFPRU 125K and as such its base own funds requirement is €125,000. Our own assessment of the minimum amount of capital is adequate against the risks identified and as at 31st March 2018 our own funds meet the requirement.
Pillar 2 Requirement
Mainspring annually reviews its Internal Capital Adequacy Assessment Process (ICAAP). Our ICAAP considers our risk appetite, risk types and determines how risks are managed and mitigated, as well as capital planning, stress and scenario tests over a 3 to 5 year basis.
We understand the level of capital required to cover risks is a function of impact and probability and assess impact by modelling the changes in our income and expenses caused by various potential risks. Probability is assessed subjectively.
In line with regulatory requirements, market and credit risks are reviewed periodically however these risks are relatively low. No additional capital is required in excess of our Pillar 1 requirement.
Pillar 3 Scope and application of requirements
These disclosures are made in respect of Mainspring Nominees Limited, which provides custody and administrative services. Mainspring is incorporated in the UK and is authorised and regulated by the Financial Conduct Authority. Mainspring Nominees Limited is a subsidiary company of Mainspring Fund Services Limited.
There are no known current or foreseen practical or legal impediments to the prompt transfer of capital resources or repayments of liabilities between parent and subsidiary undertakings and there are no subsidiary undertakings where actual capital resources are less than the required minimum. We do not rely on the provisions of the solo consolidation waiver.
In this document we disclose information in relation to our various risks, unless it is determined as immaterial or of proprietary or confidential in nature, in connection with:
- Our risk management objectives and policies;
- Our capital resources;
- Our compliance with the rules in IFPRU in association with the Pillar 1 and Pillar 2 requirements
- Risks relevant to Mainspring
Frequency of Disclosure
Our Pillar 3 disclosures will be published annually and as soon as reasonably practicable following the publication of Mainspring’s financial statements. We shall assess the need to publish these disclosures more frequently than annually based on relevant characteristics of the business.
Verification and Location of Disclosure
The disclosures will be verified and approved by the Board before being published on our website.
Risk Management Objectives and Policies / Principle Business Risks
We have established a structured approach to risk management through our governance, monitoring, reporting as well as through our risk assessment. These demonstrate how we manage a number of different categories of risk, in line with FCA requirements and include credit, market, business, operational, insurance, liquidity and group risk. Further information on all of these risks are set out below.
Mainspring does not take any personal positions in investments and accordingly a collapse in the financial market and the value of shares or the ability of a counterparty to settle a transaction is therefore unlikely to impact directly upon its balance sheet or profitability. We do not consider it has a Credit Risk as defined by IFPRU 4.
Mainspring does not take any personal positions in investments and a collapse in a financial market is therefore unlikely to impact directly upon its balance sheet or profitability. It does not consider that it has a Market Risk as defined by IFPRU 6.
Mainspring Nominees Limited believes the main business risks it faces are associated with those outlined below.
We believe that our principal risk exposures are around Operational Risks. These are briefly reviewed below:
Key Person Risks
There is a risk that one or more of the Principals of the business will be unavailable due to ill health or may exit the business unexpectedly.
The risk is recognised and managed by having multiple staff operating easily understood systems, using clearly defined and documented policies, processes and procedures. In the event of one or more of the Principals of the business were to become unavailable, a structure would be in place to support a transition to a new management team. This continues to be a work in progress and will develop as the company grows.
Mainspring applies focused selection procedures, implements performance development systems in line with its monitoring and setting of remuneration of its staff and looks to provide ongoing training for staff consistent with the needs of the business as it grows.
The Board believe that this risk is unlikely to lead to a loss to the clients of Mainspring.
Key Contract Risk
Mainspring is dependent upon a small number of customers and accordingly its profit and cash flow may be affected in the short term by loss of a customer.
Mainspring’s strategy for managing this risk by ensuring it maintains continuous and meaningful communication with them, developing personal relationships with the key individuals from inception and managing and maintaining those relationships. The risk is managed by the long-term nature of the agreements with clients and will ultimately be mitigated by the company securing more clients and as the company grows its capacity to service them will increase.
The Board recognise that this risk is unlikely to lead to a loss to the clients of Mainspring but may mean that the business is forced to close as clients withdraw their business. It is difficult to see however how additional capital will eliminate this risk entirely.
Financial Crime Risk
We believe that the financial crime risk faced by Mainspring will be low. KYC checks are undertaken on the investors whose money and assets are being safeguarded by the relevant fund manager and the illiquid nature of the investments themselves means that the theft or loss of a share or other certificate will not create material risks of loss to an investor.
Whilst there is a theoretical risk of internal fraud, for instance with an employee unlawfully accessing client money, this risk is managed by a four-eyes principle on the approval of transfers and the need for dual signatures on cheques, electronic transfers etc.
The Board recognise that the loss or unlawful removal of a share certificate is potentially covered by PI insurance and is not necessary to provide additional capital to manage this risk. The loss or theft of a share or other certificate of title is unlikely to result in a loss to a client. The nature of such documents is that they are non-negotiable and so couldn’t be sold or mortgaged. The definitive record of the ownership of such things is a company account rather than the certificate itself.
The risks caused by the theft of client money by a member of staff are principally mitigated by our PI insurance policy and the reconciliation of the four-eyes principle for the movement of such cash, the quantum of which will vary over time. PI insurance provides the best source of funds for Mainspring’s clients in the event of misconduct.