Pillar 3 Disclosures
31 December 2017 update
Lansdowne Partners (UK) LLP (the “Partnership”) is regulated in the UK by the Financial Conduct Authority (the “FCA”) and is classified as a Collective Portfolio Management Investment Firm. The Partnership is a member of a UK consolidation group which also includes its First Corporate Member, Lansdowne Partners Limited. The information provided in this document has been prepared on a consolidated basis for this group (the “Firm”).
The Pillar 3 disclosure requirement stems from the UK’s CRD III implementing Regulations which represented the European Union’s application of the Basel Capital Accord. The Firm is no longer formally subject to Capital Requirements Directive (CRD) but remain subject to the UK’s implementation Regulations of CRD III. The CRD introduced consistent capital adequacy standards and an associated supervisory framework based in the EU. The Directive, introduced into the UK by the FCA, consists of three ‘pillars’:
- Pillar 1 - This specifies the minimum capital requirements which the UK consolidation group, of which the Partnership is a member, is required to hold
- Pillar 2 - This supervisory review process requires an assessment to be made of whether additional capital should be held against risks not covered by Pillar 1.
- Pillar 3 - This introduces public disclosure of qualitative and quantitative information and is designed to promote market discipline by providing market participants with key information on a firm’s risk exposures and risk management processes.
The disclosures below are the required Pillar 3 disclosures. The disclosures do not apply to the funds managed by the Partnership, which are exposed to different risks.
The Firm is a Full Scope UK AIFM of non-EEA AIFs and also undertakes additional activities which result in the Firm being a BIPRU firm. The Firm is required to disclose its risk management objectives and policies for each separate category of risk which include the strategies and processes to manage those risks; the structure and organisation of the relevant risk management function or other appropriate arrangement; the scope and nature of risk reporting and measurement systems; and the policies for hedging and mitigating risk, and the strategies and processes for monitoring the continuing effectiveness of hedges and mitigants.
II. Risk management objectives and policies
The Firm maintains a clear delineation between Investment Management teams and the Business Management teams. The members of the Firm’s management committee determine and outline the Firm’s business strategy. As part of this process, they consider the Firm’s risk appetite to ensure that the Firm’s risk management framework is appropriately designed and implemented. The Firm’s Risk and Audit Committee (including the Firm’s Chairman, Chief Operating Officer, Chief Financial and Compliance Officer and Head of Risk) is responsible for overseeing and supervising the risk management function.
Operational risk is overseen by the Risk and Audit Committee. The Firm maintains an Operational Risk Policy & Framework including a detailed risk map that identifies the risks faced by the Firm and the mitigating factors and controls that address these risks. Each risk is assigned a level of impact and probability of either high, medium high, medium low or low. The Firm aims to ensure that there are sufficient mitigating factors and controls to ensure that the net probability of each risk is low. The risks map is reviewed and approved by the Firm’s Risk and Audit Committee on a quarterly basis. It is the responsibility of the Compliance and Risk teams to monitor the effectiveness of the mitigating controls. The Firm has also engaged an independent accounting firm to undertake annual testing of the internal control environment.
The Firm has identified the key business risks as principally taking the form of a fall in the assets under management or the loss of key staff which may reduce the fee income earned and hinder its ability to meet its expenses. To mitigate business risks, the Finance team periodically models various different economic scenarios to assess the potential impact that these would have on the Firm’s financial position. The exposure to these business risks is to some extent mitigated by having (i) distinct and diversified strategies managed by 5 separate investment teams, (ii) appropriate staff retention policies and (iii) broad investor base with no reliance on key investors.
Market risk is limited to exposure to foreign currency balances. Foreign currency balances are limited to fees due that are received in US dollars and Euros before they are converted into Sterling. Foreign currency balances are monitored and converted as appropriate.
The Firm’s exposure to credit risk is principally the risk that investment management fees cannot be collected and the exposure to banks where collected fees are deposited.
The Firm follows the standardised approach for the assessment of both market risk and credit risk, using a simplified approach to calculate risk weights for credit risk exposures.
III. Capital resources
The Firm is not required to calculate an operational risk charge for its Pillar 1 requirement under applicable exemptions. As a Collective Portfolio Management Investment Firm, the Firm’s minimum capital requirement under Pillar 1 is therefore the greatest of:
- the base capital requirement of €50,000;
- the sum of its market and credit risk requirements; and
- its fixed overhead requirement.
In practice, the fixed overhead requirement is the greatest and therefore establishes the Firm’s minimum capital requirement under Pillar 1.
The Firm assesses the adequacy of its capital through its Internal Capital Adequacy Assessment Process. As part of this process, the Firm assesses all known risks, including operational and business risks, and performs stress and scenario tests to determine whether the level of capital that the Firm holds is adequate to support its current and future activities. Following this analysis, it is the Firm’s opinion that no additional capital is currently required.
The Firm’s regulatory capital (on a consolidated basis) as at 31 December 2017 consists of the following:
Tier 1 capital less innovative tier 1 capital
Total of tier 2, innovative tier 1 and tier 3 capital
Deductions from tier 1 and tier 2 capital
Total capital resources, net of deductions
The Firm does not hold any equities, other than those considered immaterial, does not have a trading book and does not undertake any form of securitisation.
The Firm’s capital resources requirement consists of its fixed overhead requirement and not the total of the credit risk and market risk requirements. Therefore disclosures relating to credit and market risk are considered to be immaterial.
The Firm’s Remuneration and Management Committee are responsible for setting and implementing the Firm’s remuneration policy. During this process and when setting individual remuneration awards, the Remuneration and Management Committee would seek input from key business units (including business management, risk oversight and compliance). In addition, the Firm seeks advice from external consultants where appropriate.
The Firm acknowledges the following general principles:
- Remuneration policies and practices should be consistent with, and promote, sound and effective risk management and not encourage risk-taking which is inconsistent with the risk profile of the Funds the Partnership manages.
- Remuneration policy should be in line with the business strategy, objectives, values and interests of the Firm and the Funds it manages (or the investors in such Funds), and include measures to avoid conflicts of interest.
- The Firm’s total variable remuneration should not limit the Firm’s ability to strengthen its capital base.
- Where the Firm’s financial performance is subdued or negative, total variable remuneration should generally be considerably contracted, taking into account both current remuneration and reductions in pay-outs of amounts previously earned.
The Firm’s performance appraisal process includes an assessment of both financial and non-financial performance metrics. Non-financial factors considered include staff’s adherence to Lansdowne policies and procedures, ethics culture and risk management framework. Regard is also given to assess performance in a multi-year timeframe, where this is appropriate.
Discretionary bonuses will be as determined by the Remuneration Committee. The factors used in setting such bonuses include:
a) the individual’s seniority within the Firm and overall contribution to the Firm and the Funds it manages assessed over the medium to long-term;
b) achievement of objectives linked to the individual’s role;
c) financial performance of the Firm;
d) the individual’s professional development;
e) the individual’s contribution to development of junior staff; and
f) the individual’s compliance with internal policies and procedures, ethics culture and risk management framework.
Based on the Firm’s profile, senior management consider that it has one business area, investment management. For the purposes of the remuneration disclosures required by BIPRU 11.5.18 R, the partnership has identified staff who have a material impact on the risk profile of the firm. For the financial year to 31 March 2017, the total remuneration for these staff was £89m.