Pillar III Disclosure

Pillar III Disclosure

Introduction

Within the United Kingdom, the FCA is responsible for the implementation of the Capital Requirements Directive (“CRD”) of the European Union, which sets out the requirements of the regulatory capital framework for its authorised firms. Beaufort Securities Ltd is authorised by the FCA as a Full Scope Investment firm and as such are required to comply with this CRD. The regulatory capital framework consists of three Pillars:-

  • Pillar 1 assesses the impact on capital of three major risk components, i.e. credit, market and operational risk.
  • Pillar 2 requires management to assess the amount of internal capital necessary to cover all current or foreseeable risks. This is documented within the firm’s Internal Capital Adequacy Assessment Process (ICAAP) and allows the firm and the FCA to assess the additional capital required to be maintained in addition to that determined under Pillar 1.
  • Pillar 3 revolves around the importance of  market discipline and requires public disclosure of information relating to capital, risk exposures and the risk assessment process.

Company Background

As noted above, Beaufort Securities Ltd (“Beaufort Securities”) is authorised and regulated by the Financial Conduct Authority (“FCA”) as a Full Scope investment firm. The activities of Beaufort Securities comprises a broad range of stockbroking services for private clients. The firm also operates an online brokerage services. The firm is a wholly owned subsidiary of Beaufort International Associates Ltd (“BIA Ltd”).

The Board of Beaufort Securities meets monthly with the principle Board committees for the purpose of this report being the Executive, Risk, Audit and Remuneration and Benefits committees. All of these Committees have executive board member representatives. 

Risk Appetite

This section provides an overview of Beaufort Securities’ risk appetite process. In the context of this section, risk is defined as the possibility of financial loss or an event occurring that is anticipated to jeopardise achievement of the firm’s strategy.

Risk of financial loss or other adverse events can be managed and mitigated against to reduce the likelihood of a loss making event crystallising.  The remaining residual risk is therefore the amount of risk that an organisation is exposed to and is also prepared to accept or tolerate.

The Board have identified risk appetite by splitting income by operational department responsible for its income generation. This provides a quantification of the importance of each business line as to its ability to generate revenue. A further assessment takes into account both the historic performance of each revenue area as well as the potential impact on the overall mix of the business based on the firm’s future plans. Other factors that are factored into the assessment include the ability of the business to absorb losses, as dictated by capital resources and the impact of significant external events. For example, the quantification of the firm’s current risk appetite reflects the current economic conditions in which we are now operating.

Risk Management

This section documents how Beaufort Securities’ business risks are managed using a risk management framework to assess materiality, monitors risks and the effectiveness of the associated mitigating controls. The process for identifying and monitoring operational risk was developed with the view that the management of risk is best achieved by embedding the process within the individual departments and it is within this framework that Beaufort Securities operates its risk management policy.

The Board has established an Operational Management Group (OMG) to oversee responsibility for the maintenance, review and challenge to the risk management framework. The OMG formally meets on a monthly basis and consists of the relevant Head of each department and this includes the Head of Compliance. The Chief Financial Officer, Chief Operating Officer and a non Executive Director also attend such meetings where required.. The issues discussed by the Group are reported to the Board.

Managers of each business area have also recently updated/completed a department risk review return which forms the basis for assessing and quantifying the risks present in the business. The business managers document their conclusions on a pro-forma return to standardise the categorisation of risk under a number of common risk headings. These risks, together with discussions by senior management, have formed the basis of determining material risks which management deem to warrant an additional capital impact under Pillar 2 (see above).

A “Breaches & Observations” log is in operation to assist the process of identifying potential new or increasing risks and each business manager is required to report to the Risk committee on any changes in their assessment.

All new business proposals require approval by the Executive Management Group and this includes a consideration of the associated risks. 

In addition, the Compliance Department has unrestricted access to all parts of the business. This department has a dedicated team to meet the firm’s anti-money laundering responsibilities. The department also provides a monitoring role across the business. This includes random sample checking against procedures, e.g. monthly reconciliations and a client surveillance programme. 

In addition to the standardised approaches adopted for credit and market risks, the key operational risks identified within the firm’s risk management framework are:-

  • Liquidity risk
  • Legal & regulatory compliance risk
  • Strategic risk
  • Reputational risk
  • Concentration risk
  • Key personnel risk
  • System failure risk
  • Fraud risk

These risks are briefly discussed below.

(i) Liquidity risk

This is defined as the risk of late payment charges, fines and business failure due to the firm’s working capital being insufficient to meet the financial obligations as they fall due.

The majority of operating expenses are relatively fixed and therefore can be planned for. Daily cashflow prepared by Finance together with a monthly forecast. These include the impact of fixed operating costs as well as actual and forecast stock purchases. These are reviewed daily by the Chief Financial Officer and Chief Operating Officer. The cashflow position is discussed each month within the Beaufort Securities Board.

The firm’s bankers provide sufficient CREST Cap for the business to ensure settlement of trades.

(ii) Legal & regulatory risk

This is defined as the risk that staff, policies and/ or procedures are not compliant with legal and/or regulatory requirements nor has adequate responsibility taken by Board and designated senior management performing significant influence functions. This could result in financial loss and/or regulatory sanction and reduced credibility/ reputational damage to customers and others stakeholders.

The Compliance Department has a head-count of three full-time staff. The Head of Compliance has unrestricted access to all parts of the business’ activities and reports directly to the Chief Financial Officer with a dotted line report to a Non Executive Director.

The Compliance Department also provides resource to fulfil the anti-financial crime responsibilities. The Head of Compliance is also the firm’s Money Laundering Reporting Officer (MLRO).

Monthly reporting is supplied to the Board by the Head of Compliance with additional reports on Anti-Financial crime and TCF (Treating Customers Fairly) including complaints handling. An annual MLRO report is presented to the Board.

Detailed procedures and policies are in place across the Firm with the risks monitored through the Compliance Monitoring Plan and through other key risk indicators (breach & observation forms, complaints and compliance surveillance and interaction).

(iii) Strategic risk

This is defined as the risk from changes in the business environment, economic cycles and other external factors that adversely affect the long-term viability of the firm’s business strategy and which would require significant rebuilding and restructuring of the business.

Beaufort Securities has been operating in mature markets for a number of years and has built up a significant level of experience within the business. The firm’s business risk is managed by the Board and is supported by business plans covering the medium-to-long term.

Beaufort Securities’ strategy is principally driven by organic growth and continually to monitor its offering to ensure it remains competitive. Further support is given by daily analysis of business volumes, which would provide an immediate barometer or measure to potential external factors that may be affecting the business.

Price competitiveness, from the perspective of the other business lines noted is more difficult to directly compare. However, the daily income analysis again provides a clear steer. In addition, management are in the market to source new stock lines for placing. Any consistent trend of being outbid would be highlighted and noted as part of this activity.

(iv) Reputational risk

This is defined as risk of loss of income due to damage to Beaufort Securities’ reputation in the marketplace.

From the advisory broking perspective, Compliance monitoring of FCA regulations are used to assess selling practices against required standards of business conduct and identify training needs. A training program exists for all broking staff, who can only undertake broking activity after meeting the requirements necessary to successfully achieve “fitness and competency” permission. Monthly reporting of complaints summarised by individuals and category are reported to the Board by the Head of Compliance.

(v) Concentration risk

This is defined as the risk of loss of income through external changes having a disproportionate impact on overall income due to a reliance on revenue from certain sectoral, geographic areas and/ or business lines.

Broking activities represent a significant proportion of total income with the majority relating to UK equities and consequently is an area where concentration risk exists. Brokerage income is diversified into revenue from proprietary trading, agency dealing (both split geographically to service London and the South West – through the Bristol office) and Contract For Difference (“CFD”) commission. The firm’s CFD services should also assist in developing a resilience to traditional broking business.

It is also worth noting that the firm has no large individual exposures against which any undue influence can be placed on the firm.

(vi) Key personnel risk

This is defined as the risk to business continuity due to the loss of key personnel who cannot be readily replaced.

The Board has a representative from each operational area with recent appointments made at this level to strengthen the Board. Key personnel are retained under service contracts of at least three month (Directors six month contract) with salary levels set with regard to industry expectations.

(vii) System failure risk

This is defined as the risk of internal systems failure resulting in lost revenue due to inability to trade or increased costs to provide an alternative provider.

There are a number of key external partners who supply support services to the firm. In summary these cover the “front office” online trading system; the core system supporting front/ middle and back office functions; payment processes, telecommunications and CREST.

The provider of the firm’s “front office” trading system host our online systems support from a remote location, with a secondary data line available and multiple backup processes in place to cover power outage/ loss of system availability. This support is provided under a rolling twelve month agreement.

Core system functionality is supported via the firm’s disaster recovery site with an external provider. Full support is offered with “office” space for up to twenty onsite staff and batch processing during each day to minimise the impact from third party failure.

The automated payment processing system is provided by an FCA regulated business with substantial business continuity plans in place to maintain customer support. However, in the event of third party failure alternative procedures can be put in place, i.e. manual/ fax confirmations of payments.

The firm has two service providers as part of the total telecommunication infrastructure. This provides redundancy backup in the sense that loss of one provider would allow us to switch to the alternative. 

The firm’s access to CREST, is supported through duplicate data lines. Furthermore, secondary access to trading/ pricing screens is available through a second line.

(viii) Fraud risk

This has been defined as the risk of loss through either internal or external fraudulent activity.

From the perspective of commissions, brokers prepare monthly dealing books summarising all trades completed during the month. This is forwarded to Finance for reconciliation against core systems. Only upon successful reconciliation and subsequent discussion with the broking director (to identify potential monies that need to be withheld) are any commission payments referred to payroll.

All client account activity is undertaken by the Settlements function with firm activity the sole responsibility of Finance. Consequently, the Settlements function cannot transfer money using automated systems from client accounts to an external account. Any manual transfer requires two authorised signatories, one of which must be a Director of the firm.

The firm holds client assets in a pooled Nominee account under its Nominee company. Each day, Finance reconcile the amount retained within clients accounts with bank deposits and transfers cash from/ to the firm’s account to ensure that the client money account is not in deficit at the end of any day.

All external payment files prepared by Finance for the firm’s payment system require release by a Director with the necessary authority level before files are submitted for payment. In addition, all firm and client money accounts are reconciled at least monthly, with the key client settlement account reconciled daily.

HR policies ensure that full references are sought for new employees and that a criminal record check is carried out for all employees that are to be approved persons authorised by the Regulator.

Internal Capital Adequacy Assessment Process (ICAAP)

The ICAAP links Beaufort Securities’ risk management framework, business planning process (both Governed by the Board of Directors) and capital management assessment (performed by Finance).

The ICAAP document forms a fundamental part of the Board’s oversight of risk and the associated impact on capital across the firm. The document includes the impact on capital resources under “stressed” conditions. As such, the document will be updated on an annual basis as a minimum with additional updates based on significant changes within the business.

The Board will monitor performance against the ICAAP through its Committees with regulatory capital ratios continuing to be distributed to all directors on a daily basis and the monthly Board meeting.

Capital Resources

The capital resources analysis below is based on the latest set of audited accounts. The analysis will be updated on an annual basis to reflect the updated results for the year.

Capital Resources (£000s) 31 December 2012
Ordinary share capital 1,700
Retained earnings (2,007)
Capital contribution reserve 1,357
   
Fair Value Reserve (76)
Total Capital Resources 974

 

Remuneration Policy Disclosures

1) Information concerning the decision-making process used for determining the remuneration policy, including if applicable, information about the composition and the mandate of a remuneration committee, the external consultant whose services have been used for the determination of the remuneration policy and the role of the relevant stakeholders;

The Remuneration Committee is responsible for all decisions relating to remuneration. The Remuneration Committee will make proposals in the third quarter each year. Recommendations will be made based on individuals’ performance in the prior year, considering non-financial metrics and the firm’s overall position.

Executive Directors, in consultation with line management, complete an annual review of all employees’ base salaries and recommend amendments where these are considered to be merited. The recommendations are considered by the Remuneration Committee and, if approved, will usually be implemented with effect from 1 January each year.

Decisions on remuneration are taken by Remuneration Committee and they retain the responsibility for ensuring implementation of the Code, ongoing compliance and the identification of Code Staff.

After completion of the initial three month probationary period, employees become eligible to join the firm’s discretionary bonus scheme.

2) information on the link between pay and performance;

Bonuses are formulaic, and based on the achievement of a number of pre determined goals. This is combined with an overall review of performance carried out by management, which may temper the award indicated by the formula. Such a review will consider non-financial metrics.

Given the above, the firm’s remuneration practices do not encourage inappropriate risk taking. It follows that in determining the level of bonus, bonus will only be granted when the firm considers that such an award is consistent with the firm’s strategy, values and long-term interests,

The allocation of the bonus pool is based on the contribution of each business unit within the firm as demonstrated by the management accounts, and of each individual’s contribution to the firm’s results as assessed during the performance appraisal process completed during October each year.

Each employee’s performance appraisal must be properly documented by the appraising manager so that the link between performance and bonus allocation is clear. Non-financial performance criteria form a significant part of the performance assessment process, with explicit reference to the firm’s breaches, dealing errors, complaints, CPD training records and any outstanding audit points. Poor performance in non-financial metrics is likely to over-ride metrics of financial performance.

An individual’s remuneration is based on the following key principles:

  • The value of the role within the business;
  • Whether performance standards have been met or exceeded;
  • The quality of performance, taking specific account of compliance with professional standards, internal policies and procedures that are announced from time to time, laws, regulations and any conflicting interests. Quality of performance is particularly important at busy times or when standards need to be explained to people who are unfamiliar with them, but affected by them. Higher standards are expected of individuals with greater experience and level of responsibility, but all individuals are required to conduct themselves and carry out their roles to high standards;
  • Whether members of staff are demonstrating effective teamwork with other individuals in their own and other departments as and when required;
  • Whether the individual has made other contributions to the success of the business, such as by providing technical or administrative support or by showing leadership or inspiration.

For the avoidance of doubt, any instance of failure to comply with relevant legislation, regulations, or internal policies and procedures will be taken very seriously and will impact upon the level of any element of variable remuneration which might otherwise have been awarded.

The firm’s remuneration policies are designed to ensure that remuneration is consistent with effective risk management and does not expose the firm to excessive risk. For each individual there must be an appropriate balance between fixed and variable elements of total remuneration: basic salaries are set at an adequate level such that employees are not dependent upon receipt of further compensation. The firm uses a standard template employment contract which ensures that all employees are recruited on standard employment terms. Any proposal to vary these terms in relation to either bonus or pension arrangements must be approved in advance by the Remuneration Committee.

3) the most important design characteristics of the remuneration system, including information on the criteria used for performance measurement and risk adjustment, deferral policy and vesting criteria;

It is the firm’s policy to pay base salaries at a level which is sufficient to attract and retain suitably qualified and experienced staff. Base salaries should be competitive with those offered by peer group firms, and roles which are in different departments but which are of equivalent value to the firm will have similar base salaries. There must be no discrimination on grounds of age, sex, race or any other irrelevant factor. Employees within the firm’s control functions are independent of the business units they oversee and have appropriate authority. They are remunerated adequately to attract qualified and experienced staff, and their remuneration depends upon the achievement of the objectives linked to their functions, independent of the performance of the business areas they control. In general, it is expected that the ratio of fixed to variable salary will be higher for employees fulfilling control functions than for revenue-generating employees.

The firm would consider whether any potential award gave rise to a conflict of interest. Such a conflict is unlikely to arise in any event. Conflict management arrangements are described in the firm’s Conflict Management Policy.

It is an integral part of the Remuneration Committee’s role that it considers the implications for risk and risk management.

The firm takes care to ensure that its remuneration arrangements are consistent with its Conflicts Management Policy which sets out the firm’s policies and procedures for identifying and managing conflicts of interest.

There is a close alignment of the interests of shareholders and management, given that shares are largely owned by the management team.

4) information on the performance criteria on which the entitlement to shares, options or variable components of remuneration is based;

See comments under (3) above. It is not the firm’s policy to issue shares, options or other instruments as part of remuneration.

5) the main parameters and rationale for any variable component scheme and any other non-cash benefits;

There is a single bonus pool across the whole firm. 25% of the firm’s post-tax profit is allocated to the bonus pool. The amount in the bonus pool cannot be finalised until the group’s annual results have been audited following the 31 December year-end.

20% of the bonus pool is allocated to Remuneration Code Staff whilst the remaining 5% is allocated to non Remuneration Code staff.

Executive management meet to agree the size of the bonus pool and its allocation across the business units.

The size of the bonus pool is determined on the balance of what is sustainable for the firm in the long-term, and the need to incentivise and retain staff.

6) aggregate quantitative information on remuneration, broken down by business area;

For the year ended 2012

  £000
Salary 2,673
Bonus 577
Other remuneration Nil
Total 3,250

 

 

 

7) aggregate quantitative information on remuneration, broken down by senior management and members of staff whose actions have a material impact on the risk profile of the firm, indicating the following:

(a) the amounts of remuneration for the financial year, split into fixed and variable remuneration, and the number of beneficiaries;

For 2012

  Number Fixed Variable Total
    £000 £000 £000
Senior Management 10 £693 Nil £693

 

(b) the amounts and forms of variable remuneration, split into cash, shares, share-linked instruments and other types;

All variable remuneration has been paid in cash.

(c) the amounts of outstanding deferred remuneration, split into vested and unvested portions;

There has been no deferred remuneration paid for the financial year 2012.

(d) the amounts of deferred remuneration awarded during the financial year, paid out and reduced through performance adjustments;

There has been no deferred remuneration paid for the financial year 2012.

(e) new sign-on and severance payments made during the financial year, and the number of beneficiaries of those payments;

There has been no sign-on / severance payments made for the financial year 2012.

(f) the amounts of severance payments awarded during the financial year, number of beneficiaries and highest such award to a single person.

There has been no sign-on / severance payments awarded for the financial year 2012.