Grosvenor Investment Management Limited
PILLAR 3 RISK DISCLOSURE STATEMENT – December 2017
Grosvenor Investment Management Limited (The "Company") is required by the Financial Conduct Authority ("FCA") to disclose information relating to the capital it holds and each material category of risk it faces in order to assist users of its accounts and to encourage market discipline. These disclosures aim to provide information on the risk exposures faced by the Company and the risk assessment process it has in place to monitor these. Known as "Pillar 3" disclosures, they are required to be made under Chapter 11 of the FCA's Prudential Sourcebook for Banks, Building Societies and Investment Firms ("BIPRU") and are seen as complimentary to the Company's minimum capital requirement calculation ("Pillar 1") and the internal review of its capital adequacy ("Pillar 2").
Although the Company is consolidated for accounting purposes with its ultimate parent company, Grosvenor Group Limited, it does not have any subsidiary investments and is not part of a UK Consolidation Group for the purposes of the FCA’s prudential rules in BIPRU. Therefore this Pillar 3 Risk Disclosure Statement is in respect of the Company only. No additional disclosure is required as a result of the Company being part of the consolidated group of its ultimate parent company, Grosvenor Group Limited.
The Company has established a risk management process in order to ensure that the team manages risk effectively, to ensure employees are aware of risks and embed risk management into day to day work, to ensure employees understand the concept of risk management as a tool to produce the best risk adjusted rate of return and not the elimination of risk, and to include risk management in employees' objectives at all levels.
The risk management process is overseen by the Compliance Officer whose role is to oversee compliance arrangements, to advise and assist personnel as required, and to ensure, by a process of formal and informal monitoring, adherence to the FCA Rules and internal procedures. Support for this role is provided by the Board of directors of the Company, who take overall responsibility for this process.
A formal update on operational matters is provided to the Board on at least a six monthly basis. Financial data demonstrating continued adequacy of the Company's regulatory capital is submitted in accordance with the FCA's requirements, and compliance group on a six monthly basis.
Appropriate action is taken where risks are identified which fall outside of the Company's risk tolerance levels or where the need for remedial action is required in respect of identified weaknesses in the Company's mitigating controls.
Specific risks applicable to the Company come under the headings of operational and credit risks.
Operational risk is defined as the risk of loss to the firm resulting from inadequate or failed internal processes, people and systems, or from external events; it included legal and financial crime risk, but does not include strategic and business risks.
The Company has a low risk appetite in its business and operational activities. This is reflected in the firm's culture, governance, controls and activities. Policies are designed to reduce risks in areas such as recruitment, the appraisal process, the risk assessment and management process, compliance and through the use of the legal protocol. Therefore operational risk is not a risk of concern to the Company's Board and it has not allocated internal capital to it.
There is no critical outsourcing of regulated activities. The Company and the General Partners of the Limited Partnerships (the "Funds") that the Company operates and manages instruct professional advisers for advice on issues relating to areas such as legal approach and taxation.
The Company is part of Grosvenor UK Fund Management, which has a business continuity plan in place in line with the main Grosvenor Group Limited plan. This is tested periodically and reviewed annually. Professional Indemnity insurance is set at £75m which the Board considers to be adequate cover for the business.
As the Company is financed by equity and only transacts in the UK, there is no exposure to fluctuations in interest rates or foreign exchange rates. In addition, the Company is not exposed to any securitisation risk.
The Company's revenue is reliant on the performance of the existing funds under management. As such, the risk posed to the Company relates to falling asset values and cessation of income streams due to the life of a Fund not being extended, resulting in a decline in revenue.
Additional operational risks include the risk of inability to refinance within the Funds, and regulatory/tax breaches in relation to investment structures.
The Company's major risks, together with the controls that help mitigate them, and management actions to address these risks, are maintained in a detailed risk register. The register is updated on a six month basis, as a minimum.
The Company's Internal Capital Adequacy Assessment Process (“ICAAP”) has identified that operating risks fall within the Pillar 1 capital retained by the Company.
The Company does not operate a trading book and therefore market risk is not relevant.
Credit risk is the risk that unexpected losses may arise as a result of the firm's borrowers or market counterparties failing to meet their obligations to pay.
Financial assets such as management and performance fees held by the Company in the form of accrued income or trade debtors are assessed for indicators of impairment at each balance sheet date. Financial assets are impaired where there is objective evidence that, as a result of one or more events that occurred after initial recognition, the estimated future cash flows of the investment have been adversely affected.
Management and performance fees accrued or invoiced can result in a credit risk exposure.
The credit exposure relating to the Company's investment management clients is limited. Management fees are drawn quarterly and performance fees are drawn annually where applicable. As operator and manager of the Funds, the Company is well positioned to judge a credit risk. The Company considers that there is little risk of default by its clients. All bank accounts are held with large international credit institutions.
The Pillar 1 credit risk capital requirement is calculated in accordance with the standardised approach. The components of the credit risk capital requirement for the Company as at 31 December 2017 are shown in the table below:
|CREDIT & COUNTER PARTY RISK
|RISK WEIGHTED AMOUNT £000s
|Cash held by Financial
|Cash held by Other
|Other liquid debtors**
|TOTAL CREDIT AND COUNTER PARTY RISK
*Held at financial institutions given a long-term rating of Baa1 by Moody’s
**Mainly amounts owed by Funds operated and managed by the Company
The Board of the Company considers the credit risk to be low.
CAPITAL ADEQUACY - CAPITAL RESOURCES
As at 31 December 2017, the Company held regulatory capital resources of £8.1m comprised solely of core Tier 1 capital.
||TOTAL AMOUNT £000s
|Profit and loss reserve
|TOTAL CORE TIER 1
|Deductions from tier 1
|TIER 1 CAPITAL AFTER DEDUCTIONS
CAPITAL ADEQUACY - CAPITAL REQUIREMENT
The Company is authorised by the FCA as a Full-scope UK Alternative Investment Fund Manager and is categorised by the FCA for prudential regulatory purposes both as a Collective Portfolio Management Investment Firm (“CPMI Firm”) and a BIPRU Firm.
As a CPMI Firm, the Company is required to hold liquid capital in excess of the following:
a. the higher of:
i. the funds under management requirement – i.e. (subject to a maximum of €10,000,000) €125,000 plus 0.02% of the amount by which the Company’s “funds under management” exceeds €250,000,000. (For this purposes, the Company’s “funds under management” is calculated as the sum of the absolute values of all assets of all Alternative Investment Funds (“AIFs”) within the scope of AIFMD managed by the Company, including assets acquired through the use of leverage and, for such purpose, derivative instruments shall be converted into their equivalent positions in the underlying assets); and
ii. the fixed overheads requirement (“FOR”) – i.e. one quarter of the Company’s annual fixed overheads;
iii. plus, to cover professional liability risks, either:
iv. additional own funds equal to 0.01% of the value of the AIF’s managed by the Company, calculated as the absolute value of all assets of all such AIFs, including assets acquired through use of leverage, whereby derivative instruments shall be valued at their market value; or
v. professional indemnity insurance cover meeting certain criteria.
The Company has decided to cover professional liability risks by holding appropriate professional indemnity insurance cover.
As a BIPRU Firm, the Company is required to hold regulatory capital in excess of its Pillar 2 capital requirement (see below) and the following:
1. the fixed overheads requirement; and
2. the sum of the credit risk capital requirement and the market risk capital requirement.
As of 31 December 2017 the Company's regulatory capital requirement was £1.5m. This has been determined by reference to the Company's FOR and calculated in accordance with the FCA's General Prudential Sourcebook ("GENPRU") at GENPRU 2.1.53. The requirement is based on the FOR since at all times this exceeds the total of the credit and market risk capital requirements it faces and also exceeds its funds under management requirement.
The FOR is based on annual expenses net of variable costs deducted, which include discretionary bonuses paid to staff. The Company monitors its expenditure on a quarterly basis and takes into account any material fluctuations in order to determine whether the FOR remains appropriate to the size and nature of the business or whether any adjustment needs to be made intra-year. This is monitored by the Board.
|SOLVENCY RATIO (December 2017)
|Profit and loss reserve
|REGULATORY CAPITAL POSITION (A)
|(i) Funds Under Management Requirement
|Base capital resources
|0.02% of FuM in excess of €250m
|Funds Under Management requirement
|(ii) Fixed Overheads Requirement
|REGULATORY CAPITAL REQUIREMENT (B)
REGULATORY CAPITAL SURPLUS (A – B)
SOLVENCY RATIO (A/B)
CAPITAL ADEQUACY - SATISFACTION OF CAPITAL REQUIREMENTS
The Company uses its ICAAP to identify future capital requirements.
Since the Company's ICAAP (Pillar 2) process has not identified capital to be held over and above the FOR, the capital resources detailed above are considered adequate to continue to finance the Company over the next year. No additional capital injections are considered necessary and the Company expects to continue to be profitable.
REMUNERATION DISCLOSURE STATEMENT—31/12/17
a. Decision-making process for remuneration policy
Grosvenor Investment Management Limited ("GIML") is a wholly owned subsidiary of Grosvenor Europe Limited ("GEurope") and is categorised by the Financial Conduct Authority ("FCA") as a BIPRU firm and a Collective Portfolio Management Investment firm under the Alternative Investment Fund Managers Directive ("AIFMD").
The remuneration policy for GIML and GEurope staff is determined by the GEurope HR Committee which meets regularly to ensure that GEurope remuneration packages are competitive and designed to attract, retain and motivate staff of an appropriate calibre. Within the authority delegated by the Board of Grosvenor Group Limited (“GGL”), reporting to the GEurope Board, the GEurope HR Committee is responsible for approving remuneration policy and in doing so takes into account the pay and conditions across GEurope.
This includes the terms of bonus plans, long-term incentive plans and the individual remuneration packages of senior management and other senior GEurope employees, including all those in positions of significant influence and those having a material impact on our risk profile (Code Staff).
There were three meetings of the GEurope Remuneration Committee during 2017. The terms of reference of the Committee are available on written request.
The members of the HR Committee throughout 2017 were Mark Preston (GEurope HR Committee Chairman and Grosvenor Executive Trustee/Group CEO), Nick Scarles (Grosvenor Group FD) and Jonathan Lane (GEurope Non-Executive Director). Patricia Abril (GEurope Non-Executive Director) joined the Committee on 1 January 2018.
The annual pay review and bonus proposals made to the Committee were prepared by GEurope’s Human Resources function with advice from Grosvenor’s Reward Team. During the year, the GEurope Chief Executive Officer and GEurope HR team provided regular briefings to the Committee and the Committee received input from the Grosvenor Estate HR Director, Camilla Faith. No individual is involved in decisions relating to his or her own remuneration.
b. Role of the relevant stakeholders
The HR Committee takes full account of the company’s strategic objectives in setting remuneration policy and is mindful of its duties to shareholders and other stakeholders. The Committee seeks to preserve shareholder value by ensuring the successful retention, recruitment and motivation of employees.
c. Code Staff criteria
The following groups of employees have been identified as meeting the criteria for Code Staff:
A person who performs a significant influence function for Grosvenor Investment Management Limited (“GIML”), the FCA registered entity within GEurope.
A Senior Manager of GIML - unless already registered as a person who performs a Significant Influence Function (a “SIF”), an individual who is head of, or has responsibility for the management and supervision for a significant business line or business unit/team within GIML.
A Senior Manager of GIML - unless already registered as a SIF, an individual who is a head of a control function which has a material impact on the GIML's risk profile.
Risk-takers of GIML - all staff whose professional activities could have a material impact on GIML's risk profile.
The categories above include all senior level management within GIML.
d. The link between pay and performance for Code Staff
Remuneration is made up of fixed pay (i.e. salary and benefits) and performance-related pay. Performance related pay is designed to reflect success or failure against a range of targets.
For 2017, the principle GEurope bonus was paid in cash. Senior members of GIML are offered the opportunity to voluntarily defer their cash bonus for a minimum period of two years, at risk of movements of Grosvenor Group return. The discretionary bonus was based on company and individual performance.
In addition, certain individuals in GIML (including certain Code Staff) were eligible to receive a long-term cash incentive.
e. Aggregate remuneration cost for Code Staff by business area
In 2017, the following were either categorised as Senior Management or Other Risk Taker:
- 1 Jan to 31 Dec: 8 Code Staff
- 1 Jan – 20 July: 1 Code Staff
- 1 Jan – 28 April: 1 Code Staff
Total: 10 Code Staff
For clarity, GEurope has only one business area therefore we have chosen not to split the aggregated remuneration data into senior manager/other for data protection reasons given the small number of staff involved.
Aggregate remuneration expenditure was as follows:
Code Staff (10): £3.4m (of which £1.1m was variable remuneration)