Introduction
The following disclosures are made in accordance with the disclosure rules as set out in section 11 of the FSA’s Prudential sourcebook for Banks, Building Societies and Investment firms.
The FSA has implemented a prudential framework for investment management firms through three “pillars”:
- Pillar 1 sets out the minimum capital requirements for the investment manager;
- Pillar 2 is an assessment of whether additional capital is needed over and above the amount determined under Pillar 1; and
- Pillar 3 requires the investment manager to publish its objectives and policies in relation to risk management, and information on its risk exposures and capital resources.
Risk Management
The firm believes its risk management framework is appropriate for the size and complexity of the firm and that the firm’s capital is adequate to meet the risks assessed. Overall responsibility for identifying material risks to the firm and putting appropriate mitigating controls in place rests with the Chief Financial Officer; risks and mitigating controls are periodically reassessed under the firm’s Internal Capital Adequacy Assessment Process (“ICAAP”).
The specific types of risks faced by the firm are operational risk, business risk, credit risk, and market risk; and capital planning takes these risks into account.
- Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events, including legal risk. The firm seeks to minimize operational risk through an appropriate controls framework.
- Business risk arises from external sources such as changes to the economic environment or one-off economic shocks, and also from internal sources such as poor investment decisions, resulting in poor fund performance and damage to the firm’s reputation.
- The firm is not exposed to credit risk other than in respect of fees receivable and cash held on deposit (at a large UK institution). Management fees are drawn quarterly from each fund. The firm uses the simplified standardised approach when calculating risk weighted exposures, in accordance with the provisions of BIPRU 3.5.
- The firm takes no market risk other than foreign exchange risk in respect of its accounts receivable and cash balances held in currencies other than GBP. The firm calculates its foreign exchange risk by reference to the provisions of BIPRU 7.5.
A guiding principle of the firm’s risk management is that long-term incentives make up a significant proportion of total financial reward and that any benefit derived from such long-term incentives is aligned with the interests of the investors in the funds advised by the firm. In practice, long-term incentives comprise a “carried interest” in the funds advised by the firm, which typically vests over a 48-month period. Carried interest holders will not participate in any benefit until investors have themselves received a return on the capital invested by them, thus aligning investor interests with the firm and promoting good risk management. Any benefits arising out of such long-term awards will be dependent on the results of the funds advised by the firm across a multi-year horizon.
Salary and annual discretionary compensation are determined following a performance management process in which the individual’s performance is judged against agreed competencies and behaviours, and an assessment of the individual’s contribution to the objectives of the firm. A committee comprising the CEO, the CFO (who is also the Compliance Officer) and the HR Director is responsible for the determination of remuneration. The participation of the CFO and HR Director in the Committee ensures remuneration is considered in the context of the firm’s risk management and that due consideration is given to the firm’s capital requirements in the determination of annual awards. Vision Capital LLP reported aggregated partner drawings charged as remuneration of £2.2 million in its audited 31 December 2010 accounts. Due to the size of the firm, it is not possible to distinguish separate business units for remuneration purposes.
Capital Adequacy
As at 31 December 2010, the firm’s regulatory capital resources of £2.3 million comprised solely core Tier 1 Capital.
As a limited licence firm, Vision Capital’s Pillar 1 capital requirement is calculated in accordance with the General Prudential Sourcebook (“GENPRU”) as the higher of the Fixed Overhead Requirement (“FOR”), the sum of market and credit risk requirements, and the base capital requirement of €125,000. The FOR is calculated in accordance with GENPRU 2.1.53-59 and equates to one quarter of the firm’s annual expenses excluding variable costs, and it is this number which determines the firm’s capital requirement. As at 31 December 2010 the firm’s FOR was £1.9 million.
The firm takes a prudent approach to the management of its capital base and monitors its expenditure on a monthly basis in order to take account of any material fluctuations which may cause its FOR to be reassessed. The firm ensures that at all times it has sufficient capital to meet its FOR and formally verifies this on a monthly basis as part of its Management Ac-counts.
Under Pillar 2 of the FSA’s capital requirements, the firm has undertaken an assessment of the adequacy of capital based upon all the risks to which the business is exposed. This analysis concluded that the firm has adequate capital against the identified key risks under its Pillar 1 requirement, that its capital resources are sufficient to support its operations over the next year, and no additional capital injections are necessary. Therefore, the Pillar 1 requirement is the minimum regulatory capital which the firm will hold.
