The Capital Requirements Directive (CRD) created a revised regulatory capital framework across Europe governing how much capital financial services firms must retain. In the UK, this is being implemented by the Financial Services Authority and is based on the provisions of the Basel II Capital Accord. The framework consists of three ‘pillars’.
- Pillar 1 sets out the minimum capital requirements firms will be required to meet for credit, market and operational risk.
- Pillar 2 requires firms and supervisors to take a view on whether a firm should hold additional capital against risks not covered in Pillar 1.
- Pillar 3 has the aim to improve market discipline by requiring firms to publish certain details of their capital adequacy and risk management process.
The disclosures within Pillar 3 complement the work already undertaken by Lemontree Wealth Limited (‘Lemontree’) in the assessment of its capital requirements under the Internal Capital Adequacy Assessment Process (ICAAP).
The Disclosure Statement confirms that Lemontree has sufficient capital resources to comply with the capital requirements that are in force as set out by the FSA. It also covers how we identify and assess the risks facing our business together with our approach to managing those risks. In summary, we believe that capital held by our business exceeds the regulatory requirements and that procedures are in place to identify and manage the risks.
Basis of disclosure
This document has been prepared by Lemontree Wealth Limited in line with its ICAAP and FSA requirements.
Frequency, location and verification
Disclosures will be made on an annual basis. They were approved by the Board of Lemontree Wealth Limited on 5 March 2012 and published on the firm’s website (www.rsmtenon.com). The disclosures have not been subject to external audit.
The scope of our disclosure
Lemontree Wealth Limited is a leading provider of investment and wealth management services for private individuals and companies. It is classified under CRD as a limited licence firm and has followed the disclosure requirements needed for this categorisation and the disclosures presented relate to Lemontree Wealth Limited on an individual company basis only.
Responsibility for the management of risk
We encourage our management team to understand and manage risk. The Lemontree Board has taken the view that the management of risk is best achieved by embedding the process within the Board itself, rather than having a separate risk committee. The Board records all material identified risks on a Risk Register indicating which risks are considered the most important. The Risk Register was created by the members of the Board who assessed and identified the risks within the business. The Head of Compliance, who attends all board meetings, maintains the Risk Register.
The type of risks we face
Lemontree’s main risks are operational in nature. Our calculations show that our operational, market, liquidity and credit risks are significantly lower than our fixed overhead requirement (see table below) and so our capital is compared to this figure. However for completeness we also comment briefly on our main risks below:
Operational risk is defined as the potential for financial and reputation loss arising from failures in internal controls, operational processes or the systems that support them. It includes errors, omissions, disasters and deliberate acts such as fraud. The highly regulated arena in which we operate, together with our desire to create a low risk environment, results in strict reporting requirements and regular assessment of our risks.
The assessment of our key strategic and operational risks is recorded in the Risk Register approved by the Board. This Register is reviewed on a regular basis throughout the year. Both the budget and Risk Management processes contribute to the annual ICAAP.
We take the standardised approach to operational risk and as at 30 June 2011 zero capital was allocated to operational risk. This is due to the transfer of advisory business to RSM Tenon Financial Management Limited.
Market risk is the risk from changes in market conditions that result in a negative impact on the firm’s profitability. Lemontree Wealth Limited does not invest on its ‘own account’, i.e. we do not invest the company’s assets and are therefore not directly exposed to many market risks. The most relevant aspect of market risk for the company arises from a downturn in the financial markets leading to a decline in the recurring income stream based on the value of existing funds under management.
Credit risk is the risk of financial loss if a client or counterparty fails to meet its obligation under a contract. Again as we do not trade on our ‘own account’ the counterparty risk is very low, which only leaves the risks of clients not paying our fees or major providers becoming insolvent. However, we recognise that if a counterparty that we have recommended is unable to meets its obligations we may be exposed to claims made against us by clients. As this risk is only likely to crystallise if both an economic downturn and failures in our systems and controls have occurred simultaneously, this risk has been included in our considerations for both Operational Risk and Market Risk.
We closely monitor and follow up on payments due from providers, third parties and other sources. Where a fee invoice is issued we normally ask our clients to pay such fees on receipt and delays in payment are monitored within our credit control function. If necessary we will also make a provision based on our knowledge of the particular situation and the time that has elapsed since the invoice was issued. During our budget process each year, we set an internal target to minimise the level of our older debt. These exposures are very small in comparison to our overall capital levels.
We take the standardised approach to credit risk which together with our Market Risk gave rise to a capital requirement of £770,000 at 30 June 2011.
Ensuring our capital is adequate and Pillar I requirement
Lemontree Wealth Limited needs to ensure it retains sufficient capital to adequately finance its current and future activities. Each year the annual planning process looks at major events and ongoing business. The financial impact of this plan is recorded in our budget and our capital forecast is reviewed in light of the results. Where necessary the capital is adjusted.
Our Pillar I capital requirement is our Fixed Overhead Requirement (‘FOR’), calculated as one quarter of our annual relevant fixed expenditure. The expected FOR for this year and the next year is shown below.
The composition of our capital
The FSA categorise capital into three elements or ‘tiers’.
Tier 1 capital comprises ordinary share capital, share premium and audited profit and loss reserves less the net book value of intangible assets, which for Lemontree Wealth Limited relate solely to goodwill from business we have purchased less illiquid assets.
Tier 2 capital comprises other types of share capital and subordinated loans with a maturity over five years. Currently Lemontree Wealth Limited does not have any of these types of capital.
Tier 3 capital comprises subordinated loan with less than two years maturity. Currently Lemontree Wealth Limited does not have any of these types of capital.
|
2011 £'000 |
| Tier 1 (FOR) |
|
| Share capital |
46 |
| Profit and Loss reserves |
6,185 |
| Tier 2 |
|
| Total Capital |
6,231 |
| Total requirement |
1,639 |
| Surplus |
4,592 |
Base Capital Requirement = €125,000
(Exchange Rate 31/12/2011) £104,132
Total Variable Capital Requirement =(FOR) £1,639,000
Conclusion
The disclosures set out above demonstrate that Lemontree’s capital currently exceeds the regulatory requirements and that all risks and capital requirements within the firm are regularly reviewed and considered by the board.
Any queries regarding these disclosures should be directed to the Compliance Director.
Tel: 0113 244 5451 or e-mail: compliance.fm@rsmtenon.com