In January 2014, the European Union established a revised framework (Capital Requirements Directive IV, ‘CRD IV’). The relevant regulations are: the Capital Requirements Regulation (‘CRR’) and the Prudential Sourcebook for investment firms (‘IFPRU’).
The framework consists of three ‘pillars’:
This sets out the formulaic calculation of the minimum capital requirements that firms will be required to hold for the purposes of covering credit, market and operational risk. The Pillar 1 capital requirement is the higher of the fixed overhead requirement and the sum of the credit, market and settlement risk requirement.
This requires firms and supervisors (the Financial Conduct Authority, ‘FCA’) to review whether a firm should hold additional capital against risks not fully covered in Pillar 1, and take action accordingly. For this purpose the Share plc Group has an Internal Capital Adequacy Assessment Process (‘ICAAP’).
This requires a number of public disclosures to be made regarding aspects of the risks a firm faces, its risk management processes and its capital resources. This publication must be made at least annually.
Share plc Group adoption of Pillar 3
Share plc is the ultimate parent company of a Group which contains The Share Centre Limited which is an FCA regulated entity. The Group’s principal trading business is The Share Centre Limited which provides self-select investment services to retail investors.
This document is intended to meet the obligations of the Share plc Group with regard to Pillar 3 disclosures as noted above.
The disclosures are not subject to external verification, except to the extent that the same data appears in the Group’s financial statements. This Pillar 3 Disclosure Report can be found on the Share plc website.
Additional information regarding the Group’s risks and risk management not required under Pillar 3 can be found in the Group’s Annual Report.
The information in these disclosures is based on the financial position of the Group as at 31 December 2019, being its last financial year end.
The Board of the Group approved these disclosures on 9 March 2020. The Board has adopted a policy regarding Pillar 3 such that these disclosures will be made annually at the time of publication of the Group’s financial results, subject to ongoing monitoring and any requirement to amend the information contained herein arising from a material change in the circumstances of the Group.
Share Plc annual financial statements are consolidated from The Share Centre Limited and The Share Centre (Administration Services) Limited. The Share Centre Limited operates the retail stock broking operations of the business and The Share Centre (Administration Services) Limited provides administration services to The Share Centre Limited.
Both entities are all 100% owned by Share Plc. Only one of these entities, The Share Centre Limited, is authorised and regulated by the Financial Conduct Authority (register number 146768). The prudential consolidation includes these three entities (Share Plc and The Share Centre (Administration Services) Limited (under CRD IV) and The Share Centre Limited (as an IFPRU 125k Investment Firm). As with the accounting consolidation, the prudential consolidation excludes dormant and trustee companies. The group structure is shown below:
Personal Retirement Account Limited and The Shareholder Limited are dormant companies. Share Nominees Limited and Sharesecure Limited are trusts.
The Board consists of the Chairman, two Executive Directors and three Non-Executive Directors who have a range of experience and calibre to bring independent judgment on issues of strategy and performance which helps the Board to carry out its supervisory and stewardship functions effectively and to discharge its responsibilities to shareholders for the proper management of the Group. The three Non-Executive Directors of Share plc also sit on the board of The Share Centre Limited, the Group’s principal operating company, which allows them a more detailed insight into the core business, its risks and opportunities, the people involved, our systems and processes and progress in meeting our strategic targets.
The Audit and Risk Committee is responsible for monitoring the integrity of the Group’s financial accounts and the adequacy and effectiveness of the Group’s systems of internal control including risk management procedures. It is also responsible for monitoring the independence and effectiveness of the Group’s external auditors.
There are also Executive level forums, including an Executive Governance and Risk Sub-Committee which has taken on risk and governance reporting responsibilities to the Board, including reviewing and advising upon an updated version of the Group’s ICAAP.
The Remuneration Committee is responsible for setting the remuneration policy of the Group and for oversight of the remuneration of all Executive Directors and the Chairman.
The structure of the Board and its sub-committees are as follows:
|Board||Board Directors||Chairman||Quarterly||Group strategy and regulatory control|
|Audit and Risk Committee||Non-Executive Directors, Chairman, Chief Executive||Senior Non-Executive Director||Biannually||Review of internal control, compliance, effectiveness and costs of audit.|
|Executive Governance and Risk Sub-Committee||Chief Executive, Finance Director, Director of Customer Experience, IT Director, Senior Non-Executive Director, Head of Compliance||Chief Executive||Quarterly||Monitoring of Group risk and governance issues.|
|Remunderation Committee||Non-Executive Directors, Chairman||Non-Executive Director||Biannually||Structure of Board remuneration.|
|Nomination Committee||Non-Executive Directors, Chairman||Chairman||Biannually||Structure, size and composition of the Board and succession planning.|
|Corporate Investments Committee||Non-Executive Directors, Chairman||Chairman||Biannually||Review of market performance and rationale for holding corporate investments.
The Group’s risk appetite is determined by the Board. The Group considers itself to be risk averse with a low risk appetite. This applies to all activities conducted by the Group. The risk appetite defines the amount of risk that the Group is prepared to accept to achieve its strategy. This is evidenced by the Group’s strategic objectives and business model including:
- Stated objective to focus on the core retail stockbroking business, recurring revenue streams at an acceptable level of return;
- A diversified retail customer base with low concentration risk;
- Offering the highest level of customer service, making investing as straightforward as possible;
- No principal positions being held by the Group with any value other than its strategic investments in the London Stock Exchange plc, Euroclear SA, and Professional Partners Administration Limited;
- A requirement for customers to hold the necessary stock or cash on their account prior to executing a trade. Customers can trade on up to £25,000 of uncleared funds but even in these circumstances some evidence of the monies being paid to The Share Centre Limited is required (e.g. a merchant provider authorisation code);
- Where possible, no outsourcing of business critical operations;
- Avoidance of service offerings in complex financial products, such as spread betting;
- A dividend payment policy based on earnings and cash generated; and
- A cautious approach to acquisitions.
The low risk appetite and a culture of risk awareness is embedded in the culture of the Group through the various management structures which exist including those specifically relating to the management of risk as identified in below.
The ongoing identification, understanding and mitigation of risks are core to the decision making processes within the Group. Ultimately the Board has responsibility for setting the Group’s risk appetite and risk management. The attitude to risks the Group faces and strategies to mitigate those risks are then cascaded through the organisation by means of the business planning process, regular management meetings and staff communication.
The over-riding objective of the Group’s risk management processes is the identification of risks and mitigation strategies to ensure that the overall risk to which the Group is exposed, is in line with the risk appetite set by the Board. Risks are fundamentally managed through the Group’s risk register, with risks owned by both the Executive and management. The risk register is used to: record existing and emerging risks; provide a methodology for considering the probability and impact of risks; and track the status of additional controls or processes. For major projects, project risk registers are maintained, which consider project delivery risks, project specific risks or risks to the wider operations of the Group.
Three lines of defence
The Group operates a ‘three lines of defence’ model in managing risk:
First line of defence
The first line of defence is the front-line employees and departments who must understand their roles and responsibilities and apply internal controls and other risk responses to treat the risks associated with their business area. This helps to ensure that the identified mitigations are working as expected to reduce the risk. Line management also has the responsibility to identify and assess and to ensure that the control activities and other responses that treat risk are enforced and monitored for compliance.
Second line of defence
The second line of defence for TSC is, in most cases, the Compliance function (including Financial Crime and Technical). Their role is to provide independent oversight of the risk management activities of the first line of defence and the effectiveness of mitigations in place to reduce risk. The responsibilities of these second-line functions typically include participating in the relevant committees to pro-actively contribute to risk based decision making, reviewing risk assessment; and validating compliance to the risk management framework requirements with the objective of ensuring that risks are actively and appropriately managed.
Third line of defence
The third line of defence is that of external oversight such as auditors and the Authorised Corporate Director of the TC Share Centre Multi-Manager portfolio who report independently on the controls in place within the Group. The results of these independent reviews are effectively communicated to senior management, with more important issues to the Board of Directors. The Governance and Risk Sub-Committee ensure that appropriate action is taken to maintain and enhance the framework.
Risk monitoring system
The Group’s operational risk monitoring system consists of a combination of the ‘bottom up’ monitoring work, evaluation of departmental controls and scoring undertaken by the Compliance Team (predominantly driven via the Compliance Monitoring Programme), combined with the ‘top down’ approach of the Share plc Governance and Risk Sub-Committee (which utilises the corporate Risk Register as a template for regularly examining and measuring each identified element of risk). The work undertaken by the Compliance Team is reported to the Executive, together with The Share Centre Limited and Share plc Boards quarterly, with a formal detailed report.
The Governance and Risk Sub-Committee meets bi-monthly and the minutes of those meetings and the corresponding Risk Register are considered by the Executive, together with the subsequent Audit and Risk Committee. The Governance and Risk Sub-Committee is attended each quarter by the Senior Non-Executive Director as well and this Committee will formally constitute the Risk Sub-Committee of the Audit and Risk Committee of the Board. The Head of Compliance chairs the Governance and Risk Sub-Committee and also has line management responsibility for the Compliance Team. This allows him to escalate issues arising from the Compliance Team’s work or delegate downwards areas of focus for the Compliance Team to consider arising from the Governance and Risk Sub-Committee’s discussions.
The Money Laundering Reporting Officer has a ‘dotted line’ report to the Chief Executive and undertakes a six-monthly risk analysis as part of the anti-money laundering and anti-fraud risk management. This output is more specific, but usefully complements the risk management output and is also reviewed at Board level.
The Group considers that reviewing risks in this way provides the most comprehensive review and outcome. This is based on the interdependencies of the various business activities within the Group and the fact that the different business units use common systems, premises and support staff.
The ICAAP is an ongoing process of risk assessment and monitoring in the context of ensuring appropriate capital adequacy. To that end the Executive and Governance and Risk Sub-Committee have as a standard item on its agendas to review risks to ensure that circumstances have not changed to any degree, which would materially affect the level of capital that the Group should hold to cover those risks. As part of the Group’s ongoing financial processes and controls, the level of capital resources and requirements are monitored regularly. This occurs at least monthly, in part as support for the Group’s monthly regulatory financial and reporting.
Capital is defined as the total of share capital, share premium, retained earnings and other reserves. Total capital for the Group at 31st December 2019 was £17.3m.
Regulatory capital is determined in accordance with the requirements of the CRR and the Group’s Tier 1 Capital: comprising the issued share capital of the parent company, some of which may have been issued at a premium and the retained earnings of the Group as a whole (and foreseeable dividends if any), subject to regulatory adjustments including deducting the net book value of intangible assets, which for the Group principally represents systems development for its technology programme.
The Group’s objectives in managing its capital are:
- To comply with the regulatory capital requirements set by the FCA and the European Banking Authority;
- To safeguard the Group’s ability to continue as a going concern, so that it can continue to provide returns for shareholders and benefits for other stakeholders;
- To maintain a strong capital base to support the development of the business.
Disclosure is also made as required for The Share Centre Limited.
Total capital at 31 December 2019 was:
Share Plc Group
The Share Centre Limited
|Share Premium Account||1.1||-|
|Retained earnings and other reserves¹||15.4||12.2|
|Total Tier 1 capital before deductions||17.3||12.4|
|Deductions from Tier 1 Capital:|
|Investments in own shares||1.4||-|
|Total Tier 1 and total capital after deductions||11.6||8.3|
¹No dividend is proposed ('forseeable dividend')
Capital Ratios and Requirement
The Group (Share plc and The Share Centre Limited) must meet the Pillar 1 requirements of the CRR, together with the Pillar 2 requirements. The FCA takes into account the above requirements identified for Pillars 1 and 2 as part of its Supervisory Review and Evaluation Process before issuing any Individual Capital Guidance. Overall, the Group must hold capital based on the higher of the Pillar 1 and Pillar 2 calculations together with any guidance from the FCA.
Pillar 2 capital requirements are outside the scope of this disclosure document.
The Group must meet the general own funds requirements under Pillar 1 in accordance with the CRR. Institutions shall at all times ensure that they are able to satisfy the following own funds requirements:
- A Common Equity Tier 1 Capital ratio of 4.5%;
- A Tier 1 Capital ratio of 6%;
- A Total Capital ratio of 8%.
These requirements are calculated using the capital resources divided by the total of the exposures, which are the Pillar 1 requirements multiplied by 12.5. As at 31 December 2019, the Total Capital Ratio for Share plc and The Share Centre Limited was 21% and 13% respectively.
Pillar 1 minimum capital calculation at 31 December 2019
The Share Centre Limited
|Minimum own funds requirement||Minimum own funds requirement|
|Fixed overhead requirements||4.4||4.9|
|Credit risk requirement||2.7||2.1|
|Market risk requirement||0.5||-|
|Settlement risk requirement||0.1||0.1|
|Pillar 1 requirement||4.4||4.9|
|Total capital resources||11.6||8.3|
|Total capital ratio³||21%||13%|
²Total capital resources less Pillar 1 requirement
³Total capital resources (£8.6m) divided by risk weighted assets which for Share plc and The Share Centre Limited is 12.5x its Fixed Overhead Requirement. The Tier 1 capital ratio for Share plc was 21% and The Share Centre Limited was 13%
The Pillar 1 requirement for the Group is £4.4m for Share plc and £4.9m for The Share Centre Limited. No additional capital is deemed necessary in respect of the Pillar 2 requirement for both the Group and The Share Centre Limited. In assessing the Group’s risks for Pillar 2 as part its ICAAP, a range of risks have been considered including fraud, cyber-security and loss of customers to competition. Stress and scenario tests are also performed to assess whether the Group would have sufficient capital resources following a plausible but extreme scenario.
When comparing to the value of the Total Capital Resources, both Share plc and The Share Centre Limited maintain a significant surplus to their Capital Requirements.
Risk Categories and Exposures
The risk register used by the Governance and Risk Sub-Committee, as noted above, detail risks faced across the business and apply a scoring system to those risks taking into account both the probability of the risk events identified materialising and the impact those events would have on the business.
Operational risk is the risk of loss arising from inadequate or failed internal processes, people and systems, or from external events. It includes regulatory, legal and financial crime risks but excludes business risks. Operational risk can never be eliminated but the Group aims to have in place appropriate controls and mitigations such that the probability and impact of such operational events are minimised.
The principal operational risks considered by the Group include the risks associated with events which may impact business continuity, and risks relating to IT equipment, interfaces and process failures. In addition, the Group considers aspects of the risks associated with potential fraud events, along with risks related to data security.
The Group seeks to mitigate operational risks through back-up processes, a strong control and governance environment together with the segregation of duties. The Group maintains insurance against a number of operational risks. The Group has and regularly tests a business continuity plan which includes the use of alternative premises and back-up systems.
The Group considers the financial and reputational impact of operational risks as part of its Pillar 2 review.
This represents the risk of loss through default by a counterparty. The Group has a diverse retail customer base and has limits in place on the extent to which customers can trade using uncleared funds. The principal risk in this area therefore relates to the failure of a market counterparty or other institution (for example, a bank) used by the Group.
In respect of the banks used by the Group for holding client money, the Group takes a conservative approach to treasury management and the use of banking counterparties. For both client and corporate money, the Group undertakes detailed due diligence on any new banks, carries out regular reviews on banks, monitors its Treasury Policy and spreads its balances across a number of banks, together with maintaining close relationships with those banks. All of the Group’s banks are regulated by the Prudential Regulatory Authority and covered by the Financial Services Compensation Scheme*.
Risk exposures are broken down by exposure class and the Group uses the Standardised Approach to calculate its Pillar 1 requirement. The standardised approach requires the Group to nominate an ‘ECAI’ (External Credit Assessment Institutions) to provide Institutions and Corporates with a relevant credit assessment. The Group uses Moody’s for this purpose.
The exposure value of each asset is its accounting value. An 8% factor is applied to the risk weighting for each asset class. The credit risk exposure of Share plc and The Share Centre Limited at 31 December 2019 was £2.1m and £1.5m respectively, as shown below:
The Share Centre Limited
|Minimum own funds requirement||Risk weighted assets||Minimum own funds requirement||Risk weighted assets|
|Total credit risk minimum capital requirement||33.4||2.7||26.5||2.1|
*The Group places a small proportion of its client money with Barclays Ireland, which is regulated by the Central Bank of Ireland, which operates the ‘Deposit Guarantee Scheme ‘(DGS’) in the same way that in the UK, the FCSC will pay compensation to eligible depositors if their financial institution is unable to repay deposit claims against it. The DGS is an independent body, set up by the Central Bank of Ireland.
This is the risk that comes from fluctuations in values of, or income from assets or in interest or exchange rates. The Group does not operate a trading book and therefore is not exposed to a risk thereon.
Exposure to market risk in respect of market values arises primarily in the relationship between market values and some of the fee structures used by the Group. As the Group changed its tariffing structure in 2013, a greater proportion of fees are now fixed flat rate charges and the link to market values was substantially reduced.
The Group has no principal positions with any value, other than the strategic investments it has in the London Stock Exchange plc, Euroclear Holding SA and Professional Partners Administration Limited. All of the Group’s business is operated within the UK and other than its investment in Euroclear Holding SA†, the Group’s exposure to foreign currency is minimal. At 31 December 2019, Share plc had a market risk exposure of £0.5m.
Fluctuations in interest rates have a direct impact on the Group’s revenues by affecting the level of income earned on client monies held. Changes in interest rates also impact the income derived from the Group’s own cash balances. The Group has no external borrowings. The Group is also exposed to business risk from impact of interest rates on investor appetite. The impact of market movements and future changes in interest rates are dealt with in the scenario and stress testing undertaken by the Group in determining its Pillar 2 capital requirement although there is limited downside risk from base rates currently being at 0.75%.
†The Euroclear Holding SA investment is held by The Share Centre (Administration Services) Limited
This is the risk arising in respect of trades that are past an agreed settlement date and is calculated as the price difference between the agreed settlement price and the current market value, where such an exposure could result in a loss to the Group. At 31 December 2019, the settlement risk exposure for both Share plc and The Share Centre Limited was £57k.
This is the risk arising from an uneven distribution of exposures or from uneven distribution of exposures to particular sectors, regions, industries or products. The Group mitigates institution (bank) concentration risk by spreading its client and corporate money balances across a number of institutions. The Group is exposed to the risk of losing a major third party relationship but the Group now has a number of such relationships that diversify this risk. Further mitigation is provided by these relationships having a contractual term.
This is the risk arising from uncertainty in the external environment, such as investor appetite or competitive pressures. This risk is managed through Board and Executive oversight. Mitigations include delivery of the Group’s strategy including improving the customer proposition and identifying partnership opportunities. Over many years the Group has built up a diverse and loyal customer base, backed by high quality service.
The principal business risk is that of a stock market crash or a sustained downturn, including a reduction in interest rates and therefore the income earned on client monies. This scenario is assessed as a stress test as part of the Pillar 2 review and the possible capital requirement taking account of management action that would be taken to mitigate the impact.
The Group mitigates against the liquidity risk of not having sufficient financial resources to meet its obligations as they fall due by maintaining the majority of its shareholders’ funds in liquid cash. Client money is kept in a mixture of current accounts and notice accounts to ensure liquidity. Balances are monitored on a daily basis against the Treasury Policy.
There are also a number of other risks the Board does not feel that the Group has exposure to. These include, pension risk, residual risk, and securitisation risk.
The Board Remuneration Committee comprises the Group’s three non-Executive Directors and the Chairman. The Committee has responsibility for making recommendations to the Board on the Group’s general policy on remuneration and for specific packages for individual executive directors - this includes executive board members of subsidiary companies. These five individuals have been identified by the Committee as those employees within the Group whose professional activities have a material impact on the Group’s risk profile.
No director plays any part in any discussions or decisions about their own remuneration. Other senior management remuneration is set by the Executive People Sub-Committee, which applies similar principles.
Appropriate ratios: fixed and variable remuneration
Executive director base salaries are set by the Remuneration Committee to reflect each director’s responsibility and market conditions, and are reviewed at least annually with effect from 9 April. All elements of the remuneration package are included in this disclosure (e.g. pension contribution, health insurance and car allowance).
The Company operates a profit sharing arrangement for its executive directors, who do not receive sales commission, thereby ensuring that the interests of shareholders and executives in sustaining the success of the Company and in increased profits are closely aligned and risks and rewards are shared. This arrangement principally operates through the creation of a pool based on a percentage of operating profits, operating profit growth and revenue growth, which is then distributed on the basis of salary. There is no cap applied to profit sharing arrangements, hence there is no maximum ratio set between fixed and variable remuneration. In 2019, the mix between fixed and variable remuneration was £996k and £125k, 89% and 11% respectively.
Variable remuneration in shares
The Remuneration Committee has also established a system of share-based payments operating by way of EMI Share Options, Approved Company Share Options, Unapproved Share Options, Co-ownership Equity Incentive Plans or Long Term Equity Incentive Plans. The extent of these grants is linked to performance and the grants are disclosed in the Annual Report. The Remuneration Committee ensures that rewards are made within the overall limits authorised by the shareholders and at an appropriate level for an individual, taking into account their role, contribution to the business, previous option grants and market practice.
With the exception of the Chairman, who is ineligible to participate due to his controlling interest, there is also the opportunity for executive directors to partake in the Company’s Share Incentive Plan in accordance with the regulations.
Deferring variable remuneration
To the extent that variable remuneration is made in the form of shares, this element is deferred: the minimum period of deferral is three years and the maximum is 10 years.
The Share Incentive Plan arrangements achieve full tax-relieved status after a period of 5 years.
The vesting period of share-based payments is shown above. There are no reductions applied to unvested variable remuneration. The criteria of performance which determines vestability is the Group’s share price.
The following aspects additionally apply to the Group’s Remuneration policy:
- The policy is consistent with sound risk management and does not encourage excessive risk taking;
- The policy aligns with business strategy for growth in revenue and profitability, and avoids any potential conflicts of interest;
- The policy is reviewed at least annually by the Remuneration Committee;
- Employees in control functions are remunerated adequately;
- Variable remuneration, being a relatively minor subset of profit, does not impact the ability to strengthen the Company’s capital base;
- Performance, being measured by profit, is appropriately risk-adjusted;
- Pension contributions, being 8% of basic salary, are aligned with remuneration;
- All employees are subject to personal dealing rules;
- Variable remuneration is not paid through vehicles;
- Total remuneration takes into account the overall results of the firm;
- Performance measurement relates to full year profitability, although it is paid in two tranches; and
- There are no early termination contract payments which reward failure.