Pillar 3

The Capital Requirements Directive (CRD), implemented in the UK by the Financial Conduct Authority through the Prudential Sourcebook for Banks, Building Societies and Investment Firms, sets out the regulatory capital requirements firms must adhere to. Those requirements are based on three 'Pillars'. Pillar 1 is a formulaic calculation of the minimum capital requirement, Pillar 2 is a risk based internal assessment of capital requirements which is subject to regulatory review by the FCA, and finally Pillar 3 sets out the disclosure requirements regarding capital which a firm must comply with. This document sets out the information necessary for Share plc, as the parent company of The Share Centre Limited and Sharefunds Limited (both regulated entities), to meet those disclosure requirements. It details both the capital requirements of the Group and the capital resources of the Group. The document is approved by the Board of Share plc and is updated at least annually. This version was approved on 8 March 2017.

Introduction

Pillar 3 Disclosures

In January 2014, the European Union established a revised framework (Capital Requirements Directive IV) governing the amount and nature of capital that investment firms must maintain. The framework consists of three ‘pillars’:

Pillar 1:

This sets out the minimum capital requirements firms will be required to hold for the purposes of covering credit, market and operational risk. The Share plc Group is subject to the Fixed Overhead Requirement for the calculation of its Pillar 1 Capital Resources Requirement. The Pillar 1 capital requirement is the higher of the fixed overhead requirement and the sum of the credit and market risk requirement.

Pillar 2:

This requires firms and supervisors (the FCA) to take a view on whether a firm should hold additional capital against risks not fully covered in Pillar 1, and they must take action accordingly. For this purpose the Share plc Group has an Internal Capital Adequacy Assessment Process (‘ICAAP’), which has been the subject of supervisory review.

Pillar 3:

This requires certain 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 a 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. Additional information regarding the Group’s risks and risk management not required under Pillar 3 can be found in the Group’s financial statements.

The information in these disclosures is based on the financial position of the Group as at 31 December 2017, being its last financial year end.

The Board of the Group approved these disclosures on 8 March 2018. 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 circumstances of the Group.

All companies included in the Group for statutory consolidated accounting purposes are included in the capital calculations and disclosures in this document. The Group has no involvement in any special purpose vehicles.

Risk Appetite

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. This is evidenced by the Group’s strategy and business model including:

  • stated objective to focus on the core retail stockbroking business and recurring revenue streams;
  • a diversified retail customer base with low concentration risk;
  • no principal positions being held by the Group with any value other than its strategic investments in the London Stock Exchange plc, Euroclear plc, 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 is required (e.g. a bank 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 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 at 3.0 below.

 

Risk Management Objectives and Processes

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.

The identification, understanding and mitigation of risks are core to decision making processes within the Group. The attitude to risks the Group faces and mitigation strategies are then cascaded through the organization by means of the business planning process, regular management meetings and staff communication.

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 Risk Sub-Committee (which utilises corporate Risk Registers as a template for regularly examining and measuring each identified element of risk). The Risk Sub-Committee is a sub-committee of the Share plc Audit and Risk Committee.

The work undertaken by the Compliance Team is reported to The Share Centre and Share plc Boards quarterly, with a formal detailed report.

The Risk Sub-Committee meets approximately once every two months and the minutes of those meetings and the corresponding Risk Registers are considered by the subsequent Share plc and The Share Centre Limited Board meetings, as well as the Share plc Audit and Risk Committee. The Chief Executive chairs the 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 Risk Sub-Committee’s discussions. The Head of Compliance is a member of the Risk Sub-Committee and attends an Executive Group meeting each month.

The Money Laundering Reporting Officer has a ‘dotted line’ report to the Chief Executive, also undertakes 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 and its associated document is a core element in the documentation and consideration of risks within the Group and the impacts those risks have on capital adequacy. The ICAAP is reviewed and where necessary updated at least every six months.

Risk Categories and Exposures

The Risk Registers used by the 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

Operational risk is the risk of loss arising from inadequate or failed internal processes, people and systems, or from external events. 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 outsourcing, IT equipment and interfaces. In addition, the Group considers aspects of the risks associated with potential fraud events, along with risks related to data security. The Group is also subject to risks arising from regulatory change or from uncontrollable cost increases arising from levies such as those charged by the Financial Services Compensation Scheme (‘FSCS’).

The Group seeks to mitigate operational risks through a strong control environment, segregation of duties and the use of insurance. This control environment includes regular departmental reviews undertaken by the Compliance Team as noted above. The Group has and regularly tests a business continuity plan which includes the use of alternative premises and back-up systems.

Credit risk

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 failure of a market counterparty or other institution (for example, a bank) used by the Group.

In respect of deposit institutions (banks) used by the Group for holding client monies, the Group undertakes detailed due diligence on the institutions used, spreads its balances across a number of institutions, and maintains close relationships with those institutions.

Market risk

This is the risk that comes from fluctuations in values of, or income from, assets or in interest or exchange rates.

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 plc and Professional Partners Administration Limited.

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 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 clearly limited downside risk from base rates being at 0.50%.

Other risks

The Group mitigates against liquidity risk by maintaining the majority of its shareholder funds in cash. Client monies are kept in a mixture of current accounts and notice accounts to ensure liquidity.

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.

Pillar 2 requirement

The assessment and quantification of all the risks identified under the headings discussed above, including the results of stress tests on the business, gives rise to an assessment within the ICAAP process of the level of capital required to be held to cover those risks. This is the Group’s Pillar 2 capital requirement.

As noted above the Group has opted for the approach which allows a comparison between the Pillar 1 calculated capital requirement and the Pillar 2 ICAAP assessment of the capital requirement. For both The Share Centre Limited and the Group as a whole, the Pillar 2 calculation implies a capital requirement greater than that calculated under Pillar 1 and therefore the higher Pillar 2 capital sum is retained by the Group. In section 5 below, this is shown against the capital resources of the Group to demonstrate the Group’s capital adequacy.

Capital Resources

The Group’s capital can be divided into Tier 1 and Tier 2 capital. Tier 1 capital comprises 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. Disclosure is also made as required for The Share Centre Limited.

Total Tier 1 capital at 31 December 2017 was:

  Share plc Group
£000s 
The Share Cenre Limited
£000s 
Share Capital  823 229 
Share Premium Account 1,064 
Retained Earnings and other reserves 13,071  9,452 
Total Tier 1 Capital before deductions 14,958  9,681 

Tier 2 capital comprises the Group’s revaluation reserves. These arise on the revaluation of available-for-sale financial assets. Sharefunds had no Tier 2 capital as at 31 December 2016.

Total Tier 2 capital at 31 December 2017 was:

  Share plc Group £000s The Share Centre Limited £000s
Revaluation reserves 4,685 1,708
Total Tier 2 Capital 4,685 1,708

Capital adequacy

The Group operates an ICAAP as required under Pillar 2. That process formalises the Group’s risk appetite and risk management framework and integrates it with the Group’s financial processes. As a result risks are discussed, identified and where necessary quantified. The ICAAP is reviewed and updated at least every six months as part of the Group’s risk management processes noted in section 3, unless there are circumstances that warrant a more immediate update.

As part of the Group’s ongoing financial processes and controls, the level of capital resources are monitored and operational ratios and other data reviewed regularly. This occurs at least monthly, in part as support for the Group’s monthly regulatory reporting.

The Group has adopted the approach of comparing the Capital Resources Requirement calculated in accordance with Pillar 1 (the higher of the Fixed Overhead Requirement or the sum of credit and market risk), with the Capital Resources Requirement determined under Pillar 2 (i.e. by the ICAAP process). The ICAAP identifies all material risks based on the Group’s risk register and where appropriate quantifies the risk and the level of capital deemed appropriate to hold against that risk.

The Pillar 2 requirement is more than the Pillar 1 requirement for The Share Centre Limited and thus for the Share plc Group as a whole. Consequently, the Pillar 2 requirement sets the minimum level of capital the Group as a whole needs to hold.

The current (2017) Pillar 1 requirement for the Group is £3.4m on a consolidated basis, and the Pillar 2 requirement is £5.0m. In respect of the individual entities, £3.8m is the Pillar 1 requirements for The Share Centre Limited. £5.0m is the Pillar 2 requirement for The Share Centre Limited. When comparing to the value of capital resources as shown in Section 5 it is evident the Group and The Share Centre Limited all currently maintain a significant surplus to their requirements.

The overall capital adequacy position can therefore be summarised, as at 31 December 2017, as follows, based on the capital resources at that date and the Pillar 1 and Pillar 2 requirements for 2017:

Entity Capital resources *
£000s 
2015 Capital requirements
£000s 
Surplus
£000s
Share plc Group 14,815 4,970 9,845
The Share Centre Limited 8,222 4,970 3,252

* Being Tier 1 plus Tier 2 capital, as in Section 4.

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