The European Union’s Capital Requirements Directive (the “Directive”) creates a revised regulatory capital framework across the EU governing how much capital financial services firms must retain. In the United Kingdom, this is implemented by the Financial Conduct Authority (“FCA”), through its Handbook of rules and guidance including the General Prudential Sourcebook (“GENPRU”) and specifically the Prudential Sourcebook for Investment Firms (“IFPRU”).
This disclosure is underpinned by AXG Advice’s Risk Management Framework, which is well established and comprises a number of procedures and processes.
Ownership of the Risk Management Framework sits with the AXG Board, which regularly considers and reviews risk management matters, and in particular reviews the Risk Management arrangements, the Risk Management Plan and the Business Continuity Plan.
The FCA framework consists of the ‘Pillars’
Pillar 1 sets out the minimum capital requirement that we need to retain to meet our credit, market and operational risks
Pillar 2 requires us and the FCA to take a view on whether we need to hold additional capital against firm specific risks not covered by Pillar 1
Pillar 3 requires us to develop and publish a set of disclosures, which will allow market participants to assess key information about our underlying risks, risk management controls and capital position.
This framework obliges us to publish this formal disclosure in accordance with our disclosure policy.
The rules do allow us not to disclose one or more of the specified items where we consider the information to be immaterial. Materiality is based on the criterion that the omission or misstatement of any information would be likely to change or influence the decision of a reader relying on that information. Where we have considered a disclosure to be immaterial we have stated this in the document.
Additionally, we may also omit one or more of the required disclosures where we believe that the information is proprietary or confidential. In our view, proprietary information is that which, if it were shared, would undermine our competitive position.
Information is considered to be confidential where there are obligations binding us to confidentiality with our clients, suppliers and counterparties. Where we have omitted information for either of these two reasons we have stated this in the relevant section.
2. Scope and application of the requirement
AXG Advice is authorised and regulated by the FCA and has permission to provide discretionary investment management, advisory services and execution-only services.
3. Risk management
Our risk management framework reflects the FCA requirement that we must manage a number of different categories of risk, including liquidity risk, operational risk, credit risk, reputation risk, business risk, interest rate risk and concentration risk.
AXG’s liquidity resources are its own funds (plus that of its shareholders), which we generate from on-going operations. We consider liquidity positions as a part of our continuous prudential risk management and under Pillars 1 and 2 through our ICAAP assessment processes. Our key process for liquidity risk management is the continuous management of our profitability and our balance sheet, which provides a high level of confidence in our financial security.
We outsource certain operational activities to third party companies who are experts in their field and provide such services to many of our competitors. Our investment in a new, industry leading operating model will further enhance our operational risk management. We review the financial and operational stability of our third party outsource partners regularly through the Risk Committee, to ensure that service standards and financial stability requirements are met.
There is an overlap between operational and reputation risk to the extent that any significant operational failure impacts our reputation. Reputation risks are covered under the heading Business and Reputation risks below.
We do not undertake any lending activity and the major assets on the companies’ balance sheets are bank deposits, commissions and fees due from our activities and outstanding management invoices.
With regards to bank deposits, our clearing agent only deposits money with approved counterparties on agreed terms. For investment management clients these are governed by our agreements with these clients. For commissions, fees and management invoices, their terms are subject to confidentiality clauses and therefore we are not disclosing this information.
Business and Reputation risk
Our Pillar 2 business risk principally takes the form of a fall in assets under management due either to a market downturn or a loss of clients through reputation risk that leads to a significant reduction in revenues. To mitigate business risk, our Board regularly analyses various different economic scenarios to model the impact of economic downturns on our financial position. Our exposure to business risk is hedged to a degree by having significant exposure to both bonds and equities.
We do not have any foreign exchange exposures nor do we have permission to engage in proprietary trading book activities and are not directly exposed to market risk. Company revenues are linked to the values of clients’ investments so market risk resulting in a decrease in investment values will cause a reduction in revenue.
Interest rate risk
We do not currently have any borrowings, so we are not exposed to this risk.
AXG has a wide client base and diverse revenue streams, and we are not reliant on the income generated by a single client or single revenue stream.
4. Capital resources and requirements
AXG has calculated its Pillar 1 capital requirement in accordance with Part 2 of the Capital Requirements Regulations (CRR).
We submit reports for accounting and prudential purposes to the FCA on an unconsolidated basis as we are not part of a group. We are a BIPRU €50k limited licence investment firm and are therefore required to calculate a fixed overhead requirement in accordance with GENPRU 2.1.53 R
Tier 1 regulatory capital (based on most recent audited accounts
Tier 1 capital resources £50,000
Permanent share capital 0
Profit and Loss account 0
Less: Intangible Assets £50,00
Tier 2 and 3 Capital resources
Total Capital Resources £50,000
Total Capital Requirement £43,185
Solvency Ratio 115.78%
Our annual Internal Capital Adequacy Assessment Process identifies credit risk, business risk and operational risk capital requirements and will determine future capital requirements for the company.
5. Remuneration disclosure
The FCA expects public disclosure of
• Information concerning the decision-making process used to determine the remuneration policies
• Information on the link between pay and performance
• Aggregate quantitative remuneration data by business area
• Aggregate quantitative remuneration data broken down by employees whose activities have a material impact on the risk profile of the firm.
These requirements are set out in the FCA Remuneration Code. AXG complies with the Remuneration Code in the respect that the Board determines is proportionate to the firm’s size, internal organization and the nature and scale of its business activities. As a BIPRU firm falling within proportionality 4 there is no requirement to appoint a remuneration committee.
AXG maintains a compensation program designed to attract and retain highly skilled, qualified employees. Compensation for employees typically includes a salary, benefits and a discretionary bonus. When determining compensation for its employees, we consider several factors, including, but not limited to, the individual’s performance, qualifications and experience, the relative value of each position within the Firm, and the state of the compensation marketplace for each role.
Our compensation program is designed to promote integrity with a focus on developing a long term business.
We have not disclosed code staff remuneration by business area as this information is confidential and disclosure would result in an individual’s identification.