Pillar III

1      Introduction

Pollen Street Capital Limited (“Pollen Street” or the “Firm”) is required by the FCA to disclose information relating to the capital it holds and each material category of risk it faces to assist users of its accounts and to encourage market discipline.

The Capital Requirements Directive (“CRD”) created a revised regulatory capital framework across Europe covering how much capital financial services firms must retain. In the United Kingdom, rules and guidance are provided in the General Prudential Sourcebook (“GENPRU”) for Banks, Building Societies and Investments Firms (“BIPRU”).

The FCA framework consists of three “Pillars”:

  • Pillar 1 sets out the minimum capital requirements that companies need to retain to meet their credit, market and operational risk;
  • Pillar 2 requires companies to assess whether their Pillar 1 capital is adequate to meet their risks and is subject to annual review by the FCA;
  • Pillar 3 requires companies to develop a set of disclosures which will allow market participants to assess key information about its underlying risks, risk management controls and capital position. These disclosures are complimentary to Pillar 1 and Pillar 2.

Rule 11 of BIPRU sets out the provisions for Pillar 3 disclosure. The rules provide that companies may omit one or more of the required disclosures if such omission is regarded as immaterial. Information is considered material if its omission or misstatement could change or influence the decision of a user relying on the information. In addition, companies may also omit one or more of the required disclosures where such information is regarded as proprietary or confidential. The Firm believes that the disclosure of this document meets its obligation with respect to Pillar 3. Pollen Street will make the Pillar 3 quantitative disclosure on an annual basis, following the completion of its ICAAP.

In addition, the Firm, on account of its classification as a full scope Alternative Investment Fund Manager (“AIFM”), is subject to a parallel "own funds" requirement as detailed in Article 9 of the Alternative Investment Fund Managers Directive.

2      Firm Overview

Pollen Street is incorporated in the UK and is authorised and regulated by the FCA as a a collective portfolio management investment firm and full scope AIFM. As such PSC calculates its capital requirement based upon three methodologies, each of which is discussed further below:

  • The higher of the base capital requirement and the capital requirements under GENPRU 2.1.45;
  • The requirements of the Pillar 2 Rule; and
  • The requirements of AIFMD.

The CEO is responsible for the day to day management of the Group.

Risk within the Group is managed by use of the following:

  • Senior management is accountable for designing, implementing and monitoring the process of risk management and implementing it into the day-to-day business activities of the Firm;
  • The Board on behalf of the Firm has approved a risk appetite statement;
  • The Firm identifies the most material risks to its business and subjects them to scenario analyses and stress tests in order to assist in its risk management and capital planning;
  • The Group has implemented an operational risk event data collection procedure to ensure that all events, be they actual operational losses or near misses, are captured.

2.1        Capital Resources and Requirements

2.1.1         Capital Resources

2.1.1.1           Pillar 1

Pollen Street was authorised by the FCA on 16 May 2014 and holds regulatory capital resources of £1.7m, comprised solely of core Tier 1 capital.

The Firm has calculated its BIPRU capital resources in accordance with GENPRU 2.2.  As a limited company its capital arrangements are as follows:

As at December 31 2015

£m

Eligible Members Capital

0.0

Audited Reserves

1.7

Hybrid Capital

-

Tier 2 Capital

-

Deductions

-

Total

1.7

 

 

 

 

 

 

 

 

 Source: Pollen Street Capital

As a BIPRU firm, Pollen Street is required to maintain capital resources equal to or exceeding the higher of:

  • Base capital requirement of €125,000;
  • The sum of its market and credit risk requirements; or
  • The fixed overhead requirement (which is a quarter of the Firm’s fixed annual costs).

As at 1 November 2016, the Firm’s Pillar 1 capital requirement was £250,000.

On account of its classification as an AIFMD firm, in parallel with the BIPRU requirements above, Pollen Street is also required to maintain ‘own funds’ which equal or exceed the sum of:

  • The higher of:

-    The funds under management requirement; or

-    The fixed overhead requirement (which is a quarter of the Firm’s fixed annual costs); and

  • The professional indemnity requirement
  • As at 1 November 2016, the Firm’s Pillar 1 capital requirement was £310,000.

 2.1.1.2           Pillar 2

The Firm has adopted the “Structured” approach to the calculation of its Pillar 2 Minimum Capital Requirement as outlined in the Committee of European Banking Supervisors Paper, 27 March 2006 which takes the higher of Pillar 1 and 2 as the Internal Capital Adequacy Assessment Process (“ICAAP”) capital requirement.  It has assessed Business Risks by modelling the effect on its capital planning forecasts and assessed Operational Risk by considering if Pillar 2 capital is required taking into account the adequacy of its mitigation.

Since the Firm’s ICAAP has not identified capital to be held over and above the Pillar 1 requirement, the capital resources detailed above are considered adequate to continue to finance the Firm over the next year.

3      Risk Management

The Firm has established a Risk Management function (“RMF”), headed by the Firm’s Head of Risk to ensure that it has effective systems and controls in place to identify, monitor and manage risks arising in the business. The Firm’s Head of Risk oversees the performance of the Risk Management Function and reports to the Board on whether the Company remains within its risk appetite.

As risks are identified within the business, appropriate controls are put in place to mitigate these and compliance with them is monitored on a regular basis. The frequency of monitoring in respect of each risk area is determined by the significance of the risk. The Firm does not intend to take any risks with its own capital and ensures that risk taken within the portfolios that it provides advice to is closely monitored. The results of the compliance monitoring performed is reported to the Board by the Compliance Officer.

3.1        Operational Risk

The Firm places strong reliance on the operational procedures and controls that it has in place to mitigate risk and seeks to ensure that all personnel are aware of their responsibilities in this respect.

The Firm has identified a number of key operational risks. These relate to disruption of the office facilities, system failures, trade failures and failure of third party service providers. Appropriate policies are in place to mitigate against risks, including appropriate insurance policies and business continuity plans.

3.2        Credit Risk

The main credit risk to which the Firm is exposed is in respect to the failure of its debtors to meet their contractual obligations. Most the Firm’s receivables are related to investment management and advisory activities. The Firm believes its credit risk exposure is limited since the Firm’s revenue is ultimately related to management fees received from funds. These management fees are drawn throughout the year. Other credit exposures include bank deposits and office rental deposits.

The Firm undertakes periodic impairment reviews of its receivables. All amounts due to the Firm are current and none have been overdue during the year. As such, due to the low risk of non-payment from its counterparties, management is of the opinion that no provision is necessary. A financial asset is overdue when the counterparty has failed to make a payment when contractually due. Impairment is defined as a reduction in the recoverable amount of a fixed asset or goodwill below its carrying amount.

GENPRU 2.1.46 states that “When a collective portfolio management investment firm calculates the credit risk capital requirement and the market risk capital requirement for the purpose of calculating the variable capital requirement under GENPRU 2.1.40 R it must do so only in respect of designated investment business. For this purpose managing an AIF or managing a UCITS is excluded from designated investment business.” Pollen Street Capital does not undertake any designated investment activity other than managing an AIF and so is not required to hold credit risk capital.

3.3        Market Risk

Since the Firm holds no trading book positions on its own account, and its primary bank account is in GBP and the majority of its fee income is converted to GBP at the first opportunity, the Firm’s exposure to foreign currency risk is not significant. Since the settlement of debtor balances take place without undue delay, the timing of the amount becoming payable and subsequently being paid is such that it is not considered to present a material risk to the Firm. The Firm is therefore of the opinion that market risk is not a material risk to the Firm.

GENPRU 2.1.46 states that “When a collective portfolio management investment firm calculates the credit risk capital requirement and the market risk capital requirement for the purpose of calculating the variable capital requirement under GENPRU 2.1.40 R it must do so only in respect of designated investment business. For this purpose managing an AIF or managing a UCITS is excluded from designated investment business.” Pollen Street Capital does not undertake any designated investment activity other than managing an AIF and so is not required to hold credit risk and market risk capital.

3.4        Liquidity Risk

Liquidity risk is the risk that the Firm does not have adequate liquid assets to meet its obligations as they fall due.  As the firm does not have material illiquid assets, this risk is not considered to be material.

3.5        Securitisation Risk

Securitisation risk is the risk that the capital resources held by the firm in respect of assets it has securitised are insufficient.  The firm is not exposed to any securitisation vehicles and is therefore not exposed to securitisation risk.

3.6        Insurance Risk

Insurance risk is the risk that insurance liabilities occur at a different time or in a different quantum to that expected.  The firm does not undertake insurance activities and is therefore not exposed to insurance risk.

3.7        Pension Obligation Risk

Pension obligation risk is the risk that the firm is required to make contractual or non-contractual contributions to a pension scheme.  The firm does not operate a defined benefit pension scheme and does not have any pension obligations.  The firm is therefore not exposed to pension obligation risk.

3.8        Concentration Risk

Concentration risk is the risk arising from the firm having a large exposure to a particular counterparty, market or collateral type.  The firm does not undertake lending activities as principal and is therefore not exposed to concentration risk.

3.9        Residual Risk

Residual risk is the risk that the firm’s credit mitigation techniques are ineffective.  The firm does not undertake credit activities and hence does not have any credit mitigation techniques.  The firm is therefore not exposed to residual risk.

3.10     Business Risk

Business risk is the risk that the firm is may not be able to carry out its business plan or strategy.  In analysing the impact of this risk, the Firm has considered a variety of stress tests covering different scenarios and has concluded the capital held under pillar 1 adequately covers these risks.

3.11     Interest Rate Risk

Interest rate risk is the risk that the firm’s income or expenses vary as a result of prevailing interest rates.  The firm does not have any borrowings and earns an immaterial amount of interest income from its treasury balances. However, the firm derives a portion of its performance fees from AIFs whose income, and hence the Firm’s fees, may depend on interest. The firm considers this to be part of the overall business risk of the firm and so has captured this as business risk. The firm is therefore not materially exposed to further interest rate risk.

3.12     Other Risks

No other risks have been identified.

4      Remuneration Code

The Firm has adopted a remuneration policy and procedures that comply with the requirements for remuneration management in accordance with the FCA AIFM remuneration code (SYSC 19B) of the FCA’s Senior Management Arrangements, Systems and Controls Sourcebook (“SYSC”), and in accordance with ESMA’s Guidelines on sound remuneration policies. The Firm has considered all the proportionality elements in line with the FCA Guidance and, pursuant to this application, has disapplied certain provisions of the code where relevant.

The remuneration policy is reviewed by the Firm’s Remuneration Committee.