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Pillar 3 Disclosure

  1. INTRODUCTION

GBIM Limited (FRN 593265), trading as GBIM, Gore Browne, and Gore Browne Investment Management, is a bespoke investment management company which provides discretionary investment management services primarily to private clients, but also to trusts, charities, companies, and pension funds. Occasional Execution Only transactions occur.

GBIM is authorised and regulated by the Financial Conduct Authority (FCA) for all its affairs, including prudential matters. The company is privately owned by individual employees, some of whom are Directors in the firm.

This disclosure document is published on a solo basis in accordance with the FCA rules concerning Pillar 3 disclosures. It confirms that the company has adequate capital for its size and business complexity over its planning horizon and considering the potential impact of an economic downturn.

 

  1. BACKGROUND

The Basel III regulations, commonly referred to as CRD IV, have revised the definition of capital resources and included additional capital and disclosure requirements for certain firms.  This took effect from 1st January 2014; however, GBIM as a firm that does not hold client money or assets remains subject to CRD III.

The FCA interpretation of the CRD framework consists of three “Pillars”:

Pillar 1 is the minimum capital requirement set out by the Directive and instructed in the national discretions.  The minimum capital requirement has three main components:

  1.       Market Risk (Market Risk Capital Requirement)
  2.       Operational Risk (Operational Risk Requirement) and
  3.       Credit Risk (Credit Risk Capital Requirement)

Pillar 2 is the capital adequacy assessment made by each individual firm.  The adequacy of the firm’s minimum capital is no longer dictated by the regulatory minimum requirement and the firm must assess itself as to whether the capital it holds is adequate.  This is achieved by the firm through its Internal Capital Adequacy Assessment Process (ICAAP) which quantifies the risks of certain events on the firm’s profitability and the impact on its ability to continue to operate.

Pillar 3 sets out disclosure requirements regarding capital and risk management.  The disclosure requirements aim to complement the minimum capital requirements (Pillar 1) and the supervisory review process (Pillar 2) and aim to encourage market discipline by allowing market participants to assess key pieces of information on risk exposure and the risk assessment process of the firm.

In regard to the disclosure statement, the rules provide that we may omit one or more of the required disclosures if we believe that the information is immaterial.  Materiality is based on the criteria that the omission or misstatement of material information could change or influence the assessment or decision of a user relying on that information for the purposes of making economic decisions.

  1. RISK MANAGEMENT

Risk management is the responsibility of the Board of Directors and is led by the firm’s Compliance Officer. Risks are identified by staff, including the Directors and Compliance Officer, and a risk register produced by business function, which is then presented to and reviewed for effectiveness by the Board on a quarterly basis. Any significant risks without adequate mitigation in place, for example, risks which remain High (Red on the RAG rating system) after mitigation, are discussed in detail at Board level, with a view to deciding how to improve the mitigation and reduce the net risk. This process is part of a wider formal planning and review cycle throughout the year, in relation to risk management, financial projections and compliance monitoring. GBIM also contracts independent compliance consultants who review the firm’s own internal compliance monitoring .

Risk Appetite

We are generally risk-averse in all matters relating to client administration and take-on, safety of all stakeholders, and the regulatory and legal environment.

In carrying out our discretionary investment management services, we take great pains to gain a detailed and considered understanding of how much risk our clients wish to take, and then we construct portfolios for them which we believe have a good chance of achieving their investment and lifestyle objectives. This factors in volatility, correlation analysis as well as ultimate loss of capital.

In all other areas, including strategic development, we will take prudent well-considered risks with a view to securing our objectives.

Risks identified and assessed as part of the firm’s ICAAP are as follows:

Market Risk

Client portfolios are diversified to reduce market risk, in the event that markets fall sharply and remain depressed.  Such falls could impact on  GBIM’s assets under management and therefore client revenue (as fees are calculated on an ad valorem basis). In addition, deals are checked to success each day, to avoid market risk in relation to failed deals.

Liquidity risk

The company does not trade on its own account. The company’s reserves are in cash. These cash reserves are held on deposit with major banks and, therefore, it is believed that the company’s capital is not directly exposed to market risk (see market risk above). It should be noted that the returns earned by the company will be impacted by overall levels of equity markets, due to the practice of levying fees as a percentage of funds managed. However, this is treated as a business risk.

Credit Risk

Credit risk is not assessed as an applicable risk to GBIM. In the conduct of its business of operating discretionary portfolios the company does not (and does not expect to) undertake any activities that result in exposure to credit risk. No lending is carried out or extension of credit terms to any client, agent or other party.

 Operational Risk

Operational risks are categorised within GBIM’s risk register, which is managed internally, and reviewed periodically by the Directors. Each risk is separately identified, together with the actions which are being taken to mitigate the risk. This framework and the appropriate mitigating actions are monitored by the Directors and reviewed at least quarterly.

GBIM does not undertake any significant business outside the core activity of discretionary investment management, and does not trade derivatives or structured products.

It is considered that GBIM’s operational risk is lower than that of many similar businesses due to the limited range of, and structure of, its activities. The operational risks relating to the conduct of investment management activities are further mitigated by the company’s insurances. Details of the estimated potential calls on GBIM’s capital have been calculated and considered.

GBIM believes that it guards effectively against trading losses, but from time to time dealing errors occur. Sometimes these are profits, sometimes losses. A log of the history of dealing errors is available upon request.

Throughout its history GBIM Ltd (and previously as Gore Browne Investment Management LLP) has been profitable. As a result, the company has been able to build reserves to protect against cash flow risks. GBIM targets having reserves at twice the level of the regulatory requirement.

The main business risks are identified below.

Business risks:

  • Reduction in client numbers/funds under management as a result of: market falls, damage to reputation, failures in service or standards, a lack of investment in business development/marketing
  • Reduction in profitability as a result of declining margins due to increased costs or competitor activity.
  • Poor allocation of significant capital and resources into investments or activities that do not produce the expected contribution to business returns.
  • Failure to identify or adopt strategies to enable the business to retain its competitive edge and resulting dilution in profitability over time.
  • Reputational risk is a key issue for an investment management company, whose relationships are based upon trust. Damage to our reputation might impair our assets under management, our fee levels and our profitability. This might arise out of poor investment performance, poor administration, compliance failures or a failure to maintain good relationships with clients or key staff.

The impact of business risks will likely be spread over a period of time. For example, a short, sharp spike downwards in equity markets followed by a rapid recovery will have a very small impact on GBIM’s revenue. However, a prolonged period of poor market conditions or damage to the company’s reputation may have a significant impact upon revenue. When assessing these risks we have also considered the ability and the extent to which the business could take actions such as reducing costs or raising capital to mitigate or remove entirely the impact of the risk to the firm’s capital adequacy. However cost cutting forms no part of the stress testing financial analysis, and operating sustainability is expected to be maintained without such cost cutting. In practice it is likely that costs might be cut.

 Securitisation risk

GBIM is not an investor, originator or sponsor of securitisation transactions. However, the client portfolios which GBIM controls under a discretionary mandate may be invested in investments which involve securitisations.

Investments involving securitisation are carefully researched prior to investing in them, and once invested, they are regularly monitored.  This monitoring seeks to mitigate the risk of client money being invested into a securitisation arrangement which fails to operate as anticipated, or the values and risks transferred not emerging as expected, and client portfolios not performing in line with expectations.

Insurance risk

The Board reviews the insurance cover at least annually, to ensure that it is sufficient to protect the firm against residual and unexpected risks.

Pension obligation risk

Pension obligation risk is not assessed as an applicable risk to GBIM, as the firm does not operate a defined benefit scheme for staff.

Concentration risk

Concentration risk assesses and monitors the firm’s exposure to asset concentrations. As the firm does not trade as principal, it is not in itself at risk from asset concentrations.

It is ensured that client portfolios are well diversified where possible, in line with relevant client mandate asset allocations.  As always this is as determined by each clients’ information and suitability questionnaire to avoid any portfolio being too concentrated, and suffering unduly in a market correction.

Residual risk

GBIM maintains capital resources higher than the minimum required in order to provide against unexpected risks, to reduce the impact to clients and the firm.

Interest rate risk

The firm diversifies portfolios into investments which benefit from a rising rate environment, in the event that interest rates rise unexpectantly, to account for potential increased discount rates/falling investment .

Foreign exchange risk

GBIM does not consider foreign exchange risk to be substantive. GBIM holds assets invested in foreign currencies in client portfolios, where there is no foreign exchange hedge back into Sterling, which could mean these asset values are at risk, in the event of an increase in Sterling values. GBIM also holds portfolios held in other currencies, and the calculation of the management charges on the value of the portfolio could be lower, based on foreign exchange movements. Both these scenarios relate to a small proportion of total value of assets held.

  1. CAPITAL ADEQUACY

As mentioned in Section 2 above, the firm has a requirement to carry out internal capital adequacy assessments.  GBIM has a process of monitoring its capital resource availability with comprehensive analysis of its capital requirements and potential risk exposures carried out within the firm’s Internal Capital Adequacy Assessment Process (ICAAP).

This document includes a review of the adequacy of the firm’s capital resources for the next three years based on its latest financial projections and considers the risks to which the business is exposed.  The ICAAP also includes the results of various analyses aimed at assessing the firm’s position under different scenarios.  Based on the ICAAP, the firm expects to have sufficient capital to cover its requirements and that no further capital is required.  The ICAAP is updated annually and reviewed and approved by the Board of GBIM.

  1. CAPITAL RESOURCES

GBIM holds sufficient monies to cover the capital requirement.

At 31/12/2018 At 30/06/2018
£’000 £’000
Tier 1 Capital 2,378 1,962
Deductions from Tier 1 Capital 0 0
Total Tier 1 Capital After Deductions 2,378 1,962
Upper Tier 2 Capital 0 0
Lower Tier 2 Capital 0 0
Deductions from Tier 2 Capital 0 0
Deductions from Total of Tiers 1 and 2 Capital 0 0
Total Tier 1 Capital Plus Tier 2 Capital After Deductions 2,378 1,962
Total Tier 3 Capital 0 0
Total Capital 2,378 1,962
Deductions from Total Capital 0 0
Total Capital After Deductions 2,378 1,962
Pillar 1 Capital Requirement 730 821
Excess of Total Capital Over Capital Requirement 1,648 1,141

 

Remuneration Policy

GBIM is considered to be a Tier 4 firm by the FCA.  Accordingly, it has a Remuneration Policy which applies to the remuneration of all staff, including the Executive Directors (and includes the Compliance Officer and MLRO), Approved Persons (CF30s) and all other permanent staff.  These number 23 in all (including 8 Senior Managers, 19 full time staff, and 4 part-time staff, and all the directors are full-time staff).

GBIM operates a Remuneration Committee (Remco) comprising the Chief Executive Officer of GBIM, and two other staff members, all of whom are employees of GBIM. The Committee is appointed by the Board for a period up to three years, extendable by no more than two additional three year periods.  Remco meets at least two times per year, or more frequently if required, in order to fulfil the Committee’s obligations and duties.

GBIM pays competitive base salaries and may offer discretionary bonuses to a limited number of staff, which are dependent upon the relevant performance of the company and the individual.  Such performance is measured on a profitability against budget rather than investment returns. Options have been granted to 6 members of staff. Decisions on salaries and bonus levels are made by theRemco which has responsibility for setting the remuneration policy for all members of staff, and related . Details of remuneration paid are available in our annual accounts, filed with Companies House.