Baggette Asset Management Pillar 3 Disclosure
This is the Pillar 3 disclosure made in accordance with the UK Financial Conduct Authority (FCA) Prudential Sourcebook for Banks, Building Societies and Investment Firms (‘BIPRU’).
The European Capital Requirements Directive (CRD) created a regulatory capital framework consisting of three ‘pillars’ namely;
- Pillar 1 – which sets out the minimum capital requirements that firms are required to meet;
- Pillar 2 – which requires firms to take a view on whether additional capital should be held against capital risks not covered by Pillar 1; and
- Pillar 3 – which requires firms to publish certain details of their risks, capital and risk management process.
The rules in BIPRU 11 provide that the firm may omit one or more of the required disclosures if it believes that the information is immaterial. Materiality is based on the criteria that the omission or misstatement of material information would be likely to change or influence the assessment or decision of a user relying on that information for the purposes of making economic decisions. Where the firm considers a disclosure to be immaterial, this will be stated in the relevant section.
The firm is also permitted to omit one or more of the required disclosures where it believes that the information is regarded as proprietary or confidential. Proprietary information is that which, if it were shared, would undermine the firm’s competitive position. Information is considered to be confidential where there are obligations binding the firm to confidentiality with its clients and counterparties.
Where the firm has omitted information for any of the above reasons, a statement explaining this will be provided in the relevant section.
These Pillar 3 Disclosures will be reviewed on an annual basis as a minimum. The disclosures will be published as soon as is practical following the finalisation of the firm’s Internal Capital Adequacy Assessment Process (ICAAP) and the publication of its annual reports.
The information contained in this disclosure has not been audited by our firm’s external auditors and does not constitute any form of financial statement.
Our firm’s Pillar 3 Disclosure reports will be published on our website.
Scope and application of Directive requirements
The disclosures in this document are made in respect of Baggette Asset Management Limited which provides financial advice and / or discretionary investment management services.
The firm is a BIPRU firm.
Risk management objectives and policies
Our risk management policy reflects the FCA requirement that we must manage a number of different categories of risk. These include liquidity, credit, market, interest rate, business and operational risks.
- Liquidity risk
The firm manages all cash and borrowing requirements to maximise potential interest income whilst ensuring the firm has sufficient liquid resources to meet the continued operating needs of the business. This is supported by a robust budgeting and forecasting process which has the full involvement of the senior management team.
- Credit risk
The firm’s client in this context is IFSL / the relevant funds. It is understood that the firm currently has no exposure to credit risk.
- Interest rate risk
The firm has no borrowings and no exposure to interest rate risk.
- Business risk
The firm’s Pillar 2 business risk assessment principally takes the form of a fall in assets under management following a market downturn that leads to lower management fees, although other risks such as loss of advisers and systems failures are also considered. To mitigate our business risk, we regularly analyse various different economic scenarios to model the impact of economic downturns on our financial position.
- Operational risk
Operational risk is defined as the potential risk of financial loss or impairment to reputation resulting from inadequate or failed internal processes and systems, from the actions of people or from external events.Major sources of operation risk include outsourcing of operations, IT security, internal and external fraud, implementation of strategic change and regulatory non-compliance.
The firm operates a robust risk management process which is regularly reviewed and updated with details being provided to all staff. The firm’s Compliance Supervisor is responsible for the periodic reviews and recommending any changes to the Director.All senior management will bear responsibility for internal controls and the management of business risk as part of their accountability to the board.
Individuals are responsible for identifying the risks surrounding their work, implementing controls over those risks and reporting areas of concern to their line manager.
The Compliance Supervisor will provide the Director with a half-yearly summary report on all significant risk issues.
- Other risks
The firm operates a simple business model. Accordingly, many of the specific risks identified by the FCA do not apply.
Pillar 1 requirement
In accordance with GENPRU 2.1.45R (calculation of variable capital requirement for a BIPRU firm), our capital requirement has been determined as being our fixed overhead requirement and not the sum of our credit risk capital requirement and our market risk capital requirement.
The Pillar 1 capital requirement for Baggette Asset Management was 50,000 Euros (£43,000 as at the firm’s launch date).
Our overall approach to assessing the adequacy of our internal capital is set out in our ICAAP. The ICAAP process involves separate consideration of risks to our capital combined with stress testing using scenario analysis. The level of capital required to cover risks is a function of impact and probability. We assess impact by modelling the changes in our income and expenses caused by various potential risks over a 1-year time horizon. Probability is assessed subjectively.
In addition, we have reviewed the outputs of our risk reviews to quantify any risks identified. This has identified a number of key business risks which we have classified against the risk categories contained in GENPRU 1.2.30R and reviewed the guidance in BIPRU 2.2.61-65.
Our Pillar 2 capital requirement, which is our own assessment of the minimum amount of capital that we believe is adequate against the risks identified, has been assessed as greater than our Pillar 1 requirement. There is a considerable surplus of reserves above the capital resource requirement deemed necessary to cover the risks identified.
The main features of Baggette Asset Management’s capital resources for regulatory purposes, as at launch are as follows:
|Tier 1 capital (called up share capital, share premium account, profit and loss account, externally verified interim net profits)||£43|
The firm holds regulatory capital in accordance with the Capital Requirements Directive. All such capital is classified as Tier 1 capital and is therefore of the highest quality.
Remuneration Code Disclosure
The firm is subject to the BIPRU Remuneration Code. This section provides further information on our remuneration policy.
BIPRU Remuneration Code Staff
We have identified, and maintain a record of, ‘BIPRU Remuneration Code Staff’ – i.e. staff to whom the BIPRU Remuneration Code applies. This includes senior management and members of staff whose actions may have a material impact on a firm’s risk profile. All of our Code Staff fall into the “senior management" category of Code Staff (rather than the “risk taker" category) for the purposes of the BIPRU Remuneration Code.
Competitive salaries form the basis of our firm’s remuneration package. In addition, there is an element of variable pay for all staff which is based on firm-wide and individual performance. Whilst most of the variable reward components are awarded to employees across the firm, the structure, balance and amounts may differ. Variable remuneration is considerably reduced where subdued or negative financial performance of the firm occurs.
When assessing individual performance, we use a robust performance review process, with reviews including qualitative criteria and, in the case of investment managers, long-term investment results are a factor in the assessment process.
The link between performance and pay is inevitable in a small firm, but the firm’s risk-averse strategy and robust risk management systems mitigate any risks. It is important to note that risk taking is not rewarded.
Baggette Asset Management Limited does not have a remuneration committee. The bonus framework which is currently in place for Code Staff, is a guideline and the company Chairman is responsible for decisions relating to bonuses, with full discretion to deviate from the guideline previously agreed.
The bonus is calculated on performance above the benchmark to be paid at 25pct. It is clawed back, or not paid, if performance is not aligned to customer and business objectives. The Chairman also has discretion based on overall performance. The maximum bonus payable as a percentage of salary is 30%, split as follows between KPIs and KRIs:
- 35pct based on performance vs benchmark;
- 35pct based on maintaining investment policy compliance;
- 15pct assessment from compliance oversight; and
- 15pct assessment from company Chairman
The performance-based element of the bonus is dependent on the outperformance of the relevant IA benchmark for all three Mazarin Funds (Cautious, Balanced and Adventurous). Risk adjusted returns are also considered. e.g. the large drawdowns seen on Mazarin Cautious during the initial COVID-19 pandemic.
The payment of any validated bonus will be split over a three-year period, as follows:
- 40pct at outset in cash
- 20pct end year 1
- 20pct end year 2
- 20pct end year 3
The deferred bonus is invested within a General Investment Account (‘GIA’) in the Mazarin Adventurous Acc Fund. This bonus vests and cannot be accessed prior to appropriate deferral. If the employment between the employee and the company is terminated due to misconduct, any deferred bonus will be presumed nil. Should the contract between the Company and employee be terminated by mutual consent, the bonus will continue to be paid as per this agreement, however, can be paid up by the company. There is one beneficiary. The whole bonus is variable and there is no fixed bonus
There are four sections which make up the employee bonus:
- Performance above benchmark to be paid at 25pct. It is clawed back, or not paid, if performance not aligned to customer and business objectives
- Investment policy compliance adhered to;
- Compliance oversight with relevant party assessing performance against relevant Key Performance Indicators (‘KPIs’) and Key Risk Indicators (‘KRIs’); and
- Chairman discretion based on overall performance
|Outstanding deferred remuneration||Deferred remuneration awarded during financial year||New sign-on and severance payments in the financial year||Severance payments awarded during financial year|
|Zero||2019 – 50% Bonus
2020 – Zero