Capital requirements directive - Pillar 3 disclosure

As at 31 December 2016

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1. Background

1.1 Introduction

The Pillar 3 Disclosures cover the entity Cofunds Limited. Cofunds is a subsidiary of Aegon UK plc (“AUK”) following acquisition on the 1 January 2017, and was a subsidiary of Legal & General Retail Investments Holdings Ltd (“L&G RI(H)”) for the accounting period 1 January 2016 – 31 December 2016.

Under the Capital Requirement Directive framework (CRD IV) the firm is classified as an IFPRU €125k Limited Licence firm. This is due to the firm having permissions to hold client money and assets, but not having permission to deal on own account, which precludes it from being a Full-Scope or €730k firm.

The CRD IV framework is split between the Capital Requirements Directive (Directive 2013/36/EU) and the Capital Requirements Regulation (Regulation (EU) No 575/2013). The Capital Requirements Regulation (CRR) is directly binding on the firm, and does not need to be implemented by the FCA (or via UK regulation). However, the FCA has transposed the Directive into the FCA Handbook, along with a limited number of discretionary policies and derogations available to member states in the CRR.

The firm therefore refers directly to the CRR, supplemented by European Banking Authority (EBA) technical standards and the FCA’s rules/guidance in a new sourcebook, the Investment Firms Prudential sourcebook (IFPRU). The Pillar 3 disclosure requirements are contained in Articles 431 – 455 of the Capital Requirements Regulation (CRR). As a reminder of the meaning of the three pillars:

Pillar 1 establishes minimum capital requirements in respect of credit, market and operational risk exposures using standard criteria.

Pillar 2 requires firms to assess the risk exposures specific to their business and to calculate the amount of capital that should be held against those exposures. This has been implemented in the UK by the FCA as the Individual Capital Adequacy Assessment Process (“ICAAP”). FCA rules also establish a supervisory process for the FCA to challenge firms’ own assessments of their risk exposures and corresponding capital requirements.

The amount of capital a firm is required to hold is the greater of either the Pillar 1 or Pillar 2 values.

Pillar 3 requires firms to publicly disclose their policies for managing risk and their capital requirements. This is designed to promote market discipline by providing market participants with key information on a firm’s risk exposures and risk management processes.

1.2 Basis of disclosure

This document sets out the Pillar 3 disclosures of the firm in accordance with the requirements under the CRR as laid out in Part 8 of the CRR (articles 431-455). The disclosures have not been audited and do not form part of the annual audited financial statements and should not be relied upon in making any judgment about the financial position of the firm.

Unless otherwise stated all figures are as at 31 December 2016, Cofunds’ financial year end, with comparative figures for 31 December 2015 where relevant. Because of the change of control just after the accounting period end, this document’s numerical disclosures will relate to the accounting period, but references to governance and ownership structure will relate to the situation on 1 January 2017.

1.3 Frequency of disclosure, media and location

In accordance with Article 433 of the CRR, Pillar 3 disclosures are made on an annual basis as a minimum, and as soon as is practicable after the publication of Cofunds’ Annual Report and Accounts. The firm pays particular attention to the need to publish some or all of these disclosures more frequently than annually if the scale, nature or involvement in financial activities of the business changes significantly. These disclosures are published on the firm’s website (www.cofunds.co.uk).

1.4 Scope and application

With effect from the 1 January 2017, the firm was 100% owned by AUK. The firm is part of the Cofunds group (“Cofunds”) structure is as follows:

1.4 Scope and Application Structure

The different types of firms are:

  • Cofunds Limited, which is the trading firm and is an IFPRU €125k Limited Licence firm
  • Cofunds Nominees Limited, Minster Nominees Ltd and Dorset Nominees Ltd, which are all dormant nominee companies which hold and administer assets of the different business lines of Cofunds
  • Cofunds Leasing Limited, which is a non-trading wholly owned subsidiary of Cofunds Limited.

Unless otherwise indicated, the disclosures made within this document are made in respect of Cofunds Limited (“Cofunds” or “the firm”) as the FCA authorised and regulated entity, whose primary activity is to offer fund platform services and administration to FCA authorised intermediaries and their customers.

Cofunds acts as agent in the placing of aggregated deals with fund managers and does not engage in any dealings as principal. Cofunds does not offer any advice on products or investments, and is not a product provider.

1.5 Non-material, proprietary or confidential information

The firm does not seek any exemption from disclosure on the basis of materiality or on the basis of proprietary or confidential information.

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2. Risk management and governance structure

2.1 Governance

With effect from 1 January 2017 Cofunds is managed within a combination of the Aegon UK (“AUK”) governance structures, where appropriate, and Cofunds local governance structures.

The Board of the firm recognises that risks will be present throughout the activities that the firm undertakes. With that in mind, the Board is responsible for ensuring that the firm has in place a suitably robust Governance and Risk Management Framework in order to ensure that risks are adequately identified, assessed and mitigated and ultimately to ensure that clients' and the firm’s own assets are suitably protected.

The governance framework below relates specifically to the Cofunds Limited legal entity.

2.1 Governance Structure

Cofunds Limited has been granted a waiver by the FCA in respect of IFPRU 1.2.1G (1,2,4), which sets out certain governance requirements for significant IFPRU firms. The waiver recognises that Cofunds Limited is included in the remit of the AUK Remuneration, Audit and Nominations Committees, therefore is not required to operate these at firm level.

The governing body of the firm is the Cofunds Limited Board (“the Board”). To complement the role of the Board, the firm’s governance structure is comprised of a number of local and group committees as shown in the organisation chart above for 2017. Each committee has a Terms of Reference clearly stating its responsibilities, membership and escalation procedures.

The key local governance committees are listed below:

Cofunds Board

The Board is ultimately responsible for oversight of capital and the ICAAP within the business. It is responsible for:

  • Establishing the risk appetite and tolerances;
  • Reviewing the stress test and scenario report and results at least annually, including an update on key vulnerabilities and remedial actions;
  • Approving the level of capital required within the business;
  • Setting the Risk Strategy of the firm.

Cofunds Risk Committee

The Cofunds Risk Committee is a sub-committee of the Board, whose purpose is to provide oversight and make recommendations to the Cofunds Board in respect of risk matters. It is responsible for:

  • Overseeing and making recommendations on the firms overall risk appetite, risk tolerance limits and risk strategy. This covers financial, operational and conduct risk;
  • Overseeing the operational risk tolerances;
  • Overseeing the structure and implementation of the risk management framework, to ensure:
    • All material risks have been identified, assessed and managed through an effective control environment;
    • The framework can identify new and emerging risks;
    • Appropriate risk policies are in place.
  • Overseeing and advising the Cofunds Board on risks inherent to strategic transactions and business plans;
  • Ensuring via review that there is effective leadership of risk issues, the risk cultures are appropriate and the remuneration strategy does not encourage excessive risk taking.

Executive Committee (ExCo)

The ExCo has delegated authority from the AUK Digital Solutions Management Committee (“DSMC”) to run the firm. This delegation is via the AUK ExCo, which has delegated powers from the Cofunds Board. However, these committees are excluded from the diagram for simplicities sake. These bodies ensure the Cofunds decision making is consistent with other parts of Aegon’s business. The ExCo is also the primary committee for reviewing papers and submissions before being submitted to the Board. ExCo members and attendees comprise the executive members and selected senior management team of Cofunds.

Products, Investment and Capital Committee (PICC)

The PICC receives reports which monitor capital and risk requirement levels on a monthly basis, to ensure capital risks are understood by the wider business and are taken into account when new propositions are being considered.

Risk, Audit and Compliance Committee (RACC)

Cofunds has established a Risk, Audit and Compliance Committee to assist it in fulfilling its risk oversight and risk management responsibilities.

The principal duties of the RACC, as set out in its terms of reference, are to:

  1. oversee the risk management framework to ensure it is fit for purpose and being effectively applied, and
  2. oversee the key risks facing the firm, including key strategic and operational risks, to satisfy itself that they are being managed appropriately and within the firm’s agreed risk appetite tolerances.

The Committee meets on a monthly basis and is chaired by the Chief Risk Officer.

CASS Review Oversight Committee (CASSROC)

CASSROC holds delegated authority from the Cofunds ExCo for overseeing compliance with the FCA’s CASS requirements.

The principal duties of the CASSROC, as set out in its terms of reference, are:

  1. To oversee both the effectiveness of CASS controls and the management of the regulatory risks associated with them
  2. The CASSROC will consider the financial and operational risks linked to the control of CASS, ensuring that these risks are being appropriately managed.

This Committee meets on a monthly basis and is chaired by the CASS Oversight Officer (CF10a).

AUK Committees

The key AUK committees are as follows, with Cofunds using the Remuneration and Audit Committees in relation to the IFPRU 1.2.1G waiver:

  • AUK Remuneration Committee: responsible for determining and approving the framework of the remuneration policy and specifically to manage executive director and Code Staff remuneration
  • AUK Audit Committee: responsible for assisting the Board in discharging its responsibilities with regards to monitoring the integrity of the group’s financial statements, the effectiveness of the internal control (including financial control) framework and the independence and objectivity of the internal and external auditors
  • AUK Nominations Committee: responsible for evaluating the board of directors of each Board. This committee is looking for the relevant skills and characteristics that are required of members of that Board.

2.2 The Board and Board Reporting

The Board meets quarterly with additional Board meetings being convened to meet business needs as required, and has a Reserved Matters for the Board mandate which is subject to annual review. The Board also has a schedule of regular agenda items which identifies the regular and standing items that are considered at each Board meeting.

The flow of information on risk matters to the Board is as shown in the above governance structure.

Number of directorships held by members of the Board

In accordance with Article 435 of CRR, the table below shows the number of directorships held by members of the management body as at 1 January 2017:

Name Position Number of Aegon NV group directorships – including Cofunds Ltd Number of directorships held outside Aegon NV group
David Geoffrey Hobbs Chief Executive Officer 5 1
Karen Cockburn Finance Director 9 0
James Ewing AUK Director 22 0
David Dalton-Brown Independent Non Executive Director 4 2
Caroline Ramsey Independent Non Executive Director 4 3
Adrian T Grace AUK Director 24 1
Mark Bloom Independent Non Executive Director 2 0
Stephen McGee AUK Director 23 0

2.3. Recruitment and diversity guidelines for selection of members of the management body

The composition of the Board should be such that the Board has the trust of the Shareholder. The Board aims for a composition that is balanced and diverse in terms of experience, nationality, ethnicity, age, gender and active or retired background of the individual members. The Board recognises that diversity and especially diversity of thought can bring insights and behaviours that may make a valuable contribution to its effectiveness.

Individual members of the Board are assessed on the basis of the following qualities:

  • managerial experience and skills;
  • experience with an international group of companies;
  • entrepreneurial attitude;
  • sound business judgement, common sense and decisiveness;
  • independence and a sufficiently critical attitude with regard to the other Board members;
  • social involvement;
  • team player with a well developed sense for cooperation and communication;
  • appropriate time for preparation and attendance of meetings;
  • no conflicts of interest.

2.4 Adequacy of risk management arrangements

The Board is ultimately responsible for the Risk Management Framework of the firm and has implemented an appropriate governance and risk management structure. The Board is responsible for reviewing the effectiveness of the firm’s risk management arrangements and systems of financial and internal control. The risk appetite of the firm is clearly defined and is monitored on a regular basis.

By approving the latest update of the ICAAP document, the Board has expressed the firm has adequate systems and controls in place with regard to the firm’s risk profile and strategy.

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3. Risk management objectives and framework

3.1 Risk management objectives

The Risk Team is an inherent part of Cofunds’ business. Its objective is not to completely eliminate risk but to manage it to an acceptable level whilst balancing risk with reward. Effective risk management assists in the delivery of our strategic objectives, protecting the value of Cofunds by managing potential threats and adding value by enhancing our ability to take advantage of the available opportunities. It also forms a vital element of our capital planning, helping to ensure our business model is resilient and enabling Cofunds to retain the ability to meet its liabilities as they fall due.

3.2 Risk management framework

Within Cofunds, the risk framework is designed to enable the relevant Board to draw assurance that risks are being appropriately identified and managed in line with its risk appetite.

The firm has implemented a ‘three lines of defence’ model in order to identify, manage and mitigate actual or potential risks.

  • Level 1: Business line management is responsible for identifying and mitigating the risks arising within their areas of functional activity

  • Level 2: Independent assurance functions such as Risk and Compliance teams provide technical guidance to business line and senior management

  • Level 3: Internal Audit provides independent assurance to both the Board and to the Group Audit and Risk Committee.

The core elements of our risk framework are set out below:

3.3 Risk appetite

The Risk Appetite Statement, which provides parameters within which the business can operate, facilitates a simple articulation of the risks the firm faces to the shareholders and staff. In conjunction with the specific limits, the Board has put in place a set of high level principles and a set of KRIs which are a balance of quantitative and qualitative measures that provide an indication of increasing or reducing risk levels over an appropriate time horizon. These are designed to alert the Board and management that a risk is approaching, or has exceeded, an acceptable level.

The Risk, Audit and Compliance Committee undertake an annual review of the firm’s risk appetite, assessing the continued appropriateness of our key measures and tolerances relative to the risk exposures of the firm. Additionally, as part of the annual planning cycle, assessment is made of the level of risk taking proposed in the business plan and the capacity for risk taking within the overall appetite framework.

The risk appetite is used for guiding significant business decisions, and is monitored within Cofunds internal governance structure, to ensure appropriate reporting to the Board of the current status against the agreed Risk Appetite.

3.4 Risk framework structures

Both Cofunds’ parent entity, AUK and the ultimate parent, Aegon N.V., have risk structures relevant to their underlying business models, primarily focused on insurance and Solvency II. As Cofunds is regulated as an investment firm, which is derived from the banking and investment regulation, the firms risk framework has a different focus in some areas. Where areas are common structure, Aegon policies and risk frameworks are being adopted within 2017 and work will continue to ensure the Aegon approach is suitable across all firm types within the group.

3.5 Risk identification and assessment

We operate a risk identification and assessment process under which all our businesses regularly consider changes in the profile of existing and emerging risks. The assessment process evaluates the risks that are inherent in our products as well as those that are presented from changes in the environments in which we operate. This process helps feed the modelling undertaken within the ICAAP, which is discussed in section 6.5.

3.6 Risk management information

Our risk management information framework is structured to report on and support the review of ongoing and emerging risks and assess actual risk positions relative to the risk limits and targets that we set.

3.7 Risk oversight

The Cofunds Chief Risk Officer and his team, who are independent of the business lines, support the Cofunds Board and its Risk Committee in articulating acceptable risk taking and ensuring the effective operation of our Risk Framework. This includes ongoing assessment of the firm’s capital requirements to confirm that they meet regulatory capital adequacy requirements.

The Cofunds Chief Risk Officer also provides objective challenge and guidance on a range of risk matters to business managers. This happens formally through the Chief Risk Officer’s local risk committee of the RACC (see section 2.1 above), and also more dynamically on a day-to-day basis. In addition, the Compliance Monitoring regularly reports to the Aegon Audit Committee, in line with the IFPRU governance waiver.

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4. Principle risks and uncertainties

The principal risks and uncertainties give an overview of the more significant factors that may affect the delivery of the firm’s strategy, its future revenues and profitability. Factors outside of our control (such as the performance of investment markets and broader economic outlook) perhaps present the greater areas of uncertainty.

As part of our ongoing risk assessment processes we seek to identify new and emerging risks, and develop strategies to ensure our exposures to risk remain within acceptable tolerances.

The key principal risks and uncertainties identified for the firm are described below. These are modelled mainly through stress testing, with a small proportion quantified under the operational risk methodology.

Market and economic conditions

Most of the firm’s revenues are correlated to Assets Under Administration (AUA), which are in turn highly correlated to market performance. Whilst exposure to this risk is reviewed regularly, an extreme downturn would have a significant impact on earnings, profitability and customer behaviour. The decision has been made not to hedge the firm’s AUA-related revenue exposure and instead to manage through management actions. The modelling is done through stress testing under various scenarios.

Regulation and legislation

There are a number of aspects to the way in which regulation and legislation impact the firm:

  • Conduct of business
  • Regulation of product design
  • Prudential capital
  • Taxation policy.

Cofunds’ proposition and its distribution are significantly influenced by the regulatory environment. Significant, unanticipated changes could impact the firm’s ability to develop, market and administer its proposition effectively and in a compliant manner.

Confidence in the Financial Services sector

Events in the financial services sector outside the control of the firm may impact earnings and profitability. Historically, such events have included:

  • Adverse performance of investment markets
  • Control and financial failings by competitors and other counterparties
  • Actions by regulators
  • Adverse media
  • Perpetration of financial crime.

Pricing risk

The business plan of the firm already includes pricing compression in the platform industry. The firm’s risk appetite for pricing risk, after incorporating the pricing compression in the industry, is limited. This risk represents general pricing compression due to competition and client initiated fee renegotiations. The Product, Investment and Capital Committee is responsible for the oversight of pricing risk.

Market infrastructure

The firm’s investment administration activities are reliant upon the availability of market infrastructure. The loss or major disruption to this infrastructure would have a significant impact on Cofunds’ operations and profitability.

Resources

The loss of key personnel could impact the firm’s financial and operational performance. Cofunds actively focuses on retaining the best personnel and ensuring that key dependencies do not arise through employee training and development programmes, remuneration strategies and succession planning. Failure to manage resources effectively, particularly during periods of significant change, may impact the firm’s earnings and operational effectiveness.

Counterparties

Whilst the firm ensures that it only transacts with regulated counterparties, and holds assets only with strongly rated banks, the financial failure of a significant counterparty could result in operational disruption, liquidity pressure and financial loss.

Outsourced and critical supplier arrangements

Some of Cofunds’ key functions are outsourced and the reliance upon outsourcers and critical suppliers to provide an appropriate level of service presents a significant operational, reputational and financial risk to the Firm. A framework is in place to ensure appropriate oversight and management of outsourcer and critical supplier relationships.

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5. Risks profile and appetite

Cofunds recognises that it is exposed to a wide range of risks and to ensure that employees and stakeholders can demonstrate a consistent view of what the objectives a common risk language is used. Central to this language is the categorisation of risk.

The firm expresses its overall attitude to risk (or risk appetite) using the following statements and measures for each of the risk categories which are deemed material and relevant to this disclosure:

5.1 Market risk

The risk of loss arising from fluctuations in the value of, or income from, assets held on the balance sheet. Cofunds acts as agent in the placing of aggregated deals with fund managers. It does not deal or hold positions as principal.

Although the equity risk sits with the customer, Cofunds earn its revenue largely on the basis of fees calculated on the value of client assets under administration. The firm accept this risk as a consequence of its current pricing models. Revenue exposures to major market movement scenarios, and potential cost cutting remedial actions in the event of extreme and/or persistent market falls, are considered through the ICAAP process.

As part of the stress testing process, Cofunds stresses its business plan, profitability and capital against a series of differing economic scenarios. An economic downturn scenario is included as part of this stress testing. The stress testing allows management to assess the ability of the firm to withstand a significant and sustained drop in market values.

Cofunds may also be subject to the impact of market movements during the period whilst it unwinds positions on trades it has dealt erroneously or failed to place in a timely manner. In addition, where a client fails to settle a trade, Cofunds is entitled to sell the assets on which settlement is awaited and is therefore subject to market exposure until it has liquidated the holding. Such exposures are managed via Cofunds’ credit risk management arrangements.

5.2 Counterparty credit risk

The risk of loss caused by the failure of a counterparty to perform its contractual obligations.

Credit risk is not sought in its own right but arises as an unavoidable consequence of dealing with banking counterparties, or the providers of settlement and custody services. Cofunds principle exposures relate to banking counterparties where the firm’s own funds are held.

Cofunds is exposed to credit risk relating to default by its clients, product providers (e.g. fund managers) and banks holding either corporate or client money assets. Exposure to default by Cofunds’ clients and product providers is accepted as a consequence of its business model and should be mitigated through contractual provisions to liquidate client holdings and through appropriate due diligence of clients and product providers.

In respect of client default Cofunds may sell the assets on which settlement is awaited. Cofunds is therefore only exposed to market movements over the period taken to liquidate holdings. Cofunds actively monitors its credit risks, considering the effects of potential contagion where relevant, and employs appropriate aggregation and diversification techniques to manage exposures.

5.3 Liquidity risk

The risk that the firm, although solvent, either does not have sufficient available resources to enable it to meet its obligations as they fall due, or can secure them only at excessive cost. Cofunds is exposed to liquidity risk in respect of payment obligations to its clients and product providers and the settlement timing of corresponding cash inflows and outflows.

The firm expects to be able to meet its payment and collateral obligations under extreme but plausible liquidity scenarios. Cofunds conducts stress testing against a range of potential liquidity risk events and scenarios on an ongoing basis as part of its liquidity risk management process.

5.4 Interest rate risk

Interest rate risk is the potential adverse impact on our future cash flows and earnings from changes in interest rates. Although interest rate risk is considered as part of the liquidity and stress testing, the exposure to interest rate risk is limited, due to the continued presence of a low interest rate environment and is not considered a material risk for the firm.

5.5 Customer and reputational risk

The risk of loss due to damage of the firm’s reputation, whether as a result of direct or indirect consequences.

Cofunds considers that reputational risks exist as the potential outcome of risks occurring within other risk categories (such as operational or liquidity risks) and do not exist in isolation. The identification and mitigation of reputational risks is therefore managed through Cofunds’ risk management framework processes for managing those other risk types.

5.6 Concentration risk

The risk that exposure to sectoral, geographic, liability and asset concentrations increase the Company’s exposure to credit risk.

Cofunds accepts that it does have concentrations of exposures to banking counterparties, fund managers and institutional clients which could give rise to an increased level of potential credit risk. However, the firm attempts to minimise this risk by maintaining a diverse portfolio of client relationships. Cofunds’ range of distribution channels mitigates against risk concentrations associated with particular channels.

5.7 Pension obligation risk

The risk of losses arising from contractual or other liabilities to or with respect to a pension scheme is not considered material. Cofunds has no obligation to subscribe any sums to staff pension plans in excess of the agreed monthly contribution based on a percentage of salary. This is due to all pension schemes being operated for Cofunds employees are defined contribution schemes.

5.8 Securitisation risk

The firm does not participate in securitisation transactions. These are transactions where assets are sold to a bankruptcy-remote special purpose vehicle in return for immediate cash payment, facilitated by the vehicle raising funds through the issue of tradable debt securities.

5.9 Residual risk

Residual risk is defined at the risk that credit risk mitigation techniques, as defined in the EU CRR regulations, are not fully effective. As the firm does not implement any of these credit risk mitigation techniques, it is therefore not exposed to residual risk.

5.10 Business risk

Business risk is expressed as the risk to the Firm that it suffers losses because its income falls or is volatile relative to its fixed cost base. In the broader sense, business risk also covers exposure to a wide range of macro- economic, industry, regulatory and other external risks that may deflect the covered as part of the strategic plans and the stress testing activities.

5.11 Risk of excessive leverage

Firms are required to have policies and processes in place for the identification, management and monitoring of the risk of excessive leverage (Article 37 of CRD IV). As the firm does not have any (other) assets or off- balance sheet items (e.g. derivatives, guarantees etc.), the risk of excessive leverage is deemed immaterial.

5.12 Operational risk

Operational risk is the risk of loss or other adverse consequence on business outcomes arising from inadequate or failed internal processes, people or systems, or from external events.

The firm accepts a degree of exposure to operational risk where exposures arise as a result of core strategic activity, however, it has limited appetite for operational losses due to the likely customer impact, reputational damage and opportunity costs.

Cofunds aims to implement effective controls to reduce operational risk exposures except where the costs of such controls exceed the expected benefits.

Cofunds is exposed to different types of operational risk which it has further categorised to facilitate meaningful assessment and reporting in accordance with its risk management framework processes.

Controls and risk mitigation strategies, including the use of insurance where appropriate, are put in place to address operational risk exposures in line with agreed risk appetites. Each area of the business is responsible for managing and mitigating its own risks, including operational risks, subject to risk appetites and applicable Company or Group policies.

Cofunds has adopted a wide range of control and contingency measures to manage and mitigate its operational risks. Principal control measures in place include:

  • Proper supervision of employees
  • Segregation of duties, enforced through IT security access privileges and operational process controls
  • Dealing and payment authorisation levels; dual or triple authorisation procedures and transaction checking controls
  • Recruitment and development of appropriately skilled individuals, with employee objectives set and measured on an ongoing basis
  • Pre-employment screening for all roles, with additional on-going screening for high risk roles
  • Segregation and reconciliation of client money and assets
  • Due diligence conducted prior to entering into strategic outsourcing and supplier relationships and on an ongoing basis through a programme of assessment against agreed service levels
  • IT system performance and capacity testing
  • Business continuity and disaster recovery plans which are regularly tested
  • Documentation of significant internal procedures.

5.13 Group risk

This is the risks arising as a consequence of being a part of Aegon NV group of companies. For the purposes of ongoing risk management and reporting, Cofunds does not consider Group Risk as a standalone risk category. Instead, the consequences of Group Risk are explicitly considered as part of the other risk categories (i.e. counterparty credit risk, market risk, liquidity risk, business risk, pension obligation risk and operational risk).

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6. Capital requirements

6.1 Own funds requirements

Own Funds (also referred to as “capital resources”) is the type and level of regulatory capital that must be held to absorb losses. The firm is required to hold own funds in sufficient quantity and quality in accordance with CRD IV which sets out the characteristics and conditions of Own Funds.

The firm does not have any encumbered assets as at 31 December 2016.

The firm's capital requirement is driven by its fixed overhead requirement ("FOR") as this exceeds the credit risk requirement and the base capital requirement.

The own funds held by the firm comprises ordinary share capital, share premium and accumulated reserves with deductions made in line with the CRR. The table sets out the key components of own funds as at 31 December 2016.

2016 (£k)
Share capital: Ordinary shares of £1 each paid in full 1,394
Share Premium 9,499
Audited retained earnings 63,285
Net Assets / Total equity per financial statements 74,178
Intangible assets (7,857)
Deferred tax assets (91)
Total Tier 1 Capital, Total Capital and Own Funds 66,230

6.2 Pillar 1 capital requirements

The firm meets the definition of Article 95 in the CRR, which outlines that the firm has limited authorisation and in particular is not authorised to deal on its own account or place and/or underwrite financial instruments on a firm commitment basis. The firm monitors its Pillar 1 capital requirements on a monthly basis and reports the results to the PICC and Executive Committee. This includes actual business performance to date, business forecasts for future periods and any known changes in regulatory requirements.

The firm calculates its risk exposure amount, required within the Pillar 1 calculation, as the higher of the following:

  1. Base Capital Requirement (€125,000)
  2. Fixed Overhead Requirements – 25% of the fixed overheads of the preceding year
  3. Variable Capital Requirements = the sum of:
    • Credit and dilution risk;
    • Market risk for the trading book of business;
    • Settlement risk;
    • Credit valuation risk for Over the Counter Derivative instruments; and
    • Counterparty risk for the trading book of the business.

Due to the nature of the firm’s business it does not hold any financial instruments, does not have a trading book and credit risk exposures are limited to amounts receivable in the normal course of business. Therefore, for the variable capital requirements, only credit risk applies, to which the firm applies the standardised approach.

Cofunds’ Pillar 1 requirement as at 31 December 2016 was £24.0 m (31 December 2015: £17.0m) as set out below.

Pillar 1 requirement Capital requirements (£k) Comments
Credit risk 5,737 See Risk Exposure Table in section 7.3
Fixed Overhead Requirements (“FOR”) 24,015 25% of the ongoing annual fixed overheads of the firm
Base Capital Resource requirement of €125,000 125
Total Pillar 1 24,015 The highest of the above three

6.3 Total risk exposure amount

The firm is required under Pillar 1 to hold own funds in excess of 8% of the total risk exposure amount. The calculation of risk weighted assets of the firm as at 31 December 2016 is shown below.

Total exposure £k Risk weighted exposure £k Own funds capital requirements at 8% £k
Institutions 112,382 22,476 1,798
Corporates 1,150 1,150 92
Retail 34,083 25,562 2,045
Other assets 23,340 22,519 1,802
Total credit risk 170,955 71,707 5,737
Additional exposure from FOR 228,475 18,278
Total risk exposure amount 300,182 24,015

6.4 Capital ratios

The capital ratio for the firm was 22.1% (22.3% as at 31 December 2015). As the firm only has Tier 1 capital, the total capital ratio and Comment Equity Tier 1 (CET1) ratio are the same.

6.5 Internal Capital Adequacy Assessment Process (ICAAP)

The Internal Capital Adequacy Assessment Process (ICAAP) is the process under which the Board oversees and regularly assesses:

  • the firm’s processes, strategies and systems;
  • the major sources of risks faced by the firm that may impact its ability to meet its obligations;
  • the results of internal stress testing of these risks;
  • the amounts and types of financial resources and internal capital, including own funds and liquidity resources, and whether these are adequate both as to amount and quality to ensure that there is no significant risk that its liabilities cannot be met as they fall due.

Scenario analysis and stress testing are performed as part of the ICAAP to assess the firm’s exposure to extreme events for the relevant major sources of risk. The outcome of this testing it to ensure that appropriate mitigating factors are in place, where any residual risk can then be mitigated by holding capital against these risks. This assessment is known as Pillar 2 capital requirements, which are risk which are not adequately covered within the Pillar 1 requirements.

The outcome of the ICAAP is formally approved by the Board at least annually, with more frequent reviews if there is a fundamental change to the business or the operating environment.

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7. Remuneration policy

The following disclosures are made in accordance with the requirements of Article 450 of the CRR, which establishes qualitative and appropriate quantitative criteria to identify categories of staff whose professional activities have a material impact on the firm’s risk profile.

7.1 Governance

Cofunds Limited has been granted a waiver by the FCA in respect of IFPRU 1.2.1G (1,2,4), which sets out governance requirements for significant IFPRU firms. The waiver recognises that Cofunds Limited is included in the remit of the AUK Remuneration Committee, therefore is not required to operate the committee at firm level.

Therefore the AUK Remuneration Committee is empowered by the Board to:

  • approve the design of, and determines the targets for, any performance related pay schemes operated by a Company and approves the total annual payments made under such schemes;
  • provide levels of remuneration sufficient to attract, retain and motivate executives of the quality required to run each Company successfully, but avoids paying more than is necessary for this purpose;
  • ensure that the total remuneration package of an individual accurately reflects the risks for which they are responsible and does not promote or reward excessive risk taking;
  • ensure that the performance related elements of remuneration are in accordance with FCA and regulatory best practice and are designed to align their interest with those of shareholders and promote the long-term success of the Company and provide keen incentives to perform at the highest levels;
  • review the terms of executive service agreements from time to time and ensures that contractual terms on termination and any payments made are fair to the individual and the relevant Company; that failure is not rewarded; and that the duty to mitigate loss is fully recognised.

7.2 Risk input into performance reviews

The Remuneration Code (“the Code”) General Requirement states that ‘A firm must establish, implement and maintain remuneration policies, procedures and practices that are consistent with and promote sound and effective risk management’. As part of this, the Code highlights several instances where it expects risk and compliance functions to be able to have significant input into the setting of remuneration awards where concerns exist as to the behaviour of an individual or the riskiness of business undertaken.

Cofunds has processes is in place that facilitate Risk and Compliance functions inputting into the appraisal process of staff that are subject to the Code (“Code Staff”), are Approved Persons or who are Material Risk Takers (‘MRT’).

7.3 Performance conditions and performance adjustments (“Malus and Clawback”)

The Remuneration Committee reviewed the malus and clawback provisions in place for executive director incentive plans. Awards are subject to malus and clawback provisions.

7.4 Quantitative remuneration data

Cofunds has identified those employees who are deemed to be Code Staff with reference to their managerial and influence on the company’s overall risk profile of the FCA regulated business. Identification is further subject to the qualitative and quantitative methods set out in the European Banking Authority’s Regulatory Technical Standards (RTS) for the identification of material risk takers.

For 2016, Cofunds has identified 9 “Code” staff, 4 of whom were also directors of the company during the year. These individuals are not remunerated directly by Cofunds, with employee contracts being with Legal & General for the 2016 accounting period. The remuneration disclosed below relates to the amounts they received in 2016 for their services to Legal & General as a whole.

For 2016, £3.9m was awarded as remuneration to the “Code” Staff. Remuneration includes salary, benefits, bonus awards, compensation in respect of loss of office and long term incentive schemes.

Despite Cofunds being a proportionality level three firm, a full breakdown of the figures is provided below due to the firm being a ‘significant IFPRU firm’:

Executive Directors Other Code Staff
No of recipients £k No of recipients £k
Fixed remuneration(1) 4 898 5 1,349
Variable remuneration
- Cash 4 124 5 498
- Shares 4 61 5 485
Total Variable remuneration(2) 185 984
Deferred remuneration changes:
- Awarded(3) 4 338 5 188
- Lapsed due to performance adjustments 0 £0
Outstanding deferred remuneration at year end
Outstanding unvested 2,010 3,736
Outstanding vested by unexercised 0 0
Sign-on payments(4) 0 0
Severance payments(5) 0 0
Highest individual severance payment 0 0
Total Remuneration awarded for 2016 4 1,421 5 2,521

There was one member of Code Staff earning more than €1m. Their total remuneration was in the €1.5-2m range.

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Last updated 21/08/2017