Pillar 3 Disclosure 2017-2018.

 

Introduction

 

Blue Whale Capital LLP (‘Blue Whale’ or ‘the firm’) is incorporated in the UK and is authorised and regulated by the Financial Conduct Authority (‘FCA’). Authorised activities include the investment management and marketing of a global equities long only UCITS fund (the “fund”).  It is a MiFID investment BIPRU limited licence firm.

 

Purpose of disclosure

The Capital Requirements Directive (‘the CRD’) of the European Union has established a revised regulatory capital framework across Europe to govern the amount and nature of capital that credit institutions and investment firms must maintain. The CRD has been implemented in the United Kingdom by the FCA through the General Prudential Sourcebook (‘GENPRU’), the Prudential Sourcebook for Investment Firms (‘IFPRU’) and the Prudential Sourcebook for Banks, Building Societies and Investment Firms (‘BIPRU’). The rules are built on three Pillars:

 

Pillar 1: is the minimum capital requirement that a firm must hold, determined by the size and nature of the firm. The Pillar 1 Capital requirement for Blue Whale comprises the greater of:

 

• a Base Capital Requirement of €50k;

• the sum of the Credit Risk Capital Requirement and Market Risk Capital Requirement; or

• the Fixed Overhead Requirement (‘FOR’).

 

Pillar 2: requires firms to consider whether additional capital should be held to cover additional risks not covered by Pillar 1 requirements, or where the firm determines that the Pillar 1 requirement is insufficient to meet the credit, market and operational risks specific to the activities of the firm. Blue Whale carries out this assessment through the Internal Capital Adequacy Assessment Process (ICAAP).

 

Pillar 3: is the disclosure element of the Capital Requirements Directive. This requires firms to publish information to encourage market discipline by enabling market participants to assess key information about a firm’s capital, risk exposures and risk assessment process. The disclosures are made public for the benefit of the market.

 

Scope, permissions and background

Blue Whale is an investment manager that specialises in global equities products suitable for all types of underlying investors. It is a limited liability partnership owned by its members. It is not part of a group so this disclosure has been prepared on an unconsolidated basis. Its FCA permissions include managing and advising on investments for professional clients.  It may control but not hold client money.

The firm acts as Investment Manager to LF Blue Whale Investment Funds – LF Blue Whale Growth Fund.

 

Materiality

Certain elements of the Pillar 3 disclosure requirements can be omitted where the firm believes the information not to be material. A disclosure is deemed to be material if the omission or misstatement of that information would be likely to change or influence the assessment or decision of a user relying on the information for the purposes of making economic decisions. This disclosure states where Blue Whale has decided something meets this criterion and has therefore been omitted.

 

 

Publication

Disclosure will be made as soon as reasonably possible after the annual accounting date, or more frequently if required. Blue Whale’s Pillar 3 disclosure is available at www.bluewhale.co.uk.

 

 

Risk Management

 

Governance

It is the responsibility of the members of the LLP and the Management Committee to approve and periodically review the strategies and policies for taking up, managing, monitoring and mitigating the risks that the firm is or might be exposed to in relation to the business.

 

Risk Objectives and Risk Appetite

Risk appetite limits set out the amount and type of risk that the firm regards as appropriate for it to accept in order to execute its strategy. The Management Committee through its ICAAP reviews and approves the risk appetite statement for areas of actual or potential significant risk to the business. Blue Whale has considered all relevant risks, including all those categories suggested by the FCA, and has put in place risk appetite statements for those risk categories which are applicable to the nature of its business.

 

Risk Identification and Control Environment

The Management Committee is ultimately responsible for the risk environment. Through the Compliance and Risk consultant, it has developed a Risk Register of all pertinent risks along with a qualitative appetite for those risks. It has overseen the development of a control environment that links the risks, their mitigation and the various processes, procedures and responsibilities in the firm. The Risk Register has been devised to address the broader risks in and to the business, not merely those risks that are relevant for the purposes of its capital resources requirements.

 The firm’s control environment is based on the Enterprise-wide Risk Management approach as described below.

 

First Line of Defence

Day to day risk management is delegated as the responsibility of line management and staff responsibilities are clearly established whilst appropriate segregation of duties is in place between the activities of investment management, dealing and operations. The firm attempts to foster a professional and fair culture, and employs staff of sufficient experience and skill. The internal controls established by key outsourcers (including dealing) form an important element of the First Line of Defence.

 

Second Line of Defence

The Compliance & Risk and Legal and Finance functions the latter two of which are outsourced, as well as the Management Committee provide oversight and independent assurance that enable the firm to assess that risk management policies and procedures are operating effectively and efficiently, and in accordance with the firm’s risk tolerances and the requirements of applicable laws, regulations, guidance and best practice statements.

 

Third Line of Defence

The firm takes additional assurance from services undertaken by the firm’s external auditors, legal advisors and compliance consultant, as well as interaction with investors and the roles performed by the depositary and other advisors or service providers to the fund. The firm believes that with the current scale of business and lack of complexity it would not be proportionate to establish an internal audit function.  It reviews this position annually.

 

Internal Capital Adequacy Assessment Process

 

The Internal Capital Adequacy Assessment Process (ICAAP) documents the approach and assessment of the risk profile of the firm and the adequacy of its capital. It includes an assessment of all the material risks faced by the firm, the controls in place to identify, manage and mitigate those risks and ensures that sufficient capital is maintained to withstand the resulting residual risk. The ICAAP is reviewed and approved by the Management Committee, which has identified the following key risk categories;

 

Market Risk

Market risk is the risk of loss caused by a decline in the value of assets. As Blue Whale is an investment management firm trading as agent rather than principal and does not take principal positions, market risk exposure is nugatory.

Credit Risk/Counterparty Risk

Credit risk is the risk of loss caused by the failure of a counterparty to meet its contractual obligations. The main elements of credit risk for the firm arise from:

• Cash - while Blue Whale does not hold client money, it does hold its own cash (sterling) which attracts a low degree of credit risk;

• Investment – the firm does not invest its capital; and

• Institutional - credit risk arising from the non-payment of income due from clients.

 Blue Whale does not undertake credit risk mitigation techniques, as defined in BIPRU 5.

 

Liquidity Risk

Blue Whale is a non-ILAS firm, so must meet general liquidity standards. The firm operates a liquidity policy.  Sufficient liquid resources (predominantly cash and cash equivalent) are maintained to meet requirements under all normal and stressed conditions. There are no identified severe threats to Blue Whale’s liquidity positions. The liquidity risk is therefore considered low.

 

Business Risk

Business risk encompasses threats to the long-term sustainability of the business model, including the exposure to uncertainty in the wider economic and competitive environment and the impact of that environment on the firm’s core business focus on long-only global equities. Threats include long-term bear markets and a major switch in asset allocations from equities. Common to all asset managers, persistent negative investment performance may result in the firm losing clients and/or reduced fees from those retained. In this context, business risk is construed as those risks that the firm has only some or less immediate control over, but which are part of the external economic environment or inherent in its business strategy. The firm will seek over time to mitigate these risks by limiting its economic dependency on any individual fund/investors, customer type, investment strategy or individual employees.

 

Conduct Risk

This is the risk of poor customer outcomes arising from inappropriate actions or conduct of Blue Whale and its employees. Customer detriment, or potential customer detriment, could lead to compensation awards, the risk of regulatory action or reputational damage leading to asset and revenue loss. The firm seeks to establish the correct culture, with senior management setting and articulating expectations of conduct, and a governance structure designed to enable escalation without delay of issues for their proactive and timely resolution. Competency and training needs are assessed on a regular basis. The customer is central to the organisation through product design and governance throughout the lifecycle and identification and management of potential conflicts. The firm does not charge performance fees.  We aim to provide investors and professional intermediaries with a high quality service, including relevant, detailed and up-to-date information needed to make good investment decisions or provide suitable advice to their clients.

 

Operational Risk

Operational risk is defined as the risks resulting from inadequate or failed internal processes, people and systems or from external factors such as failure of a supplier, service provider or cyber security threat. Any disruption or financial loss incurred by an investor may have a direct impact on the financial position and/or reputation of the firm. The firm’s operational risks include failure of key systems, control procedure failure and transaction processing errors albeit the latter reduced by the scale and flexibility of the organisation. Clear differentiation of control functions, reconciliation processes and layered oversight of control effectiveness all support operational risk mitigation. There is a further risk that the business could suffer reputational damage, financial loss or operating issues in the event of severe business disruption at Blue Whale or an outsource provider, rendering the firm unable to deliver critical services for a period. The firm has implemented a Business Continuity Plan and reviewed similar contingencies of its outsource providers, which it validates on an on-going due diligence basis to address this risk. With specific regard to cyber threat, the firm maintains systems flexibility and back-ups, undertakes appropriate staff training and has in place an IT Security policy.

 

Investment Risk

The firm embraces investment risk as necessary to achieve investment goals, provided the levels of risk are appropriate to seeking to achieve the investment objectives as defined in the fund’s constitutional and marketing documentation. Adherence to investment rules and restrictions is monitored real time by the co-managers and daily by the Link Fund Solutions, the Authorised Corporate Director.  The Investment Oversight Committee, a sub-committee of the Board, reviews investment risks pertinent to each portfolio on a monthly basis.  

 

Remuneration Risk and Remuneration Code Disclosure

The firm has established a Remuneration Policy and list of Code Staff in line with FCA regulatory requirements. The Management Committee oversees the implementation and periodical review (at least annually) of the Remuneration Policy, in compliance with the latest policies and procedures of the relevant Remuneration Code. The policy is available at www.bluewhale.co.uk.

As a limited licence MiFID firm, Blue Whale is subject to the BIPRU Remuneration Code (the “Code”) contained in SYSC 19C of the FCA Handbook and the FCA’s Guidance on Proportionality (the "FCA Guidance").

 

Under the Code, the firm must establish and apply remuneration policies and practices that: (1) are consistent with and promote sound and effective risk management; (2) do not encourage risk taking which is inconsistent with the risk profile and prospectus of the fund it manages; (3) includes measures to avoid conflicts of interest, and (4) do not impair the firm’s compliance with its duty to act in the best interests of the fund.

 

Blue Whale earns revenue through periodic management fees.  The partners’ profit shares are fixed.  The partners and the Management Committee may award a proportion of profits as variable remuneration to employees. Thus, firm-wide levels of variable remuneration are determined directly by the profitability of the firm. If the firm is not profitable or needs to bolster its capital, variable payments are not made. The award of variable remuneration is discretionary and linked to individual performance through an annual appraisal process which includes assessment of the achievement of non-financial objectives. Blue Whale has applied proportionality to the requirements of the Code, in particular to the requirements described in Principle 4 in respect of a Remuneration Committee, in Principle 12 in respect of payment in shares, deferral and performance adjustment. For the year to 31st March, the aggregate remuneration paid to Remuneration Code staff, is £75,000.

 

Capital Resources & Capital Adequacy

 

The firm maintains sufficient capital to meet regulatory requirements. In line with these requirements, it maintains Pillar 1 based on the higher of the Market plus Credit risks requirement and the Fixed Overhead Requirement, plus any additional amount under Pillar 2. The adequacy of capital requirements is formally assessed by the Management Committee through its ICAAP process.

 

The table below illustrates the firm’s capital resources and ratios as at 31st March 2018:

 

                                                                                                        £

 

Tier 1 Capital

 

279,450

Tier 2 Capital

0

Tier 3 Capital

0

 

Total Capital

 

279,450

 

Pillar 1 Capital Requirement

 

43,067 (or €50,000)

Additional Requirement under Pillar 2

125,000

 

Total Pillar 1 & Pillar 2 Capital Requirement

 

125,000

 

Surplus Capital

 

266,960

 

Total Capital as a multiple of Pillar 1 Capital Requirement

223%

 

Total Capital as a percentage of Pillar 1 +2 Capital Requirement

 

223%

 

 

                                    

September 2018

 

 

 

 

 

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