Pillar 3 Disclosure
Flying Colours Finance Limited – As at 31 December 2015
The Pillar 3 disclosure of Flying Colours Finance Limited (“Flying Colours”) is set out below as required by the Financial Conduct Authority’s (“FCA”) ‘Prudential Sourcebook for Banks, Building Societies and Investment Firms’ (“BIPRU”). The BIPRU disclosure rules implement the European Union’s capital adequacy requirements and the Basel Committee Recommendations.
The capital adequacy framework for investment management firms, such as Flying Colours, consists of three “Pillars”:
- Pillar 1: sets out the minimum capital requirements of firms to cover credit, market and operational risk;
- Pillar 2: deals with the Internal Capital Adequacy Assessment Process (“ICAAP”) undertaken by a firm and the supervisory review and evaluation process through which the firm and regulator satisfy themselves of the adequacy of capital held by the firm in relation to the risks it faces; and
- Pillar 3: requires the firm to publish its objectives and policies in relation to risk management, and information on its risk exposure and capital resources.
We are permitted to omit required disclosures if we believe such information is confidential, or regarded as proprietary, or if we believe the omission would not in any way influence the decision of a reader relying on such information. Flying Colours has made no omissions on these grounds.
Background to Flying Colours
Flying Colours is an investment management and advisory firm based in Ascot and incorporated in England and Wales as a private limited company on 6 June 2014. Flying Colours formally commenced business on 17 December 2015. Flying Colours is authorised and regulated by the Financial Conduct Authority (firm reference number: 672022). The effective date on which Flying Colours received its authorisation from the FCA was 17 December 2015.
Flying Colours is authorised and regulated by the FCA and is a BIPRUFirm for regulatory capital purposes. Flying Colours does not hold client money or assets.
Flying Colours is a sole entity and is not part of any group. As such it makes this Pillar 3 disclosure on a solo basis.
Flying Colours will be making Pillar 3 disclosures annually (as soon as possible after the publication of its annual accounts) or more often, as appropriate.
Media and Location
This disclosure is published on the Flying Colours website.
The information contained in this document has not been audited by Flying Colours’ external auditors and does not constitute any form of financial statement. The disclosures are subject to external verification only to the extent that they have been taken from our audited financial statements. The disclosures should not be relied on in making judgements about Flying Colours.
Flying Colours regards information as material in disclosures if its omission or misstatement could change or influence the assessment or decision of a user relying on that information for the purpose of making economic decisions. If Flying Colours deems a certain disclosure to be immaterial, it may be omitted from this statement.
Flying Colours regards information as proprietary if sharing that information with the public would undermine its competitive position. Proprietary information may include information on products or systems which, if shared with competitors, would render Flying Colours’ investments therein less valuable. Further, Flying Colours must regard information as confidential if there are confidentiality or other such obligations to customers or other counterparty relationships or employees or members.
Risk assessment and management
Risk Management Objective
Flying Colours has a risk management objective to develop systems and controls to mitigate risk to within its risk appetite. This overall risk appetite is low.
Governance and Risk Management
Flying Colours is a limited company which has a Board of Directors (the “Board”) which assumes overall responsibility for overseeing its governance. The Board is responsible for the decision and implementation of Flying Colours’ governance and risk management framework. The Board meets on a quarterly basis specifically to monitor and investigate any Compliance and Operational Risk aspects of Flying Colours’ activities.
The quarterly Compliance and Operational Risk meetings oversee Flying Colours’ activities in relation to its regulatory obligations. Flying Colours has defined key performance indicators and management information metrics, that provide a quantitative overview of the operation, and are aligned with the risks as outlined within this document.
Flying Colours takes a prudent approach to the management of its capital base and ensures that at all times it has sufficient capital to meet its regulatory requirements.
In accordance with GENPRU 2.1.45R of the FCA Handbook (calculation capital resources requirements 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. Flying Colours’ fixed overhead requirement has been determined to be £273,000.
As at 31 December 2015, the Company’s capital resources were in excess of £108,000 over the minimum capital required to be held under Pillar 1.
The majority of Flying Colours’ Tier 1 capital comprises ordinary shares.
The ICAAP (Internal Capital Adequacy Assessment Process), which assesses our capital adequacy, involves separate consideration of risks to our capital combined with stress testing using scenario analysis. We assess the impact of potential risks by modelling the changes in our income and expenses caused by various potential risks over a three-year timeframe.
Furthermore, Flying Colours has considered the costs, risks and processes involved in winding down or transferring its regulated activities in the event it should cease trading.
As such, the Board has determined that Flying Colours should hold, in accordance with the ICAAP, £10,000 of additional Pillar 2 capital.
The adequacy of the capital held by Flying Colours is assessed, at least annually, as part of the ICAAP process undertaken and is subject to the approval of the Board.
Flying Colours’ total capital resources as at 31 December 2015 are comprised as follows:
|Total Tier 1 capital (including share capital, share premium, profits and losses and deductions)||0.809|
|Total Tier 2 capital||0|
|Deductions from Tier 1 and Tier 2 capital||0.428|
|Total capital resources, net of deductions||0.3|
Summary of Material Risks
Flying Colours has been structured such that it operates with a limited risk profile. Although Flying Colours provides financial advice and may provide its services to retail clients, the Board considers that the business is exposed to limited risk as Flying Colours does not hold client money or assets and will not invest in financial instruments for its own account.
Flying Colours’ material risks are therefore operational and business-related. As such, Flying Colours is not materially exposed to either credit, market or liquidity risks. Flying Colours’ main risks are:
- securing sufficient revenue and growth during its initial start-up phase.
- attracting and retaining talented, experienced and ethical investment professionals, to ensure it can continue to deliver its services and establish new customer relationships
- maintaining industry-leading compliance procedures. Flying Colours’ reputation and continued success is dependent on its ability to maintain high ethical standards. It is critical that compliance procedures are maintained in order to minimise any opportunities for actual or perceived conflicts of interest.
- risk measurement and control: the investment strategy and advice processes must be operated and maintained to the highest levels of excellent, robustness and ethical standards. Flying Colours must ensure it conducts regular reviews of its financial and operating results, to ensure consistency of performance in terms of its regulatory obligations.
In addition to the material risks that have been identified above, Flying Colours is also exposed to the following risks:
Credit risk is the risk of loss if another party fails to perform its obligations or fails to perform them in a timely fashion.
Flying Colours does not hold client money and does not provide credit to its clients. Accordingly, Flying Colours does not have an obligation to pay its clients.
Flying Colours is exposed to credit counterparty risk as it holds its working capital on deposit. However, this is risk is seen as low as working capital is held with large credit institutions in the UK which have good credit ratings. Flying Colours takes a conservative approach to selecting banking counterparties and carries out frequent reviews of those which it uses.
Flying Colours holds sufficient surplus cash to meet its anticipated working capital requirements and other immediate financial requirements that can reasonably be foreseen. Flying Colours seeks to mitigate its liquidity risks by regularly reviewing its liquidity requirements.
Flying Colours does not deal in investments for its own account or take positions for the purposes of client servicing or market making, so it is not exposed to market risk in relation to its assets. Nor does Flying Colours have any foreign exchange exposure.
Flying Colours is exposed to operational risk in the event of inadequate or failed internal systems or process, human error, or certain external events.
Flying Colours seeks to minimise operational risk through regular operational reviews and its governance and risk management framework (as described above).
As Flying Colours’ is principally an online business, its most significant operational risk is catastrophic systems failure. However, it is also exposed to other operational risks, such as negligent or fraudulent actions or breaches of regulatory requirements which may lead to legal claims, fines or public censure. These operational risks could impact upon Flying Colours’ ability to conduct its business and/or damage its revenue, growth or reputation. It is also subject to reputational risk.
Flying Colours has established and implemented a remuneration policy that complies with the requirements as set out in chapter 19C of the FCA’s Senior Management Arrangements, Systems and Controls Sourcebook (“SYSC”).
In interpreting the SYSC requirements, Flying Colours has applied the FCA’s guidance publication entitled ‘General Guidance on Proportionality: The BIPRU Remuneration Code (SYSYC 19C) and Pillar 2 disclosures on Remuneration’. In accordance with this guidance, Flying Colours has determined not to comply with certain of the SYSC rules, on the basis that this would not be proportionate.
Flying Colours has established a remuneration committee that has full decision-making responsibility for overseeing and determining Flying Colours’ remuneration policy, which is reviewed on an annual basis. The remuneration committee is responsible for ensuring Flying Colours takes a risk-focused approach to remuneration in relation to Code Staff. This includes reviewing and recommending performance-related or other incentive schemes, as well as pension and bonus policies.
During 2015, there were no bonus or incentives schemes in operation during the year, nor is there currently an employee share option scheme in operation.
Flying Colours has identified 3 Code Staff in total for the year ending 2015, assessed as Board directors or senior management. Code Staff received aggregate remuneration of £126,000 for the year ending 31 December 2015.