The Pillar 3 disclosure of the firm is set out below as required by the Financial Conduct Authority’s (“FCA”) “Prudential Sourcebook for Banks, Building Societies and Investment Firms” (“BIPRU”), specifically BIPRU 11.3.3 R. The regulatory aim of the disclosures is to improve market discipline through increased transparency.
The FCA framework consists of three ‘Pillars’:
· Pillar 1 sets out the minimum capital amount that meets the firm’s credit, market and operational risk capital requirement;
· Pillar 2 requires the firm to assess whether its capital reserves, processes, strategies and systems are adequate to meet pillar 1 requirements and further determine whether it should apply additional capital, processes, strategies or systems to cover any other risks that it may be exposed to.
· Pillar 3 requires disclosure of specified information about the underlying risk management controls and capital position to encourage market discipline.
The rules in BIPRU 11 set out the provision for Pillar 3 disclosure. This document is designed to meet our Pillar 3 obligations.
The Pillar 3 disclosure document has been prepared by Brooklands in accordance with the requirements of BIPRU 11 and is verified by the senior management. Unless otherwise stated, all figures are as at the financial year-end.
We are permitted to omit required disclosures if we believe that the information is immaterial such that omission would be unlikely to change or influence the decision of a reader relying on that information for the purpose of making economic decisions about the firm. Where we have chosen to omit information because it is proprietary or confidential we have explained the omission and provided our reason.
Background to the business and business model
Brooklands is a private limited company incorporated in the United Kingdom (“UK”) with its registered office address at 25 Green Street, London, W1K 7AX and the company number 10170491. Brooklands is an investment management firm authorised and regulated by the Financial Conduct Authority (“FCA”) in the UK as a Full Scope UK Alternative Investment Fund Manager (“AIFM”) with additional permissions to carry out other designated investment business activities. As a result of Brooklands’ regulatory permissions, the Firm is prudentially categorised as a “Collective Portfolio Management Investment” (“CPMI”) firm.
Brooklands carries on regulated activities within the meaning of Section 22 of the Financial Services and Markets Act 2000 (“FSMA”).
Brooklands’ main business activities include providing emerging asset managers a hedge fund platform that would allow them to launch their fund(s). Furthermore, Brooklands can cater for all non-investment activities including regulatory authorisation under the AR regime, regulatory compliance, fund operations, systems, risk management, business management and legal support. Currently, Brooklands has four funds under management where Brooklands acts as the AIFM with a combined AUM of $122m. The funds have their own individual strategies including long/short equity, event driven and multi strategy. Brooklands only deals with professional clients and does not accommodate retail clients.
The governance of the Firm is affected through its senior management being, the Directors. The Firm has established a culture of compliance that is in line with the FCA’s requirements and expectations. This culture is reflected in the Firm’s compliance infrastructure which has been designed to follow both the rule and spirit of the FCA’s requirements. This culture has been developed to help ensure Brooklands’ client’s best interests are safeguarded and are at the forefront of the Firm’s business and business decisions. Brooklands believes that having robust governance arrangements and a strong compliance culture is central to running a successful business.
Mohsin Khan is the Firm’s Compliance Officer (SMF16) and Money Laundering Reporting Officer (“MLRO”) (SMF17). Mohsin Khan has day-to-day responsibility for the oversight and management of Brooklands’ compliance arrangements. This is in line with the SMCR allocation of Prescribed and Other Responsibilities related to compliance, all out outlined as part of the statement of responsibilities document.
Mohsin Khan reports directly to the Directors on any relevant matters relating to the Firm’s compliance arrangements including, but not limited to, capital adequacy. On a periodic basis, typically monthly, Board of Director Meetings are held. These Board of Director Meetings provide a formal structure for compliance, risk management and corporate governance to be considered. It is noted that, given the nature, scale and complexity of the Firm, in practice, many compliance, risk management and corporate governance matters will be discussed and considered, informally, through the day-to-day interaction between the Compliance Officer and the Firm’s Directors.
Risk management and appetite
The day-to-day risk management of Brooklands’ business typically involves identifying risks through a framework of policies, procedures, systems and internal controls that take account of relevant laws, standards, principles and rules, including the FCA’s requirements. These policies, procedures, systems and internal controls aim to ensure that the Firm operates with utmost integrity and professionalism in all business dealings. The Firm considers risk as part of its normal business operations and formally documents its risk findings in detail within its ICAAP. Risk management is not a standalone topic. Risk exists in all areas of the Firm’s business including, but not limited to, portfolio management, trading, operations and compliance. As such, risk management is an underlying and inherent consideration in all the policies, procedures, systems and internal controls that Brooklands has established, implemented and maintains. Risk management is embedded within the day-to-day operations of the Firm to ensure that risks are mitigated as far as reasonably possible.
Collectively, Brooklands’ Directors are responsible for setting the Firm’s risk appetite. Brooklands Directors meet on a periodic basis and discuss current projections for profitability, cash flow, regulatory capital management, business planning and risk management. Through its framework of policies, procedures, systems and internal controls, Brooklands aims to operate a defined, effective and transparent risk management framework. These policies, procedures, systems and internal controls are periodically reviewed, both formally and informally, and are updated, as required.
On a periodic, typically annual basis, Brooklands reviews the Firm’s risks, internal controls and other risk mitigation arrangements and assesses their ongoing effectiveness. To the extent required, updates on operational matters are provided to the Firm’s Directors. Brooklands’ monthly management accounts monitor the continuing adequacy of the Firm’s regulatory capital resources to meeting the Firm’s regulatory capital resources requirement. In the event that new risks emerge or existing risks are amplified, appropriate action is taken to mitigate these risks and to ensure that these risks fit within Brooklands’ risk appetite. At firm-level, Brooklands has a low-risk appetite.
Brooklands has given due consideration to the main areas of risks to which the Firm is, or may be, exposed. The predominant risks facing Brooklands have been categorised as follows:
This is the risk of loss inherent in the business and the specific domains in which it operates.
Brooklands’ revenue is reliant on the performance of the portfolios that it manages on behalf of its clients. As such, the risk posed to Brooklands relates to underperformance resulting in a decline in revenue or adverse market conditions hindering the Firm’s ability to generate performance fees. In such circumstances, there is also an increased risk of redemptions. Due to the nature of Brooklands’ business, it is very difficult to mitigate these risks. Nevertheless, through a combination of (a) the continued support of the Firm by its Directors and (b) the significant levels of capital held by the Firm, Brooklands is in a position to continue to cover all the expenses of the business for a prolonged period.
It was noted that the Firm is heavily reliant upon a small number of significant clients and investors in the investment vehicles advised by the Firm. It is noted that whilst the Firm has a high concentration risk this is mitigated by the long-standing relationship with these clients and therefore the risk is low in terms of probability. It is noted that the Firm has increased its efforts and resources towards minimising the client concentration risk with its marketing efforts but it is unlikely this risk can be fully mitigated in the short to medium term. It was noted that in the interim the most likely eventuality upon the loss of the current clients would be the wind up of the Firm. As such it was resolved that as the Firm holds liquid capital in excess of its wind up costs, being 3 months of ordinary expenses, there was no requirement to increase the Firm’s capital requirement.
This is the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events, including legal risk.
The Firm has established well-structured processes and controls through its Operational Risk Policy, its ICAAP and other internal policies and procedures which have been designed to minimise operational risk. Through the establishment and implementation of effective operational policies, procedures, systems and internal controls (including adequate training of staff), operational risks are mitigated to an acceptable level. To the extent that the Firm outsources activities that could give rise to operational risk, these are mitigated to an acceptable level through regular oversight and the appointment of professionally-competent service providers only. Operational risk is monitored by Brooklands on a continuous basis, both formally and informally. The Operational Risk Policy includes “key man risk” and how this is mitigated.
This is the risk that changes in market prices, such as interest rates and foreign exchange, affect Brooklands’ income and/or the value of certain assets. Brooklands does not have a trading book and, as such, market risk is limited.
However, Brooklands is indirectly exposed to market movements through the impact a market downturn may have on the value of the Firm’s assets under management and the consequential impact on the performance fees that Brooklands generates. It was noted that the investment vehicles which the Firm managed had seen strong performance in 2020 both in absolute terms and relatively against the indices. Also, the investment vehicles that are managed by Brooklands are well balanced portfolios with exposures across sectors, industries and geographies.
In terms of the Firm’s client base, there is a risk in relation to the potential wind-up of a portion of clients but this is mitigated by a likely increase in new clients in the event of a market down-turn due to new launces.
In addition, Brooklands is directly exposed to foreign exchange risk in respect of its accounts receivable being calculated in US dollars and cash balances held in US dollars, whilst the Firm’s operating expenses and reporting currency is UK sterling. Gains and losses arising from foreign exchange movements are monitored on a regular basis. Brooklands may choose to mitigate foreign exchange risk by hedging its foreign currency exposures.
This is the risk that a party will default on a financial agreement. Primarily, the Firm is exposed to credit risk as follows:
• Investment management fees due to it from its client,
• Other debtors, and
• Cash held on deposit.
The risks are mitigated by:
• periodic monitoring of the financial strength of the credit institutions with whom the Firm banks;
• contractual arrangements being in place in relation to the payment of fees (e.g., management fees are payable on a monthly basis) and the monitoring of payments against agreed payment arrangements; and
• engaging with reputable credit institutions and service providers.
Scenario and stress testing has been conducted as part of the ICAAP and Brooklands believes that the Firm holds sufficient capital to manage these credit risks.
Brooklands Regulatory capital
In line with the FCA’s requirements, Brooklands must maintain, at all times, capital resources equal to (or in excess of) the higher of the Firm’s base capital resources requirement or variable capital resources requirement. As a CPMI firm, Brooklands’ base capital resources requirements are as follows:
€125,000 (or other currency equivalent).
As a CPMI firm Brooklands ‘variable capital resources capital requirement is calculated as follows:
The higher of
• €125,000 plus 0.02% of AIF AUM above €250 million (the “funds under management requirement”);
• the sum of the credit risk capital requirement and the market risk capital requirement; or
• 1/4 of the firm’s annual fixed overheads (the “fixed overheads requirement”).
• Own funds requirement (0.01% of AIF AuM);
• ARs additional Capital Requirement
Brooklands has concluded that the fixed overheads requirement determines the Firm’s Pillar 1 Requirement. The Firm does not believe that it needs to hold Pillar 2 Requirement capital. Brooklands ‘total capital resources and total capital resources requirement, as at the 31st December 2022, are as follows:
Tier 1 Capital (Members’ capital) 399
Total capital resources requirement 246
As shown in the table above, as at 31st December 2021, the total capital resources that the Firm held exceeded the Firm’s total capital resources requirement and provides a significant capital “buffer”.