Investment Firms Prudential Regime (IFPR) Disclosure – Arnold, Stansby & Co Ltd
The figures below are based on the last fully audited statements of the firm. This is 31st March 2023.
The Investment Firms Prudential Regime (IFPR) requires investment firms to make public disclosures according to Financial Conduct Authority (FCA) rules.
Arnold Stansby & Co is authorised and regulated by the FCA.
This form has been prepared according to, and to meet, the rules set out by the FCA.
Arnold, Stansby is a non-SNI MIFIDPRU firm. Disclosures are appropriate to the size, internal organisation and nature, scope, and complexity of the Firm.
The firm has no associate businesses or subsidiaries other than the nominee company.
Where a disclosure is deemed to be immaterial it will be omitted.
The firm is wholly owned and controlled by Arnold Stansby Holdings Ltd which is registered in England. There are currently four directors all involved in the running of the business.
The firm provides stockbroking and investment management, and ancillary services, primarily to private clients.
Arnold Stansby Holdings Ltd is controlled by its two Directors, who are also beneficial owners. They each control 50% of the share capital with equal voting rights.
The company is not part of a larger group but controls Asco Nominees Ltd which holds the nominee investments in this name for all client securities held this way. s.
SCOPE OF APPLICATION
These disclosures are made to comply with FCA rules. The firm is an agency only broker dealing with retail clients.
GOVERNANCE (MIFIDPRU 8.3)
The directors are responsible for managing and monitoring all risks. Due to the small size of the firm. It is not considered necessary to set up separate committees to oversee specific risk types. These are all undertaken at board level.
All four directors form the various committees set up.
Remuneration committee (see below)
Client Money & Assets committee
The requirement to have separate Risk, Remuneration and Nomination Committees does not apply.
There is a simple and clear organisational structure within the firm. This allows it to maintain governance as well as implementing a risk management structure. It also should be well positioned to recognise the risks that the business faces.
The Directors determine how the risks the business faces may be mitigated and assess on an ongoing basis the arrangements to manage those risks.
The Firm’s Directors are registered with the FCA and under SMCR, regulatory approval must be granted before the appointment of any individual holding a Senior Management function. The Firm does not deal on its own account or have positions in any securities.
OWN FUNDS (MIFIDPRU 8.4)
The tables below is set out in the format given by the FCA. Funds shown are as per the Balance Sheet in the firms Audited Financial Statements (amounts shown in £1,000’s
TABLE OF1 – COMPOSITION OF REGULATORY OWN FUNDS
1 OWN FUNDS £613
2 TIER 1 CAPITAL £613
3 COMMON EQUITY TIER 1 CAPITAL £581
4 Fully paid-up capital instruments £168
5 Share premium
6 Retained earnings £450
7 Accumulated other comprehensive income
8 Other reserves
9 Adjustments to CET1 due to prudential filters
10 Other funds
11 TOTAL DEDUCTIONS FROM COMMON EQUITY TIER 1
19 CET1: Other capital elements, deductions, and adjustments
20 ADDITIONAL TIER 1 CAPITAL £0
21 Fully paid up, directly issued capital instruments
22 Share premium
23 TOTAL DEDUCTIONS FROM ADDITIONAL TIER 1CAPITAL £0
24 Additional Tier 1: Other capital elements, deductions 33,325and adjustments
25 TIER 2 CAPITAL
26 Fully paid up, directly issued capital instruments
27 Share premium
28 TOTAL DEDUCTIONS FROM TIER 2
29 Tier 2: Other capital elements, deductions, and adjustments
TABLE OF2 – OWN FUNDS: RECONCILAITION OF OWN FUNDS TO BALANCE SHEET IN THE AUDITED FINANCIAL STATEMENTS
1 Tangible Assets £11
2 Debtors (less than 12 months) £1053
3 Client Money £21,001
Total Assets £22065
1 Creditors due within 1 year (includes Client Money) £21,446
Total Liabilities £21446
1 Share Capital £168 (cross reference OF1 No 4)
2 Retained Earnings £450 (cross reference OF1 No 6)
Total Shareholders’ equity £618 (cross reference OF1 No 1, 2 & 3)
OWN FUNDS REQUIREMENTS (MIFIFPRU 8.5) (amounts shown in £1’s
Minimum Capital Requirement £150,000
K Factor Calculation £302,000
Fixed Overhead Requirement £122,000
ADEQUACY ASSESSMENT OF OWN FUNDS
Risk Management – the board assesses the risks to the firm. This includes financial control, monitoring and analysing all data as well as regulatory and other risks. The board believe the risks to the business could be best described as low.
ICARA Process (MIFIDPRU 7.7)
The Firm must calculate and assess liquidity requirements to ensure sufficient
resources are maintained to meet the Liquid Assets Threshold Requirement
The ICARA process
The board assess risks that could be caused to the firm by the following
Identify and monitor harms
Mitigate these where possible
Use simple modelling to assess, plan & forecast
Look at recovery planning
Undertake wind-down planning
Assess the adequacy of own fund and liquidity
The process comprised of the following
Calculate minimum capital figures Own Funds Requirement.
Review the possible harms the company could cause and assess each was material to the firm and how much capital needed to be put aside to cover those risks.
Look at forward-looking information of the firm’s operations and scenarios that could occur.
Look at forward looking events and assumptions, and how these would impact the firm.
The calculation of the capital required in this document is based on IFPR.
The firm is involved in a very competitive market. However, the decision has been made to focus on the advisory client sector and no change to this is foreseen. The major stockbroking businesses focus on the execution only and discretionary customers which require much less regulatory work by the firms. This has left a relatively small number of stockbrokers that focus on private clients with an individual point of contact within the firm.
There are no plans to increase capital expenditure. We feel that any slowdown will not have any impact on the capital requirement of the firm. The business model of the firm and the management structure has not changed significantly for many years, we feel this has led to no annual losses being reported in all the time the current management has been in place.
The calculation of the capital required in this document is to meet the minimum regulatory requirement and any additional risks to the business and the safety of client assets and money. Mitigations are used by the firm to reduce risk.
BUSINESS PLAN & RECOVERY PLAN
A business & recovery plan is also made annually
BUSINESS & RECOVERY PLANS may23.docx
The current financial position of the firm is maintained by the directors in line with the rules of the regulator. Should there be a need to inject further capital for any short term or long-term reason this should not pose a problem and has not done, when needed, in the past.
Analysis of the profit and loss account does show that most costs are fixed rather than variable. This is seen in the way the rising compliance costs have fed directly through to reduced profitability.
OWN FUNDS & CAPITAL ADEQUACY
The approach to the required level of capital adequacy is based on the regulatory minimum with extra capital, which the firm believes is adequate to meet all regulations. A buffer over the minimum requirement has always been maintained and the intention is to continue this, as well as looking at potential financial risks to clients and if the funding is adequate to ensure no potential loss can be likely.
As capital figures used in the ICARA are from the unaudited annual results the figures below are also as at the last financial year end.
The firm’s credit risk is the possibility of a loss happening due to a failure of a party to satisfy contractual obligations. This could be either a client, business counterparty or bank.
We have mitigation in place through holding client money and/or assets prior to undertaking a transaction for virtually all clients. The firm only deals with a counterparty on a cash against delivery basis. Finally, client and firm’s money are only held in A rates UK banks.
OPERATIONAL RISK (risk of market movements to the firm)
The operational risk of the firm can be split in separate types, and these are set out below:
1) Non-payment by a customer/counterparty. This is the most material risk to the business and therefore we have implemented risk mitigation techniques to ensure this is minimized. Following the purchase of shares/stock the registration in the client’s name is not undertaken until payment has been made to us. Settlement must be made within 10 working days; if this is not received the firm has the right to sell the shares at its discretion. The firm also holds shares and cash for almost all clients and runs daily collateral calculations to ensure there is as little risk as possible to the firm.
For clients who are ‘trading’ shares (hoping to buy and sell without paying) the firm will only act if we hold ‘cover’ in cash or stock of the total exposure and we must hold the stock in the firm’s nominee name. This type of business is immaterial to the firm.
2) Non delivery of stock by a customer/counter party –When buying or selling shares there is the risk that if the share price changes the customer fails to send his certificate and transfer to us. To mitigate this risk we sell shares for a shorter period than when buying (usually 7 working days) and make sure we contact the customer on or before settlement date and beyond if necessary.
The vast bulk of the business is for clients that we have money and/or nominee assets. Transactions in ISA’s can only be made if the stock or cash is in the plan and therefore carry no credit risk.
3) Trading for clients in unsuitable investments or without a mandate. As nearly all the clients have been dealing with us for many years this is highly unlikely. The firm has not had one complaint of this type for as long as our records go back.
The mitigations in place does seem to have worked as we have had no bad debts for many years. It was in response to a customer not paying that we improved and changed our controls to ensure the chance of recurrence was minimized.
4) The other element of credit risk is the possibility of one of the market makers (with whom we exclusively deal) defaulting, dealing errors or being unable to deal due to an outage in the systems. The fact that every market maker is authorised and regulated by the Financial Conduct Authority also gives a degree of confidence. All the stocks traded on a cash V delivery basis. This means the stock moves at the same time as cash moves in the opposite direction. The risk of delivering stock and not receiving the proceeds, or vice versa is remote. Well over 90% of the business is undertaken through Euroclear UK with an A credit rating.
ASSESMENT OF BUSINESS WIND DOWN (As per IFPR)
The firm considers the minimum level of capital needed can ensure an orderly wind down of the business if that is needed.
We look at the assets the firm holds for clients (including cash), level of expenses, time needed and the firms liquid assets and calculate what the likely cost of the wind down will be keeping in mind the income will cease.
In addition the small size of the business should mean that any wind down is straight forward and relatively quick.of the 3 Months will be more than adequate for the small business to be transferred to other firms. The FOR is therefore more than the ultimate cost of this.
The firm does not count any assets other than cash as capital and therefore there is no Liquidity risk (inability to sell assets quickly)
INTEREST RATE RISK
The firm has no debts of any type and therefore no interest payments to banks or other lenders.
The firm takes a minimal interest rate ‘turn’ on client’s cash deposits held with our bank (Bank of Scotland) and therefore any changes in interest rates will have no impact on profitability or capital.
The firm does not have any secured assets and therefore this risk is not relevant.
BUSINESS RISK/CONCENTRATION RISK
The firm deals exclusively with private clients and small pension funds, trusts and companies. However, there is no concentration on one client, or group of clients. The firm does deal in equities, funds and bonds for clients and therefore there is diversification in that if investors feel they need to switch out of one type of investment they are likely, as has happened previously, to switch funds to another type we deal with and hold in ISA &/or nominee.
The fact that over 50% of transactions are on behalf clients within an ISA, which is a tax haven for most clients, does mean it is unlikely that there will be a mass closure of plans and withdrawal of funds
Looking at the impact a market downturn may have on the firm’s capital we have looked carefully at the relationship between dealing volumes (shown by lower turnover) and costs. There is an element of variable costs to the business. Income other than commission is unlikely to be impacted by any downturn as these are not affected by the number of transactions.
The intention of the firm if any slowdown was for several years would be to increase fees and charge during the year rather than in arrears. The firm already has clients signed approval for this to be done at any time. The effect of this change would be to generate an additional annual income of £100000. This would be what would happen in a business wind down further reduces the impact of a downturn in activity.
There are no plans to change the business in the foreseeable future. The costs of the firm have been analysed and looking at the last 10 years there has been stability which seems unlikely to change
Due to the small size of the firm and the policy of no advertisements we do not feel there is likely to be any material loss to the reputation of the firm.
The firm does not receive any performance bonus for the performance of its client’s investments.
ADDITIONAL TIER 1 CAPITAL
The directors consider it prudent to treat the total risks about to be treated as Additional Tier One for the purposes of IFPR
Tier 2 Capital
Due to the nature of the firm’s business, it is felt by the directors that no additional Tier 2 Capital is needed.
CHALLENGE OF THE ICARA
We have challenged the ICARA by determining what could go wrong financially with the firm. Any event that could occur was looked at in terms of likelihood and financial impact, this was then checked against previous examples if they had occurred. Finally, we overestimated the risk attached to the event for added security.
No external suppliers were used for the ICARA. Because of the small size of the firm and the relatively few similar size firms in the Stockbroking business it proved difficult to find somebody who understood the business model.
USE OF THE ICARA WITHIN THE FIRM
The ICARA has replaced ICAAP and will be one of the main tools used to ensure that the firm meets the financial requirements of the regulator.
However, we will continue to ensure that risks remain valid, and the calculation is kept up to date as circumstances change. We will use the most recent financial returns to update all the calculations in the ICARA. This may mean extra capital is needed to be held by the firm in the future.
Capital modelling has been done at a very basic level in the ICAAP because of the nature of the firm’s business. The form of modelling will also be reviewed and improved if this is felt possible.
REMUNERATION POLICY STATEMENT
The firm has completed a Remuneration Policy Statement in accordance with the rules of the regulator. However, the firm has decided that it will not make any payments based on performance to any staff. Decisions regarding any change to this policy will be made by directors of the firm. The board will act as the Remuneration Committee. The policy statement will be made not less than annually.
CONCLUSION/CALCULATION OF RISK
The conclusion we have reached is that the firm’s capital & reserves are adequate to ensure it can survive any downturn that can be foreseen. In addition, the firm will ensure that a wind down of the business can be funded.
The firm is happy that the IFPR calculations but the risk to clients at very low risk. The capital held within the firm, and no gearing of any type gives confidence that there is minimal risk to clients. Of the capital a large percentage is bank deposits.
Completed by JW Stockton (Compliance Director) July 2023