Corporate Governance

Pillar 3 Disclosures 2016

1. Overview

1.1 Background

The Pillar 3 disclosures of Armila Capital Limited (“Armila” or the “Company”) are prepared in accordance with the Capital Requirements Directive (“CRD IV”), which is the framework for implementing Basel III in the European Union and sets out certain capital adequacy standards and disclosure requirements to be implemented by regulated firms.

The CRD IV comprises three ‘Pillars’:

  • Pillar 1 specifies the minimum capital requirements that the Company needs to meet credit, market and the fixed overhead requirement;
  • Pillar 2 requires the Company and the Financial Conduct Authority (“FCA”) to consider whether it needs to hold additional capital to cover risks not covered by Pillar 1 requirements; and
  • Pillar 3 seeks to improve market discipline by requiring firms to disclose certain information on their risks, capital and risk management and remuneration policies.

CRD IV came into effect from 1 January 2014 and is divided into two legislative instruments being:

  • the Capital Requirements Directive (CRD) Directive 2013/36/EU, which the FCA transposed into its Handbook in a new sourcebook, the Prudential Sourcebook for Investment Firms (“IFPRU”); and
  • the Capital Requirements Regulation (CRR) Regulation (EU) No 575/2013, which is directly binding on firms.

The Company is classified by the FCA as a non-significant IFPRU limited licence investment firm and is therefore required to provide the disclosures as set out in CRR Part 8, Articles 431 to 455.

1.2 Basis of disclosure

This document has been prepared by the Company in line with its internal policy for Pillar 3 disclosure and the FCA requirements.

The Company is a subsidiary of Kuwaiti European Holdings Company K.S.C. (‘KEH’) and Armila (together with all other subsidiaries of KEH, the “Group”) is the only company in the Group that undertakes a regulated activity and these disclosures relate to Armila alone.

The effective date of these disclosures is as at 31 December 2016 based on the financial statements as at that date. The total credit risk exposures and total capital resources have been reconciled to the audited financial statements and there are no reconciling items.

1.3 Comparatives

The Pillar 3 disclosures include, where appropriate, the 31 December 2015 comparatives.

1.4 Frequency of disclosure

Due to the scale of the Company’s operations and activities, the Board has decided that disclosures should be published annually.

1.5 Location of disclosure

The Pillar 3 disclosures are published in Armila’s annual accounts and will be available from the Company’s registered office on request.

The information contained in this document has not been audited and does not constitute any form of financial statement and must not be relied upon in making any judgement on the Company or the Group.

2. Risk management

The Board of Directors is required to make a declaration concerning the adequacy of the Company’s risk management arrangements and to provide a concise risk statement describing the Company’s overall risk profile derived from its business strategy.

The Board of Directors of the Company confirms that:

  • The Board has ultimate responsibility for approving risk appetite and the effective management of risk.
  • Day-to-day risk management responsibilities rest with the executive management. The Chair of the Audit, Risk and Compliance Committee is a non-executive director.
  • Due to the business activities and small size of the company, the Chair of the Audit, Risk and Compliance Committee has an enhanced role for the purposes of overseeing risk management and compliance matters in providing assurance, challenge and oversight.
  • The Company’s overall risk appetite is conservative and consistent with the business strategy and the Company’s mission and vision. The Company carries out an internal assessment of its risks at least annually as part of its Individual Capital Adequacy Assessment Process (“ICAAP”).
  • The ICAAP document sets out the risk appetite and how the Company identifies, assesses, monitors and reports the key risks to which the business is exposed. The Company’s largest risks are business risk and operational risk. Therefore it seeks to minimise this risk by designing and implementing controls and procedures to, reduce, monitor and report the risks associated with the Company’s operations.
  • The Company measures credit and market risks in accordance with the CRR methodologies. It also compares them to the fixed overhead requirement. However, the Directors recognise that some additional operational risk will remain and has established an internal Pillar 2 add-on to cover that risk. The FCA has not set Individual Capital Guidance for the Company.
  • Capital adequacy reports are circulated quarterly. In addition, significant changes in the overall capital and risk profile of the Company are reported to the Board. Similarly the capital and risk implications for significant investments or other business changes are assessed by the Board prior to approving a new transaction or other change. Any risk breaches are investigated and escalated to the Board if necessary.

During 2016 the Board met twice (on the 11th July and 15th December). The Audit, Risk and Compliance Committee did not meet separately due to the low volume of business activity.

As at 31 December 2016 the Company had a Pillar 1 capital surplus of £481,000 (2015: £199,000). In addition internal capital metrics were exceeded.

The Directors consider, based on the governance structure, the Company’s risk appetite, the systems and controls in place and the information provided to the Board, that the Company holds sufficient capital to cover the risks inherent in the Company’s business strategy and its current activities and size. Further information is provided in sections 3 and 4.

The Board has adopted a formal policy to comply with the disclosure requirements in the CRR.

3. The Board of Directors

Armila’s Board is made up of three Directors, all of whom have substantial financial services experience. Humphrey Percy, the Chief Executive Officer (CEO), is currently the sole executive director, while the remaining directors are non-executives, including a non-executive Chairman. The CEO and one of the non-executive directors are domiciled in the UK.

The controlled functions allocated to each individual are set out below. These allocations are based on:

  • the individual’s role within the organisation, supported by their expertise in their relevant areas;
  • segregating responsibilities to manage conflicts of interest and other risks; and
  • the scale of the business i.e., as the business starts with a relatively small headcount, there will be a double-hatting of roles in the front-line. This will be addressed when additional staff is recruited once the company develops and operates independently; and ensuring that the mind and management of the business remains in the UK at all times.

The Directors have a mix of relevant skills including senior management and relevant product and advisory experience:

Chairman (Non-Executive) – Dr Abdulla Al-Humaidi

After studying medicine for seven years at the Royal College of Surgeons in Dublin, Ireland, Dr Abdulla has acted as CEO, executive vice chairman and chairman of several companies in Kuwait and Saudi Arabia. In addition to his duties as a board director, Dr Abdulla is also responsible for setting overall KEH Group strategy, including investment policies for companies in the KEH group. These responsibilities include investments in a variety of business sectors, primarily the medical, leisure and hotel sectors, as well as in a number of countries in addition to Kuwait, most notably the UK and Egypt.

Chief Executive Officer – Humphrey Percy

Humphrey is Chief Executive Officer of Armila Capital. Humphrey also holds the position of Group Chief Executive Officer of KEH, the holding company of of Armila Capital, having joined the group in May 2016. Prior to this appointment, Humphrey founded Bank of London and The Middle East plc and was Chief Executive Officer of BLME Holdings having joined in August 2006.

Humphrey has more than 30 years of international banking experience and has worked at J. Henry Schroder Wagg, Barclays Merchant Bank (later Barclays de Zoete Wedd/BZW) and WestLB where he held positions including CEO, Managing Director, General Manager, and Head of Global Financial Markets. He has managed a number of global businesses within Barclays and WestLB as well as founding his own business in 2002 where he remains Non-Executive Chairman.

He is a Chartered Fellow of the Chartered Institute for Securities & Investment (CISI), is on the Advisory Board of the London Capital Club and is a Business Ambassador for the Royal Marines Business Liaison Group.

Non-Executive Director – Richard Williams

Richard joined KEH as Group Chief Financial Officer in July 2016 was appointed CEO of Armila in January 2017. Previously he was Chief Financial Officer of Bank of London and The Middle East plc. where, following authorisation by the regulator in 2007, the bank grew to be the largest Islamic bank in London. He also led the listing of BLME on the Dubai Nasdaq exchange.

Having qualified as a chartered accountant with KPMG in 1980, Richard spent his early career with Chase Manhattan, Credit Agricole and Bankers Trust. He then spent 10 years at Robert Fleming & Co setting up its Global Equities Derivatives business, including three years in Hong Kong with Jardine Fleming.

Richard also has experience with start-up companies and in private equity with Legal & General Ventures.

Richard is also a Non-Executive Director of Agricultural Bank of China (UK) Limited where he chairs the Audit Committee.

4. Capital resources

Capital resources (£000) 31 December 2015 31 December 2016
Ordinary shares 385 385
Retained Earnings 443 702
Deductions
Total Common Equity Tier 1 & Total Capital resources 828 1,087

Tier 1 capital represents Ordinary Share Capital and Retained Earnings as disclosed in the audited financial statements as at 31 December 2016. For the purpose of these disclosures retained earnings include net profit for the current year. There are no unusual terms attached to these items of capital.

Armila has no Additional Tier 1 capital instruments, Tier 2 capital or deductions.

5. Capital resources requirement

The Company’s capital resources requirement is the higher of the sum of its credit risk capital requirement and its fixed overhead requirement. It must be equal to or in excess of its base capital requirement (€50,000).

For 2016, Armila Capital’s minimum capital requirement was £238,000. This was calculated as follows:

Capital requirement (£000) 31 December 2015 31 December 2016
Credit Risk 90 105
Market Risk
Fixed Overhead Requirement 163 238

The components are discussed further in the section below.

6. Specific risk management policies

6.1 Risk identification

Armila has undertaken an assessment of the relevance and prevalence of risks as they apply to the Company within the ICAAP.

6.2 Market risk

The Company invoices counterparties in sterling and only incurs expenses in the UK. It does not hold assets or liabilities denominated in foreign currencies. Therefore it has no market risk.

6.3 Credit risk

The FCA defines credit risk as the risk that a counterparty will fail to meet its contractual obligations to the Company when they fall due. Armila’s Pillar 1 credit risk capital requirement has been calculated using the FCA’s standardised approach to credit risk.

As at 31 December 2016 the Company’s credit risk capital requirement was:

 Credit Risk Exposure – Risk Weighted Assets FY2015 FY2016
£000 £000
Risk Weight %
Other Assets 100% 531 1,164
Institutions 20% 11 9
Intercompany Debtor 100% 581 139
Total risk weighted assets 1,123 1,312
 
Credit Risk Capital Requirement @ 8% 90 105

On a regular basis the Board will review credit exposures and if appropriate move funds to other banks or companies.

6.4 Fixed Overhead Requirement

The FCA defines the fixed overhead requirement as three months’ of a company’s fixed costs based on the latest available audited annual financial statements.

The fixed overhead requirement will be reset for 2017 based on the Company’s audited financial statements for the year ended 31 December 2016. Consequently the fixed overhead requirement shown in Section 5 above is based on the administrative expenses shown in the financial statements for the year ended 31 December 2015.

6.5 Business risk

The principal risk to Armila’s business related to the business strategy of KEH and other members of the Group, in particular Al Fouz Investments KSC and London Resort Company Holdings Limited. Should those relationships not develop in the manner expected then Armila will have to consider other business opportunities and seek to diversify and expand its client base.

6.6 Operational risk

This is the risk of loss resulting from inadequate or failed internal processes, people and systems and from external events. The key operational risks for Armila have been identified as outsourcing risk, key man risk and compliance risk. The Risk Management Matrix looks at each of these risks in more detail.

The Board’s appetite for operational risk is low and it will put in place systems and controls to monitor those risks regularly. However, in recognition that this risk cannot be fully mitigated by systems and controls, it has set aside an internal capital requirement based on 15% of income. This contributes to the Company’s internal Pillar 2 capital add-on.

7. Remuneration code

The FCA implemented its Remuneration Code (the “Code”) as required by the Capital Requirements Directive and the Financial Services Act 2010. Under the Code, Armila must report annually on its Remuneration Governance Process and certain details on its Remuneration Policies and Practices.

Armila Capital Limited is classified as a ‘proportionality Tier 3’ firm.

Proportionality Tier 3 firms are considered to be the lowest category from a risk perspective and as such can disapply a number of the FCA’s remuneration code requirements. Prior to doing so, however, firms must consider their individual circumstances and be satisfied that risks related to remuneration must not be unduly increased.

Armila believes that its systems and processes relating to remuneration do not pose a risk to either it, the industry on the regulator’s objectives. In line with FCA guidance, and following Armila’s own assessment, the Company has opted to not apply rules under the remuneration principles proportionality rule relating to deferral, payment in shares or other instruments and ratio between fixed and variable remuneration.

Armila staff is remunerated with a fixed salary. In addition, the directors hold shares in the company and non-discretionary pension contributions and made to a money purchase scheme.  This has been reviewed by the Company and considered appropriate, given the nature of the business and its operations.

The Board is responsible for ensuring that it, and the Company, remains in adherence with the obligations and the spirit of the FCA’s Remuneration Code.