Financial Risk Management

The Board is responsible for the entire process of risk management, as well as forming its own opinion on the effectiveness of the process. In addition, the Board determines the Group's risk appetite or tolerance for risk and ensures that the Group has implemented an effective, ongoing process to identify risks, to measure its potential impact and then to ensure that such risks are actively managed. The Executive Management Team is accountable for designing, implementing and monitoring the process of risk management and implementing it into the day-to-day business activities of the Group.

The Board is accountable for risk and is responsible for oversight of the risk management process. The Board has considered the most significant risks facing the Group, including quantitative exposure measures such as stress tests where appropriate.

Although not currently a regulated entity the Company performs a formal internal capital adequacy and liquidity assessment process (“ICAAP”) in compliance with the Capital Requirements Directive. The Basel II accord was implemented in the European Union (“EU”) through the CRD in 2008 introducing a new framework for the amount of capital banks, building societies and certain investment firms were required to hold.

 The ICLAAP assessment is formally reviewed by the Board on an annual basis, and amended where necessary, or when a material change to the business occurs. The CEO and Compliance and Governance Officer present the ICAAP document to the Board which reviews and endorses the risk management, at the same time as reviewing and signing off the ICLAAP document. On a monthly basis the Executive Management Team reviews management financial statements demonstrating the continued adequacy of the firm’s regulatory capital.

The Group’s financial instruments comprise cash and cash equivalents and various receivables and payables that arise directly from its operations. The Group did not enter into derivative transactions.

The main risks arising from the Group’s financial instruments are credit and price risk. The Board reviews and agrees policies for managing this and the other risks arising on the Group’s financial instruments and they are summarised below. Further discussion of the Group’s approach to financial instruments is set out in note 11.

Financial Management Policy

As stated in our CPCM, the Board is accountable for risk and is responsible for oversight of the risk management process. The Board has considered the most significant risks facing the Group, including quantitative exposure measures such as stress tests where appropriate and incorporated such measures in the Company’s Internal Capital & Liquidity Adequacy Assessment Process (ICLAAP).

Risk Management Policy

As stated in our CPCM, the Board is accountable for risk and is responsible for oversight of the risk management process. The Board has considered the most significant risks facing the Group, including quantitative exposure measures such as stress tests where appropriate and incorporated such measures in the Company’s Internal Capital & Liquidity Adequacy Assessment Process (ICLAAP).

Material Risks

Although not a regulated entity the Group has adopted the BIPRU approach for Financial (incl. Market, Credit & Liquidity), Compliance, Operational and Strategic risk.

The Company’s revenue base is reliant on the level of assets under management (AUM) and the associated investment performance. As such the risk posed to the Company relates to underperformance of the assets and the related risk of redemptions. The risk is heavily mitigated in that the firm is a family office with Board representation for 3 family members. The risk is further mitigated via the investment strategies of conservatism, diversification and the vast predominance of short duration, fixed income, held to maturity assets within the portfolios.

As part of Capital Stress Testing the Group has performed an analysis to model capital sufficiency in the event of major reductions in AUM. Even in extreme circumstances such as a 50% reduction in AUM, the firm anticipates that capital adequacy could withstand a very substantial fall in assets and continue to meet all expenses from the significant levels of capital held.

Market risk

Market risk is the risk of lost earnings or capital arising from changes in the value of financial instruments. The Group does not deal in principal and therefore does not have a proprietary trade book and associated market risk for its own account. All trading activities are executed as an agent of the client who takes account of any market risk. As per the Group’s Regulatory Business Plan, the Group has outsourced custody and brokerage to firms who carry out instructions and are responsible for trading and settlement activity. Nevertheless, the Group will monitor performance and risks of the family portfolios and ensure that combined VaR remains below 2% daily at 97% confidence level.

The assets under management are invested in a highly conservative manner with a view to protecting capital with limited risk exposure. The vast majority of the assets held are in a diversified portfolio of short duration, held to maturity instruments with investment quality counter parties. There is limited market risk from income associated to assets under management. The fund management platform is still in its early stages and the Group ascertains the market risk requirement to be minimal.

There is no external market in order to assess the value of the unlisted investments held directly by the Group. However, the directors assess the value of these investments on a regular basis and consider potential impairments. Listed investments with a book value of £372,367 (2010 - £3,729,001) are exposed to price risk due to market volatility: Although fluctuation in market price cannot be controlled, the directors review the portfolio prices and are able to make judgements as to if and when to realise any gains or losses through their decision to retain the holdings or to sell.

Credit / Interest rate risk

Interest rate risk represents the potential impact of adverse movements in interest rates on planned cash flows of the Group.

The Group has minimal outstanding debt other than its shareholder loan and immaterial trade creditors. The Group does not maintain a proprietary trade book and hence has no trade book interest rate risk exposures. Non trade book interest rate risk is limited to cash deposits held with credit institutions rated AA and above by S&P. The Group uses the simplified standardised approach detailed in BIPRU 3.5.5 of the FSA Handbook when calculating risk weighted exposures in respect of cash balances, debtors and fixed assets.

Interest income is not a major driver for the firm’s economic success. Although substantial cash assets are held, the majority of these are in non-interest bearing accounts. During Fiscal 2011 interest income for the Group’s own book totalled £946 (2010 - £30).

Liquidity risk

This is the risk that the Group, although solvent, either does not have available sufficient financial resources to enable it to meet its obligations as they fall due, or can secure such resources but only at excessive cost. It includes the risk that the Group will encounter difficulty in meeting obligations associated with financial liabilities.

The Group’s liquidity requirements relate mainly to operational costs (which are primarily staff costs) and the cash available is sufficient to cover such risk.

Operational risk

Management is responsible for operational risk controls. Where appropriate, risk and control maps have been prepared which are captured on an online system. The Board receives reports from management regarding matters giving cause for concern and ensures that appropriate remedial action is taken. The Chief Operating Officer is responsible for assessing the impact of material issues and errors, in order to ensure that appropriate risk mitigation is undertaken on a timely basis.

The management of investment risk is a core activity of the Group. The Company Investment Management Process and Guidelines framework provides review and challenge of investment risks across each of the asset classes managed by the Group.

Statutory capital

The Group’s risk appetite is determined and reviewed by the Board, and defined principally in accordance with its investment objectives of managing conservative portfolios. The Group expects to continue to do so through its operating life.

In the year ended 30 June 2011, to ensure that the Company complies with its internal capital objective, substantial further funds were injected by the shareholder and substantial portions of shareholder loans were converted to equity. Forecast Tier 1 capital after deductions at 30 June 2011 is approximately £5 million in comparison to a capital requirement of £653,000. This creates a capital cushion of approximately £4 million.