Capital requirements directive - Pillar 3 disclosure

As at 31 December 2015

Note regarding the Aegon acquisition from Legal & General: This disclosure is a regulatory point-in-time requirement, and hence reflects the position as at the 31st December 2015, when Cofunds was owned by Legal & General. The requirement to disclose this information at least annually means a new disclosure will be made “as at 31 December 2016”, and is expected to be published in the first half of 2017.

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1. Background

1.1 Introduction

The Pillar 3 disclosures cover the solo entity Cofunds Limited, which is part of the consolidated supervisory group of Legal & General Retail Investments (Holdings) Ltd (LGRI(H)). LGRI(H) is a holding company and all regulated activity is in practice carried out by its reporting entities, including Cofunds Ltd or “the Firm”.

Following implementation of the new Capital Requirements Directive (CRDIV) with effect from 1 January 2014, the Firm is now classified as an IFPRU €125k Limited License firm.

The CRD IV framework is split between the Capital Requirements Directive (Directive 2013/36/EU) and the Capital Requirements Regulation (Regulation (EU) No 575/2013). The Capital Requirements Regulation (CRR) is directly binding on the Firm, and does not need to be implemented by the FCA (or via UK regulation). However, the FCA has transposed the Directive into the FCA Handbook, along with a limited number of discretionary policies and derogations available to member states in the CRR.

The Firm therefore refers directly to the CRR, supplemented by European Banking Authority (EBA) technical standards and the FCA’s rules/guidance in a new sourcebook, the Investment Firms Prudential sourcebook (IFPRU). The Pillar 3 disclosure requirements are contained in Articles 431 – 455 of the Capital Requirements Regulation (CRR). The revised framework consists of three pillars:

Pillar 1 establishes minimum capital requirements in respect of credit, market and operational risk exposures using standard criteria.

Pillar 2 requires firms to assess the risk exposures specific to their business and to calculate the amount of capital that should be held against those exposures. This has been implemented in the UK by the FCA as the Individual Capital Adequacy Assessment Process (“ICAAP”). FCA rules also establish a supervisory process for the FCA to challenge firms’ own assessments of their risk exposures and corresponding capital requirements.

The amount of capital a firm is required to hold is the greater of the Pillar 1 and Pillar 2 values.

Pillar 3 requires firms to publicly disclose their policies for managing risk and their capital requirements. This is designed to promote market discipline by providing market participants with key information on a firm’s risk exposures and risk management processes.

1.1 Basis of disclosure

This document sets out the Pillar 3 disclosures of the Firm in accordance with the requirements under CRD IV as laid out in Part Eight of the CRR (articles 431-455) . The disclosures have not been audited and do not form part of the annual audited financial statements and should not be relied upon in making any judgment about the financial position of the Firm.

Unless otherwise stated all figures are as at 31 December 2015, Cofunds’ financial year end, with comparative figures for 31 December 2014 where relevant. Pillar 3 disclosures are published annually and as soon as is practicable after the publication of Cofunds’ Annual Report and Accounts. The Firm pays particular attention to the need to publish some or all disclosures more frequently than annually based on the relevant characteristics of the business.

1.3 Frequency of disclosure, media and location

In accordance with Article 433 of the CRR, Pillar 3 disclosures are made on an annual basis as a minimum, and more frequently when appropriate. These disclosures are published on the Firm’s website (

1.4 Scope and application

With effect from May 2013, the Firm was 100% owned by Legal & General. The Cofunds group (“Cofunds”) structure, following Legal & General acquiring the remaining share capital, is shown below.

1.4 Scope and Application Structure

Cofunds Holdings Group is the UK consolidation group consisting of Cofunds Holdings Limited (registered number 04022350) and:

  • Cofunds Limited (registered number 03965289, FCA regulated number 194734), which is a wholly owned FCA regulated subsidiary of Cofunds Holdings Limited, and is a IFPRU €125k Limited License firm
  • Cofunds Nominees Limited (registered number 04022340), Minster Nominees Ltd (registered number 07131518), Dorset Nominees Ltd (registered 07131576) are all dormant companies wholly owned by Cofunds Limited
  • Cofunds Leasing Limited (registered number 04022744), which is a non-trading wholly owned subsidiary of Cofunds Holdings Limited.

Unless otherwise indicated, the disclosures made within this document are made in respect of Cofunds Limited (“Cofunds” or “the Firm”) as the FCA authorised and regulated entity, whose primary activity is to offer business-to-business fund platform services and administration.

Cofunds acts as agent in the placing of aggregated deals with fund managers and does not engage in any dealings as principal. Cofunds does not offer any advice on products or investments.

1.5 Non-material, proprietary or confidential information

This document has been prepared to satisfy the Pillar 3 disclosure requirements set out in the CRR. The Firm does not seek any exemption from disclosure on the basis of materiality or on the basis of proprietary or confidential information.

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2. Risk management and governance structure

2.1 Governance

In 2015, the business of Cofunds Limited was managed within the Digital Savings Division of the Legal & General Group . The Digital Savings Division was led by a Managing Director (EMD) who in turn reported to the Group Chief Executive.

In 2015, the Digital Savings Division was responsible for the digital savings business which consisted of:-

  • Cofunds Limited (Cofunds);
  • Certain products and services provided by Legal & General (Portfolio Management Services) Limited (PMS);
  • Suffolk Life Group Ltd and subsidiaries;
  • Distribution of institutional and intermediary business (on behalf of various legal entities within the Legal & General Group).

The Firm operates within the governance and risk framework of the Legal & General Group of companies. It ensures that risks are being appropriately identified and managed, and that the risks of significant loss or damage to our reputation are being minimised.

The Board of the Firm recognises that risks will be present throughout the activities that the Firm undertakes. With that in mind, the Board is responsible for ensuring that The Firm has in place a suitably robust Governance and Risk Management Framework in order to ensure that risks are adequately identified, assessed and mitigated and ultimately to ensure that clients' and The Firm’s own assets are suitably protected.

The governance framework below relates specifically to the Cofunds Limited legal entity.

2.1 Governance Structure

From January 2016, Cofunds Limited forms part of a newly formed ‘Savings’ business unit within Legal & General.

Cofunds Limited has been granted a waiver by the FCA in respect of IFPRU 1.2.1G (1,2,4), which sets out certain governance requirements for significant IFPRU firms. The waiver recognises that Cofunds Limited is included in the remit of the Legal & General Group Risk Committee and Group Remuneration Committee, therefore is not required to operate these at firm level. In addition, the waiver authorises Cofunds Limited to operate a Nominations Committee without non-executive Directors.

The governing body of the Firm is the Cofunds Limited Board (“The Board”). To complement the role of The Board, the Firm’s governance structure is comprised of a number of local and group committees as shown in the organisation chart above for 2015. Each committee has a Terms of Reference clearly stating its responsibilities, membership and escalation procedures.

The key local governance committees are listed below:

  • Product, Investment and Capital Committee (Monthly): responsibility for ensuring products are appropriately designed, priced and reviewed to deliver agreed returns on risk based capital and fair customer outcomes; and that all risks are identified, assessed, monitored and mitigated to within agreed risk appetites and capital limits.
  • Risk & Compliance Committee (Bi-monthly): responsibility for ensuring that appropriate processes are in place to identify, assess, monitor and control areas of risk. It ratifies proposed changes to risk frameworks and risk mitigations, and informs senior management in their decision making, for example when accepting risks.
  • Nomination Committee (Met twice during 2015): responsibility for leading the process for new appointments to the Board and ensuring that these appointments bring the required skills and experience to the Board.
  • CASS Oversight Committee (sub-committee of the Board – meets monthly): holds delegated authority from the Cofunds Limited Board for overseeing compliance with the FCA CASS rulebook.

The key Legal & General group committees are as follows

  • Group Risk Committee: responsibility for advising the Group Board in relation to the group’s overall risk appetite for each of the categories of principal risk to which the group may be exposed, and overseeing the management of those risks across the group.
  • Remuneration Committee: responsibility to determine and approve the framework of the remuneration policy of Legal & General Group Plc and its subsidiaries (including international subsidiaries) (‘Group’) and specifically to manage executive director remuneration and the remuneration of the designated individuals.
  • Audit Committee: responsibility to assist the Board in discharging its responsibilities with regards to monitoring the integrity of the group’s financial statements, the effectiveness of the internal control (including financial control) framework and the independence and objectivity of the internal and external auditors.

2.2 The board and board reporting

The Cofunds Limited Board comprised the following members as at 31st December 2015:

  • Executive Managing Director ( Digital Savings ) – (Chairman) - resigned 31/12/2015
  • Chief Executive Officer (Cofunds Limited)
  • Finance Director ( Digital Savings )
  • Distribution Director (Digital Savings)
  • Chief Information Officer (Digital Savings)
  • Chief Financial Officer (Legal & General Assurance Society)

The Digital Savings Chief Risk Officer (CF10), Cofunds CASS Operational Oversight Officer (CF10a), Group Conduct Risk Director, Head of Internal Audit (Insurance and Digital Savings) and Cofunds Limited Operations Director are standing attendees.

The Board meets quarterly with additional Board meetings being convened to meet business needs and has a Schedule of Matters Reserved for the Board which is subject to annual review. The Board also has a schedule of regular agenda items which identifies the regular and standing items that are considered at each Board meeting.

The flow of information on risk to the Board is as shown in the above attached governance structure.

At each quarterly Board meeting the Cofunds Limited Board receives a business update from the Managing Director and a Finance Director’s report along with reports on Commercial, Operational and Technology performance. The Digital Savings Chief Risk Officer also provides the Board with a Risk & Compliance Report at quarterly Board meetings.

Number of directorships held by members of the Board

In accordance with Article 435 of CRR, the table below shows the number of directorships held by members of the management body as at 31st December 2015:

Name Position Directorships(*) held
James Michael Bury Executive Managing Director (Digital Savings) resigned 31/12/15
David Geoffrey Hobbs Chief Executive Officer (Cofunds) 1
Michael Peter Rudge Finance Director (Digital Savings) 6
David Patrick Fagan (**) Distributions Director (Digital Savings) 2
Stuart Johnson Chief Information Officer (Digital Savings) 1
Christopher James Knight Chief Financial Officer (LGAS) 5

*Directorships within the Cofunds Holdings Ltd Group of companies are counted as one. This excludes dormant companies and non-commercial directorships. Directorships held outside of Cofunds Holdings are counted individually.
**Also Interim Chief Commercial Officer (Digital Savings)

2.3 Recruitment policy for members of the Board

All Appointments for directors are governed by the Nomination Committee and are subject to rigorous screening criteria. The Nominations Committee ensures that The Board has an effective balance of skills and experience around the boardroom table and is responsible for identifying the skills required of future directors in light of the group’s strategy. The Committee ensures that there is a rigorous process in place for the appointment of new directors.

Typically for external recruitment, an executive search firm is engaged to prepare a short list of candidates suitable to meet specific requirements of the Firm. A series of interviews are held before any appointment is made. For very senior roles/ director positions, this will typically include most members of the Management Board and in some cases senior executives within the Legal & General Group. Any appointment is subject to comprehensive referencing including CRB/DBS checks.

The selection of directors is based in particular on their integrity, experience, skills, diversity and professional competence (with specific attention also paid to any potential or actual conflicts of interest and the number of directorships already held by the proposed candidate within or outside of the Legal & General Group). Once a candidate is identified, the nomination is presented to the Nomination Committee for its review and validation (prior to any approval by the Board itself). The review is conducted across a broad set of qualities and competences based on same criteria for selection – integrity, experience, skills, diversity and professional competence. The Nomination Committee reviews candidates’ other commitments and ensures that a candidate will have sufficient time to undertake the role. Members of the Cofunds Limited Nomination Committee are senior executives of Legal & General Group who have no active involvement in the day to day management of the Company.

Once the Nomination Committee has reviewed and validated the nomination of a candidate, it is presented to the local Board for approval. The appointment will be effective only after the individual has received the approval from the FCA and the entity has been notified accordingly.

2.4 Policy on diversity

We consider a diverse Board to be extremely important, be that diversity of thought, background, experience or gender. In 2012 Legal & General published a Board diversity policy which the Nominations Committee considers throughout the candidate search process.

The Nomination Committee encourages female candidates and candidates of diverse backgrounds by:

  • Engaging an executive search firm that is a signatory to the executive search firms' Voluntary Code of Conduct
  • Liaising with the search firm to produce a brief that includes an appropriate emphasis on diversity of skills and background, independence of approach and other personal qualities, in addition to career experience and compatibility with the values and behaviours of existing Board members, with a view to enhancing the overall effectiveness of the Board
  • Encouraging the search firm to produce long lists which include women and other diverse candidates of appropriate merit

The Committee will also consider high-performing women and other diverse senior executives who may not have previous board experience for executive and non executive directorship roles, subject to potential candidates meeting the regulatory requirements for a board director of a financial services firm.

The Committee is also working to further strengthen the representation of women among the non-Board senior management who may be the Board members of tomorrow.

2.5 Board declaration – adequacy of risk management arrangements

The Cofunds Limited Board is ultimately responsible for the Risk Management Framework of the Firm and has implemented an appropriate governance and risk management structure. The Board is responsible for reviewing the effectiveness of the Firm’s risk management arrangements and systems of financial and internal control. The risk appetite of the Firm is clearly defined and is monitored on regular basis.

The Board considers that it has in place adequate systems and controls with regard to the Firm’s risk profile and strategy.

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3. Risk management objectives and framework

3.1 Risk management objectives

Risk is an inherent part of Cofunds’ business. Our objective is not to completely eliminate risk but to manage it to an acceptable level whilst balancing risk with reward. Effective risk management assists in the delivery of our strategic objectives; protecting the value of Cofunds by managing potential threats and adding value by enhancing our ability to take advantage of the available opportunities. It also forms a vital element of our capital planning, helping to ensure our business model is resilient and enabling Cofunds to retain the ability to meet its liabilities as they fall due.

3.2 Risk management framework

The Firm’s risk framework is designed to enable the Board to draw assurance that risks are being appropriately identified and managed in line with its risk appetite. It is managed in line with the risk framework of the Legal & General Group.

The Firm has implemented a ‘three lines of defence’ model in order to identify, manage and mitigate actual or potential risks.

  • Level 1: Business line management is responsible for identifying and mitigating the risks arising within their areas of functional activity.

  • Level 2: Independent assurance functions such as Risk & Compliance, Legal, Finance, and Human Resources teams provide technical guidance to business line and Senior Management.

  • The Group and Divisional Chief Risk Officer (CRO) teams acts as an independent second level assurance function which undertakes independent assurance testing of local controls, policies and procedures and provides reports to management and indicates actions necessary in order to mitigate risks. The CRO function also provides advice to Senior Management and the business as necessary, including advice and guidance in relation to changes in regulatory requirements or practice.

    The risk management function acts also as an independent second level of control. Its role is to provide the Firm’s Senior Management with an independent view of the Firm's risks and to support mitigation efforts.

  • Level 3: The Internal Audit team provides independent assurance to both the Board and to the Group Audit & Risk Committee.

The core elements of our risk framework are set out below:

Risk appetite

The group’s risk appetite statement sets out our overall attitude to risk, and the ranges and limits of acceptable risk taking. Cofunds then defines its own risk appetite which is commensurate to the level of risk that it is prepared to accept, both on an individual risk and aggregate basis, in pursuit of its strategic goals and objectives.

The Risk Appetite Statements, which provides parameters within which the business can operate, facilitates a simpler articulation of the business risks to the shareholders and staff. In conjunction with the specific limits, the Board has put in place a set of high level principles and a set of KRIs which are a balance of quantitative and qualitative measures that provide an indication of increasing or reducing risk levels over an appropriate time horizon. They are designed to alert the Board and management that a risk is approaching, or has exceeded, an acceptable level.

The Risk & Compliance Committee leads an annual review of the firm’s risk appetite, assessing the continued appropriateness of our key measures and tolerances relative to the risk exposures of the firm. Additionally, as part of the annual planning cycle, assessment is made of the level of risk taking proposed in the business plan and the capacity for risk taking within the overall appetite framework.

The firm’s risk appetite is approved by the Cofunds Limited Board on the recommendation of the Risk & Compliance Committee and the EMD. The regular management information received by The Board and Cofunds Risk & Compliance Committee includes our risk appetite dashboard setting out actual positions relative to the key targets and limits set in our risk appetite.

Risk taking authorities

We cascade the parameters of our risk appetite to our business managers through ‘Risk and Capital Mandates’, empowering managers to make decisions that are consistent with our appetite for risk.

Our mandates articulate the activities that are permitted; the product and proposition types and features that may be written; the assets classes that may be held; the target capital positions and ranges of earnings volatility within which the overall profile of risks should be managed; and tolerances for specific risk exposures. Activities that would result in a business operating outside agreed parameters require formal approval from the Product, Investment and Capital Committee.

Risk policies

Risk control

We set formal policies for the management of market, insurance, credit, liquidity and operational risks. The policies specify our overall strategies for ensuring each risk type is managed in line with our risk appetite and the minimum control standards that should be applied in managing our significant risk exposures.

Risk mitigation

We deploy a range of risk management techniques to manage and mitigate risks, so as to control risk exposures in line with our risk limits. For example, our framework of controls includes documented due diligence policies and structured delegated pricing and approval authorities. We also seek to transfer significant aggregations and concentrations of risks as part our corporate insurance programme.

Risk identification and assessment

Review process

We operate a risk identification and assessment process under which all our businesses regularly consider changes in the profile of existing and emerging risks. The assessment process evaluates the risks that are inherent in our products as well as those that are presented from changes in the environments that we operate in.

Internal Capital Adequacy Assessment

Our risk identification and assessment process forms part of our broader ‘Internal Capital Adequacy Assessment’ process (see section 6.6), our ongoing assessment of the risks to which the Firm is exposed and an evaluation of the sufficiency of resources to sustain the business strategy over the horizon of the strategic plan.

Risk management information

Our risk management information framework is structured to report and support the review of ongoing and emerging risks and assess actual risk positions relative to the risk limits and targets that we set.

Risk oversight

The divisional chief risk officer and his team, who are independent of the business line, support the Cofunds Limited Board and its Risk Committee in articulating acceptable risk taking and ensuring the effective operation of our risk and capital framework. This includes ongoing assessment of the firm’s capital requirements to confirm that they meet regulatory capital adequacy requirements.

The divisional chief risk officer also provides objective challenge and guidance on a range of risk matters to business managers, including the risks implicit in product developments, business transactions and new asset classes, and strategies for managing risks in line with the firm’s overall risk appetite.

Risk Committees

The Board has ultimate responsibility for the Firm’s risk management framework. The Risk & Compliance Committee (RCC) supported by the divisional chief risk officer, serves as the focal point for risk management activities.

Beneath the Board is a structure of risk oversight and management committees providing more focused review and challenge of specific risks to the group, and reviewing the effectiveness of frameworks in place to manage those risks.

Details of the Firm’s governance arrangements are covered in section 2.1.

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4. Principle risks and uncertainties

The Principal Risks and Uncertainties section gives an overview of the more significant factors that may effect the delivery of Firm’s strategy, its future revenues and profitability. Factors outside our control such as the performance of investment markets and broader economic outlook perhaps present the greater area of uncertainty. As we saw with the recent Sunset Clause (FCA PS13/1: Payments to platform service providers and cash rebates), changes in legislation and regulation can also impact our business model. As we continue to evolve in the platform market we must also be mindful of the range of cyber crime threats to which we may be exposed.

As part of our ongoing risk assessment processes, we seek to identify new and emerging risks, and develop strategies to ensure our exposures to risk remain within acceptable tolerances.

The key principal risks and uncertainties identified for the Firm are described below. They are modelled mainly through stress testing, with a small proportion quantified under the operational risk methodology.

Market and economic conditions

Most of the Firm’s revenues are correlated to Assets Under Administration (AUA), which are in turn highly correlated to market performance. Whilst exposure to this risk is regularly reviewed, an extreme downturn would have a significant impact on earnings, profitability and customer behaviour. The decision has been made not to hedge the Firm’s AUA-related revenue exposure and to manage through management actions. The modelling is done through stress testing under various scenarios.

Regulation and legislation

There are a number of aspects to the way in which regulation and legislation impact the Firm:

  • Conduct of business
  • Regulation of product design
  • Prudential capital
  • Taxation policy

Cofunds’ proposition and its distribution are significantly influenced by the regulatory environment. Significant, unanticipated changes could impact the Firm’s ability to develop, market and administer its proposition effectively and compliantly.

Confidence in the financial services sector

Events in the financial services sector outside the control of the Firm may impact earnings and profitability. Historically, such events have included:

  • Adverse performance of investment markets
  • Control and financial failings by competitors and other counterparties
  • Actions by regulators
  • Adverse media
  • Perpetration of financial crime

Pricing risk

The business plan of the Firm already includes pricing compression in the platform industry. The Firm’s risk appetite for pricing risk, after incorporating the pricing compression in the industry, is low. This risk represents general pricing compression due to competition and client initiated fee renegotiations. The Product, Investment and Capital Committee is responsible for the oversight of pricing risk.

Market infrastructure

The Firm’s investment administration activities are reliant upon the availability of market infrastructure. The loss or major disruption to this infrastructure would have a significant impact on Cofunds’ operations and profitability.


The loss of key personnel could impact the Firm’s financial and operational performance. Cofunds actively focuses on retaining the best personnel and ensuring that key dependencies do not arise through employee training and development programmes, remuneration strategies and succession planning. Failure to manage resources effectively, particularly during periods of significant change, may impact the Firm’s earnings and operational effectiveness.


Whilst the Firm ensures that it only transacts with regulated counterparties, and holds assets only with strongly rated banks, the financial failure of a significant counterparty could result in operational disruption, liquidity pressure and financial loss.

Outsourced and critical supplier arrangements

Some of Cofunds’ key functions are outsourced and the reliance upon outsourcers and critical suppliers to provide an appropriate level of service presents a significant operational, reputational and financial risk to the Firm. A framework is in place to ensure appropriate oversight and management of outsourcer and critical supplier relationships.

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5. Risks profile and appetite

Cofunds recognises that it is exposed to a wide range of risks and to ensure that employees and stakeholders can demonstrate a consistent view of what the key risks are and how their management is aligned to the Company's strategic objectives a common risk language is used. Central to this language is the categorisation of risk.

The Firm expresses its overall attitude to risk (or risk appetite) using the following statements and measures for each of the risk categories which are deemed material and relevant to this disclosure:

Market risk

The risk of loss arising from fluctuations in the value of, or income from, assets or in interest or exchange rates. Cofunds acts as agent in the placing of aggregated deals with fund managers. It does not deal or hold positions as principal.

Although the equity risk sits with the customer, Cofunds earn its revenue largely on the basis of fees calculated on the value of client assets under administration. The Firm accept this risk as a consequence of its current pricing models. Revenue exposures to major market movement scenarios, and potential cost cutting remedial actions in the event of extreme and/or persistent market falls, are considered through the ICAAP process.

Cofunds also may be subject to the impact of market movements during the period whilst it unwinds positions on trades it has dealt erroneously or failed to place in a timely manner. In addition, where a client fails to settle a trade Cofunds is entitled to sell the assets on which settlement is awaited and is therefore subject to market exposure until it liquidates the holding. Such exposures are managed via Cofunds’ credit risk management arrangements.

Counterparty credit risk

The risk of loss caused by the failure of a counterparty to perform its contractual obligations.

Credit risk is not sought in its own right but arises as an unavoidable consequence of dealing with banking counterparties, or the providers of settlement and custody services.

Cofunds is exposed to credit risk relating to default by its clients, product providers (e.g. fund managers) and banks holding either corporate or client money assets. Exposure to default by Cofunds’ clients and product providers is accepted as a consequence of its business model and should be mitigated through contractual provisions to liquidate client holdings and through appropriate due diligence of clients and product providers.

In respect of client default Cofunds may sell the assets on which settlement is awaited. Cofunds is therefore only exposed to market movements over the period taken to liquidate holdings. Cofunds actively monitors its credit risks, considering the effects of potential contagion where relevant, and employs appropriate aggregation and diversification techniques to manage exposures.

Cofunds has an exchange rate exposure in relation to liabilities for services in India payable in US dollars.

Liquidity risk

The risk that the Firm, although solvent, either does not have sufficient available resources to enable it to meet its obligations as they fall due, or can secure them only at excessive cost. Cofunds is exposed to liquidity risk in respect of payment obligations to its clients and product providers and the settlement timing of corresponding cash inflows and outflows.

The Firm expects to be able to meet its payment and collateral obligations under extreme but plausible liquidity scenarios. Cofunds conducts stress testing against a range of potential liquidity risk events and scenarios on an ongoing basis as part of its liquidity risk management process.

Interest rate risk

Interest rate risk is the potential adverse impact on our future cash flows and earnings from changes in interest rates. Although interest rate risk is considered as part of the liquidity and stress testing, the exposure to interest rate risk is limited and is not considered a material risk for the Firm.

Customer and reputational risk

The risk of direct or indirect loss arising from damage to the Company’s reputation. The Firm treats our customers with integrity and act in a manner that protects or enhances the franchise.

Cofunds considers that reputational risks exist as the potential outcome of risks occurring within other risk categories (such as operational or liquidity risks) and do not exist in isolation. The identification and mitigation of reputational risks is therefore managed through Cofunds’ risk management framework processes for managing those other risk types.

Concentration risk

The risk that exposure to sectoral, geographic, liability and asset concentrations increase the Company’s exposure to credit risk.

Cofunds accepts that it does have concentrations of exposures to fund managers and institutional clients which could give rise to an increased level of potential credit risk. However, the firm attempts to minimise this risk by maintaining a diverse portfolio. Cofunds’ range of distribution channels mitigates against risk concentrations associated with particular channels.

Pension obligation risk

The risk of losses arising from contractual or other liabilities to or with respect to a pension scheme is not considered material. Cofunds has no obligation to subscribe any sums to staff pension plans in excess of the agreed monthly contribution based on a percentage of salary. All pension schemes operated by Cofunds are defined contribution schemes.

Securitisation risk

The Firm does not get involved in securitisation transactions, through which assets are sold to a bankruptcy-remote special purpose vehicle in return for immediate cash payment and that vehicle raises the immediate cash payment through the issue of debt securities in the form of tradable notes or commercial paper.

Residual risk

The Firm does not implement any credit risk mitigation techniques and is therefore not exposed to residual risk.

Business risk

Business risk is expressed as the risk to the Firm that it suffers losses because its income falls or is volatile relative to its fixed cost base. In the broader sense, business risk also covers exposure to a wide range of macro-economic, industry, regulatory and other external risks that may deflect the Firm from its desired strategy and business plan. Exposure to business risk is covered as part of the strategic plans and the stress testing activities.

Risk of excessive leverage

Firms are required to have policies and processes in place for the identification, management and monitoring of the risk of excessive leverage (Article 37 of CRD IV). As the Firm does not have any (other) assets or off-balance sheet items (e.g. derivatives, guarantees etc.), the risk of excessive leverage is deemed immaterial.

Operational risk

Operational risk is the risk of loss or other adverse consequence on business outcomes arising from inadequate or failed internal processes, people or systems, or from external events. The group’s definition of operational risk includes risks arising from outsourced and critical third party provider relationships, compliance and legal risks and strategic and business risks.

The Firm accepts a degree of exposure to operational risk where exposures arise as a result of core strategic activity, however, it has very limited appetite for large operational losses due to the likely customer impact, reputational damage and opportunity costs.

Cofunds aims to implement effective controls to reduce operational risk exposures except where the costs of such controls exceed the expected benefits.

Cofunds is exposed to numerous types of operational risk which it has further categorised to facilitate meaningful assessment and reporting in accordance with its risk management framework processes.

Controls and risk mitigation strategies, including the use of insurance where appropriate, are put in place to address operational risk exposures in line with agreed risk appetites. Each area of the business is responsible for managing and mitigating its own risks, including operational risks, subject to risk appetites and applicable Company or Group policies.

Cofunds adopts a wide range of control and contingency measures to manage and mitigate its operational risks. Principal control measures in place include:

  • Proper supervision of employees.
  • Segregation of duties, enforced through IT security access privileges and operational process controls.
  • Dealing and payment authorisation levels; dual or triple authorisation procedures and transaction checking controls.
  • Recruitment and development of appropriately skilled individuals, with employee objectives set and measured on an ongoing basis.
  • Pre-employment screening for high risk roles.
  • Segregation and reconciliation of client money and assets.
  • Due diligence conducted prior to entering into strategic outsourcing and supplier relationships and on an ongoing basis through a programme of assessment against agreed service levels.
  • IT system performance and capacity testing.
  • Business continuity and disaster recovery plans which are regularly tested.
  • Documentation of significant internal procedures

Group risk

The risks arising as a consequence of being a part of the Legal and General group of companies. For the purposes of ongoing risk management and reporting, Cofunds does not consider Group Risk as a standalone risk category. Instead, the consequences of Group Risk are explicitly considered as part of the other risk categories (i.e. counterparty credit risk, market risk, liquidity risk, business risk, pension obligation risk and operational risk).

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6. Capital requirements

6.1 Own funds requirements

Own Funds (also referred to as “capital resources”) is the type and level of regulatory capital that must be held to absorb losses. The Firm is required to hold own funds in sufficient quantity and quality in accordance with CRD IV which sets out the characteristics and conditions of Own Funds.

The Firm does not have any encumbered assets as at 31st December 2015.

The Firm's capital requirement is driven by its fixed overhead requirement ("FOR") as this exceeds the credit risk requirement and the base capital requirement.

During 2015, the Firm has complied with the capital requirements that were in force as set out by European and FCA regulation. The own funds held by the Firm comprises ordinary share capital and accumulated reserves with deductions made in line with the CRR. The table below sets out the key components of own funds of the firm as at 31 December 2015.

2015 (£k)
Share capital: Ordinary shares of £1 each paid in full 10,893
Audited retained earnings 54,235
In year losses(*) (1,911)
Net Assets / Total equity per financial statements 63,217
Intangible assets (15,770)
Deferred tax assets (191)
Total Tier 1 Capital, Total Capital and Own Funds 47,256

(*)In year loss includes shareholder dividend distribution of £1,392k.

6.2 Pillar 1 capital requirements

The Firm meets the definition of Article 95 in the CRR, which outlines that the firm has limited authorisation and in particular is not authorised to deal on its own account or place and/or underwrite financial instruments on a firm commitment basis. The Firm monitors its Pillar 1 capital requirements on a monthly basis and reports the results to the management body. This includes actual business performance to date, business forecasts for future periods and any known changes in regulatory requirements.

The Firm calculates its risk exposure amount, required within the Pillar 1 calculation, as the higher of the following:

  1. Base Capital Requirement (€125,000)
  2. Fixed Overhead Requirements – 25% of the fixed overheads of the preceding year.
  3. The sum of:
    • Credit and dilution risk;
    • Market risk for the trading book of business;
    • Settlement risk;
    • Credit valuation risk for Over the Counter Derivative instruments; and
    • Counterparty risk for the trading book of the business.

Due to the nature of the Firm’s business it does not hold any financial instruments, does not have a trading book and credit risk exposures are limited to amounts receivable in the normal course of business. Therefore, for “C” above, only credit risk applies, to which the Firm applies the standardised approach.

Cofunds’ Pillar 1 requirement as at 31 December 2015 was £17.0 m (31 December 2014: £18.7m) as set out below.

All £’m Capital Requirements Comments
Credit risk 3.3 See Risk Exposure Table in section 6.3
Fixed Overhead Requirements (“FOR”) 17.0 25% of the ongoing annual fixed overheads of the Firm
Base Capital Resource requirement of €125,000 0.1 (1,911)
Total Pillar 1 17.0 The higher of the above three

6.3 Total risk exposure amount

The Firm is required under Pillar 1 to hold own funds in excess of 8% of the total risk exposure amount. The calculation of risk weighted assets of the Firm as at 31st December 2015 is shown below.

Total exposure £k Risk weighted exposure £k Own funds capital requirements at 8% £k
Institutions 8,775 1,755 140
Corporates 375 375 30
Retail 32,972 24,729 1,978
Other assets 14,337 14,337 1,147
Total credit risk 56,459 41,196 3,295
Additional exposure from FOR 170,779 13,662
Total risk exposure amount 211,975 16,957

6.4 Capital ratios

The Capital Ratios for the Firm are all 22.3%, as the Firm only has Tier 1 capital, as set out in section 6.1.

6.5 Internal Capital Adequacy Assessment Process (ICAAP)

The Internal Capital Adequacy Assessment Process (ICAAP) is the process under which the Board of the Firm oversees and regularly assesses:

  • the Firm’s processes, strategies and systems;
  • the major sources of risks faced by the Firm that may impact its ability to meet its obligations;
  • the results of internal stress testing of these risks;
  • the amounts and types of financial resources and internal capital, including own funds and liquidity resources, and whether these are adequate both as to amount and quality to ensure that there is no significant risks that its liabilities cannot be met as they fall due.

We undertake an internal assessment of capital requirements (ICAAP) every 6 months or more frequently, if required.

Scenario analysis and stress testing are performed as part of the ICAAP to assess the Firm’s exposure to extreme events for the relevant major sources of risks referred to in section 5. and to ensure that appropriate mitigating factors are in place. Any residual risk is then mitigated by setting aside capital based the output of The Firm’s Internal Capital Model.

The outcome of the ICAAP is formally approved by the Board at least annually, with more frequent reviews if there is a fundamental change to the business or the operating environment. The ICAAP determines the amount of any risk-based capital resources requirement (Pillar 2) that we identify over a three to five year planning horizon, in addition to the Pillar 1 requirements.

The ICAAP is monitored and reviewed on an on-going basis by the ICAAP Steering Group and the PICC to ensure that all group-wide changes to the Firm’s risk profile are assessed and reported to the Board.

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7. Remuneration policy

The following disclosures are made in accordance with the requirements of Article 450 of the CRR, which establishes qualitative and appropriate quantitative criteria to identify categories of staff whose professional activities have a material impact on the firm’s risk profile.

7.1 Governance

The Remuneration Committee is empowered by the Board to determine and approve the framework of the remuneration policy of Legal & General Group Plc and its subsidiaries (including international subsidiaries) (‘Group’) and specifically to manage executive director remuneration and the remuneration of the designated individuals. The Terms of Reference for the Remuneration Committee can be found on the Group’s website (web link below).

The Committee particularly focuses on:

  • Determining the individual remuneration for executive directors and for other designated individuals or for those who are discharging a head of control function role;
  • Undertaking direct oversight on the remuneration of other high earners in the Firm;
  • Oversight of the remuneration of Code staff and employees in the control and oversight functions.

The salaries and bonuses of senior employees in ‘Control Functions’ such as Compliance, Internal Audit, and Risk are reviewed directly by the Remuneration Committee to ensure that they can be independent in their roles.

7.2 Remuneration policy and strategy

The Group’s remuneration policy sets out the framework that is applied across the whole group for the remuneration of staff.

The remuneration policy for the Firm is broadly consistent across the Legal & General Group and, in line with the Group’s remuneration principles, is designed to reward, motivate and retain high performers in line with the risk appetite of the Firm.

Remuneration is considered within the overall context of the group’s sector and the markets in which the Firm operates. The policy for the majority of employees continues to be to pay around the relevant mid-market range with a competitive package designed to align the interests of employees with those of shareholders, and with an appropriate proportion of total remuneration dependent upon performance.

More information on the Legal & General Group’s remuneration policy can be found on the Legal & General Director’s report on remuneration.

7.3 Remuneration structure and the link between pay and performance

Strong performance is rewarded, but only if consistent with living and respecting group’s values and behaviours, ensuring that we deliver results within our risk parameters and that we have desired customer outcomes.

Remuneration structure

We define core remuneration as base salary, annual bonus and other benefits such as pension. Key employees are also eligible to participate in the performance share plan (PSP).

Variable remuneration pools and awards

Employees are considered for a discretionary cash bonus, determined at the same time as the relevant salary review, to ensure that total pay reflects individual performance. The bonus is principally to reward the achievement of predetermined objectives laid down for the previous calendar year, in the context of the employee’s behaviour during the year.

Objectives are set between the employee and his or her manager, in light of business objectives for the team in question: more senior managers will have elements of their bonus tied to broader business performance.

The factors taken into account in setting the level of bonus include achievement of objectives, conduct and behaviours (including the approach to risk controls), the role performed during the period and internal relativities. No bonus is payable to employees who are underperforming, including those responsible for serious breaches of compliance or risk controls.

The cash bonus is expected to vary significantly between staff as well as from year to year. This means that not all individuals will necessarily receive a cash bonus and that there may be considerable differences in the individual's variable cash remuneration year on year based on individual performance and on the financial performance of the Firm and the Group.

Deferred remuneration

The Group operates an automatic deferral policy applicable to all employees earning more than a specific minimum threshold of total variable pay. This applies to all “Key Risk Takers” but excludes the sales team. Any bonus above the minimum threshold will have a proportion deferred into the company’s Share Bonus Plan for 3 years, during which time it is subject to forfeit on resignation or dismissal. For our most senior employees, these deferred awards may also be reduced or forfeited in the event that the performance leading to that award is found to be misstated.

7.4 Risk Input into performance reviews

The Remuneration Code (“the Code”) General Requirement states that ‘A firm must establish, implement and maintain remuneration policies, procedures and practices that are consistent with and promote sound and effective risk management’. As part of this, the Code highlights several instances where it expects risk and compliance functions to be able to have significant input into the setting of remuneration awards where concerns exist as to the behaviour of an individual or the riskiness of business undertaken.

The Legal & General Group has in place a robust process is in place that facilitates Risk and Compliance functions inputting into the appraisal process of staff that are subject to the Code (“Code Staff”), are Approved Persons or who are Material Risk Takers (‘MRT’).

7.5 Performance conditions and performance adjustments

Malus and clawback

Following the publication of the 2014 Corporate Governance Code (the “Code”), the Remuneration Committee reviewed the malus and clawback provisions in place for executive director incentive plans. Awards are subject to malus and clawback provisions. Malus and clawback provisions already apply on the deferred element of the AVP and the PSP.

7.6 Quantitative remuneration data

Additional quantitative information on the breakdown of remuneration for the L&G Group can be found in the Annual Report on Remuneration section of the L&G Annual Reports and Accounts -

However, the information on remuneration for the L&G Group is normally produced at a later date than the Cofunds Ltd Pillar3 disclosures. Therefore, there is likely to be a delay in being able to obtain this information for the Group’s website for 2015.

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Last updated 24/05/2016