Firms are required under the Senior Management Arrangements, Systems and Controls (SYSC) manual of the Financial Conduct Authority Handbook to have in place robust governance arrangements and effective procedures which allow it to identify, manage, monitor and report the risks it is or might be exposed to.
Shojin Financial Services Limited (“SFS”) is authorised and regulated by the Financial Conduct Authority and this document sets out how the Firm complies with its obligations to identify, manage and mitigate risks.
The Capital Requirements Directive (‘CRD’) of the European Union created a regulatory capital framework across Europe governing how much capital financial services firms must retain. The rules are set out in the CRD under three pillars:
- Pillar 1 sets out the minimum capital resource requirement firms are required to maintain
- Pillar 2 requires firms to assess firm-specific risks not covered by Pillar 1 and, where necessary, maintain additional capital
- Pillar 3 requires firms to disclose information regarding their risk assessment process and capital resources with the aim to encourage market discipline by allowing market participants to assess key information on risk exposure and the risk assessment process.
The rules in the FCA Prudential Sourcebook for BIPRU sets out the requirements for a Pillar 3 disclosure. The document is designed to meet SFS’s Pillar 3 disclosure obligations.
2.1 FREQUENCY AND LOCATION OF DISCLOSURE
Future disclosures will be issued on an annual basis once they have been reviewed and approved by management. The disclosures are not subject to audit except where they are equivalent to those prepared under accounting requirements for inclusion in the financial statements.
The report and all future ones will be published on our Firm’s website.
2.2 SCOPE OF DISCLOSURE
Equity-based crowdfunding platform
SFS operates and offers an equity-based crowdfunding platform, and is categorised as an IFPRU125K firm because it holds client assets under the safeguarding and administration permission.
For an equity-based project, shares will be issued via a Special Purpose Vehicle (‘SPV’) to raise capital. SFS will then promote the unlisted equity securities to investors via its online platform. Investors will be able to view, select and invest in the listed projects. Investors will subscribe for new shares in the SPV. A new SPV will be set up for each project in order to ring-fence each project and avoid cross-contamination in the event one project faltered. The SPV will own the underlying property and enter into the mortgage with the bank as required. The principals of the SPV will be the developers and Shojin Property Partners Limited.
3 GOVERNANCE ARRANGEMENTS
3.1 THE MANAGEMENT BODY
The Directors are responsible for the Firm’s risk management governance structure and how the Firm’s risk exposure must be managed in line with the Firm’s overall business objectives and within its stated risk appetite. This includes the governance of the process for identifying, evaluating, managing and reporting the significant risks faced by the Firm.
The Directors are ultimately responsible for ensuring that the Firm maintains sufficient capital and liquidity resources to meet its regulatory capital and liquidity requirements and to support its growth and strategic objectives. Risk management is embedded throughout the business, with the overall risk appetite and risk management strategy approved by the Directors propagated down throughout the business as appropriate.
The Firm has reviewed the number of directorships held by members of the Board and are satisfied that the arrangements are such that the management body is able to commit sufficient time and resources to perform their obligations in the Firm. The number of directorships held is monitored on an ongoing basis.
4. CAPITAL ADEQUACY AND ICAAP
The Firm’s overall approach to assessing the adequacy of its internal capital is documented in the Internal Capital Adequacy Assessment Process (“ICAAP”).
The ICAAP process includes an assessment of all material risks faced by the Firm and the controls in place to identify, manage and mitigate these risks. The risks identified are stress-tested against various scenarios to determine the level of capital that needs to be held.
Where risks can be mitigated by capital, the Firm has adopted the CRD requirements for Pillar 1. Following an assessment under Pillar 2 of risks significant to the firm arising from its particular activities, the directors of the firm are of the opinion that the firm is sufficiently capitalised for the risks to which it is exposed and that it is not necessary to retain a Pillar II capital add-on at this time, or in the foreseeable future.
Whilst the ICAAP is formally reviewed once a year, the Directors review risks and the required capital more frequently and will particularly do so when there is a planned change impacting risks and capital or when changes are expected in the business environment potentially impacting the ability to generate income.
4.1 CAPITAL RESOURCES
A IFPRU125K firm must maintain at all times capital resources equal to or in excess of the base requirement (€125,000). The Pillar 1 capital requirement for a IFPRU125K firm is the higher of:
Base Capital Requirement OR Credit Risk plus Market Risk plus Counterparty Risk Capital Requirements OR Fixed Overhead Requirement
The Firm has no innovative Tier 1 capital instruments or deductions.
The Firm must maintain at all times capital resources equal to or in excess of the Pillar 1 requirement. The Company complied fully with all capital requirements at point of authorisation and will continue to ensure compliance with capital adequacy rules.
The Directors are therefore comfortable that the Firm is adequately capitalised for Pillar 1 purposes. The Directors constantly monitor the performance of the Firm and capital adequacy is regularly assessed by the same. The Firm will also monitor risks throughout the year and decide if additional capital should be held against them. Additional risks that supplement the Pillar 1 requirements are detailed below and, where necessary, additional capital will be provided.
5 MANAGEMENT OF RISK FRAMEWORK
5.1 Risk Profile
SFS has identified the following core risk categories: investment risk, reputational risk, liquidity risk and operational risk.
SFS’s profile of these risks is continually evolving and is generally driven by:
- Changes to the market in which it operates;
- SFS’s strategies and business objectives and;
- SFS’s business/operating models
SFS will seek to generate positive returns through carefully considered risk taking and robust risk management. As such the effective management and control of both the upside of risk taking and its potential downside is a fundamental core competency of the Firm.
5.2 Risk Appetite
The Directors are responsible for setting the Firm’s risk appetite, defining the type and level of risk that the Firm is willing to accept in pursuit of its business objectives.
5.3 Three Lines of Defence
To ensure the effectiveness of SFS’s risk management framework, the Firm adopts the ‘three lines of defence’ model as detailed below.
- The first line of defence is the operational management within the business, responsible for directly identifying, assessing, controlling and mitigating risks. Its objective is to ensure the effective design, operation and implementation of risk controls. Employees within a customer facing function are also considered to be first line of defence. This reinforces the risk-awareness culture throughout the Firm.
- The second line of defence monitors and reviews the risk management activities of the first line of defence. The second line is comprised of risk and compliance functions that develop and uphold principles, policies and frameworks for risk management and facilitate risk assessment. Its objective is to provide oversight and challenge to the first line of defence.
- The third line of defence is an internal audit function that provides objective and independent assurance on the adequacy and effectiveness of governance, risk management, and internal controls in the first and second lines.
5.4 Risk Assessment Framework
The Board are responsible for approving the Risk Assessment Framework, which is used to ensure that the Firm has a comprehensive understanding of its risk profile, including both existing and emerging risks facing the Firm, and to enable it to assess the adequacy of its risk management in the context of the Firm’s risk appetite.
Principal Risk: The risk that arises when decisions fail to reflect the full business operating environment and the impact of failing to adequately identify changes to the business model.
Appetite: The Firm will remain competitive by identifying opportunities and assessing the risks, rewards and costs associated with them before proceeding.
Internal business/operating model.
Regulatory landscape impacting the business.
Mitigation: Due diligence is carried out prior to any new business opportunity and a full assessment of the potential and actual risks taken into account. Appointment of external compliance consultants.
Principal Risk: Refers to the risk that a borrower or counterparty will default on any type of debt owed to the firm by failing to make required payments.
Appetite: The Firm will only engage with reputed and where applicable authorised third party firms. As far as individuals are concerned due diligence processes are in place to on-board reputed customers.
Counterparty credit worthiness.
Mitigation: The Firm uses the standardised method of calculating Credit Risk and ensures capital is held to cover exposures Documented ICAAP in place.
Principal Risk: The risk that the Firm does not have sufficient liquid resources or is unable to deploy such resources to meet its actual or potential obligations in a timely manner as they fall due.
Appetite: The Firm will have sufficient and accessible financial resources as to meet any financial obligations as they fall due.
Credit risk events.
Internal business operating model
Mitigation: Periodic reviews of financial resources Directors have access to contingency funding arrangements
Principal Risk: The risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events.
Appetite: The Firm will actively identify and manage the risk of its people, processes or systems failing.
Internal business operating modeL.
Mitigation: Where applicable employees will be provided training and guidance on their obligations. Given the small nature of the firm and Director involvement operational risk will be closely monitored.
Principal Risk: The risk arising from defective transactions, failing to take appropriate measures to protect assets, changes in law and claims resulting in a liability or loss to the Firm.
Appetite: The Firm has an in-house lawyer and does not intend to have any appetite for legal breaches.
Mitigation: Staff training and regular monitoring of changes in law and the implications to the Firm.
Interest Rate Risk
Principal Risk: The risk that interest rates (e.g. Libor, Euribor) and/or their implied volatility will change.
Appetite: The Firm accepts that volatility in interest rates will impact on cash balances and any future borrowings and has sufficient resources in place.
Mitigation: Entities with whom balances are held are regularly monitored.
Risk of Excessive Leverage
Principal Risk: The potential increase in risk caused by a reduction in the Firm’s own funds through expected or realised losses.
Appetite: The Firm will have adequate financial resources in place.
Mitigation: Regular reviews of financial resources and financial position via the ICAAP process.
Financial Crime Risk
Principal Risk: The risk that the Firm fails to prevent its involvement in or use by other parties to commit financial crime.
Appetite: The Firm has no appetite for any breaches or lapses occurring that result in financial crime taking place.
Mitigation: Financial crime policies and procedures are in place and employee training will be provided.
6 REMUNERATION POLICY
SFS’s Remuneration Policy complies with the Remuneration Code in relation to its size, nature, scope and complexity of activities. The Policy is aligned to the Firms’ business strategy, objectives, values, and long term interests in respect of performance and effective risk management in line with the Firm’s risk appetite.