Brewin Dolphin Holdings PLC Pillar 3 Disclosures 2020 TABLE OF CONTENTS
1. Executive Summary ...... 2 2. Group Overview ...... 2 3. Regulatory Framework ...... 4 4. Scope of Application ...... 4 5. Frequency of Disclosure ...... 4 6. Means of Disclosure ...... 4 7. Risk Management Objectives and Policies...... 5 8. Own Funds ...... 8 9. Regulatory Capital Requirements ...... 10 10. Credit Risk ...... 11 11. Market Risk ...... 13 12. Operational Risk ...... 15 13. Liquidity Risk ...... 15 14. Remuneration Policy ...... 16
1. EXECUTIVE SUMMARY
The purpose of Pillar 3 disclosures is to provide information on the risks, capital, and risk management arrangements of Brewin Dolphin (“the Group”). As at 30 September 2020, the Group’s:
• Total capital resources (£161.1m) exceeded Pillar 1 capital requirements (£57.4m); and • Total capital ratio (22.5%) sufficiently exceeded the own funds requirement (8%).
2. GROUP OVERVIEW
The Group is a leading independently-owned Wealth Manager, with a network of branches in the United Kingdom, Channel Islands and the Republic of Ireland. As at 30 September 2020, total funds amounted to £47.6 billion, of which £41.2 billion was managed on a discretionary basis.
2.1. GROUP STRUCTURE
The Group is controlled by Brewin Dolphin Holdings PLC (“BDH”), a FTSE 250 listed company incorporated in the United Kingdom. BDH consists principally of two wholly owned regulated trading subsidiaries:
• Brewin Dolphin Limited (“BDL”), regulated by the Financial Conduct Authority (“FCA”); and • Brewin Dolphin Wealth Management Limited (“BDWM”) (comprising of the entities formerly known as Tilman Brewin Dolphin Limited and Investec Capital & Investments (Ireland) Limited), regulated by the Central Bank of Ireland (CBI).
The Group’s lead regulator is the FCA. The Group has the following unregulated subsidiaries:
• Brewin Dolphin MP, which holds the Group’s seed capital investment in its model portfolios. • In addition, during 2020, the Group acquired Mathieson Consulting Limited, an expert witness report writing service.
All other Group companies are either dormant or nominee companies. Refer to Figure 1 below for details of the Group’s legal structure.
2
Figure 1 - Group Legal Structure1
Brewin Dolphin Holdings PLC
100% owned subsidiary 100% owned subsidiary Brewin Dolphin Limited Brewin Dolphin Wealth (Authorised and Regulated by the Management Limited Financial Conduct Authority) (Authorised and Regulated by the Central Bank of Ireland)
100% owned subsidiary 100% owned subsidiary 100% owned subsidiary (as of 31st October 2019) Brewin Dolphin Mathieson Brewin Dolphin Capital & MP Consulting Limited Investments (Ireland) Limited (Authorised and Regulated by the Central Bank of Ireland)
2.2. NATURE OF BUSINESS
The Group predominantly provides wealth management, financial planning and discretionary investment management to private clients in the UK and Ireland. The Group’s services are accessed either directly or indirectly, as follows: • Direct access: private individuals, charities and corporates; and • Indirect access: intermediaries where the Group provides investment management services for the intermediaries; the underlying clients are typically private individuals.
2.3. BUSINESS STRATEGY
The Group’s vision is to become the leading provider of personalised wealth and investment management services in the UK and Ireland, delivering a compelling client proposition, rewarding careers and sustainable shareholder returns. It aims to achieve this vision by taking an integrated, advice-led approach to protecting and growing clients’ wealth, combining its experience and expertise in financial planning and investment management.
Refer to the “Our Strategy” section of the Group’s Annual Report and Accounts 2020 for further details of the Group’s strategy.
1 Excluding dormant and nominee companies
3
3. REGULATORY FRAMEWORK
The Capital Requirements Directive IV (“CRD IV”) of the European Union established a revised regulatory capital framework across Europe, which governs the amount and nature of capital that credit institutions and investment firms must maintain, and the manner in which capital resources and requirements are disclosed. This framework primarily consists of three pillars:
• Pillar 1: outlines the minimum capital requirements firms are required to meet for credit and market risk, and the Fixed Overhead Requirement; • Pillar 2: requires firms to assess the amount of internal capital they consider adequate to cover all of the risks to which they are, or are likely to be, exposed. This is implemented through the Internal Capital Adequacy Assessment Process (“ICAAP”) undertaken by the Group; and • Pillar 3: requires firms to publicly disclose certain details of their risks, capital, and risk management arrangements.
A detailed assessment of the requirements under Pillars 1 and 2 has been completed through the Group’s ICAAP, which is reviewed periodically by the FCA. The disclosures outlined in this document meet the obligation with respect to Pillar 3 and the requirements outlined in Articles 431- 455 of the Capital Requirements Regulation (“CRR”).
4. SCOPE OF APPLICATION
The capital reporting requirements outlined in section 3 apply to the Group. The Group has two regulated entities, BDL and BDWM, which are IFPRU €125k Limited Licence Firms. For accounting and prudential purposes, BDL and BDWM are fully consolidated into the Group.
All disclosures in this document are for the year ended 30 September 2020.
5. FREQUENCY OF DISCLOSURE
The Group publishes Pillar 3 disclosures on at a least an annual basis following the publication of its financial statements. Given the scale and range of its operations and complexity, the Group currently assesses that there is no need to publish some or all of the Pillar 3 disclosures more frequently than annually.
6. MEANS OF DISCLOSURE
These disclosures have been compiled to satisfy those required under Pillar 3 and have not been audited. Where the equivalent disclosures have been made in the Group’s Annual Report and Accounts 2020, this document indicates where they can be found. The Group publishes its Pillar 3 disclosures on its website. BDWM Pillar 3 disclosures are published separately on its own website.
4
7. RISK MANAGEMENT OBJECTIVES AND POLICIES
Effective risk management is key to the success of delivering our strategic objectives. Our approach to risk management continues to evolve as the risk landscape changes; it ensures timely identification, assessment, and management of the principal risks to our business.
The primary objectives of risk management at Brewin Dolphin are to ensure that there is:
• A strong risk culture so that employees are able to identify, assess, manage and report against the risks the business is faced with; • A swift and effective response to risk events and potential issues in order to minimise impact; • A defined risk appetite within which risks are managed: and • An appropriate balance between risk and the cost of control.
Our approach is to maintain a strong control framework to identify, monitor and manage the principal risks we face, adequately quantify them and ensure we retain sufficient capital in the business to support our strategy.
The key parties involved in the risk management process within the Group and their respective responsibilities and an explanation of the how risk management is structured within the Group, is set out in Figure 2 below.
5
Figure 2 – Overall Risk Management Framework
We follow industry practice for risk management through the three lines of defence model. The first line is the business that owns and manages the risk, the second line are the functions that monitor and facilitate the implementation of effective risk management practices, and the third line is independent assurance provided by audit. The Board reviews the effectiveness of this Risk Management Framework and undertakes an assessment of the principal and emerging
6 risks, receiving reports on internal control from the Audit and Risk Committees and debating key risks for the Group following more detailed work by the Risk Committee.
7.1 RISK APPETITE
Risk appetite is an assessment of a firm’s willingness to take risk to achieve its strategic objectives. The Group has set Risk Appetite Statements against each Key Risk with Key Risk Indicators in place to monitor exposure against appetite. This is a fundamental element of the Risk Management Framework.
The Risk Appetite Statements are owned, updated, reviewed and re-approved at least annually by the Board. The Board has delegated oversight of the Risk Appetite Statements to the Risk Committee.
7
8. OWN FUNDS
A reconciliation of the Group’s 2020 audited financial statements to regulatory own funds is shown in Figure 3 below.
Figure 3 – Reconciliation of Own Funds
As at 30 September 2019 As at 30 September 2020 BDL Group BDL Group Tier 1 Capital (£'m) (£'m) (£'m) (£'m) Called up share capital 20.9 3.0 20.9 3.0
Share premium account 112.4 58.2 112.5 58.3
Own shares - (25.2) - (25.2)
Merger reserve - 70.6 - 70.6
Revaluation Reserve 0.0 (0.0) (0.0) (0.0)
Shares to be issued - - - -
Profit and loss account 133.0 231.1 135.5 228.3
Shares to be issued 3.7 3.7 3.7 3.7
270.0 341.4 272.6 338.8
Tier 1 Capital Regulatory Deductions
Intangible assets (net of deferred tax liability) (123.6) (111.0) (146.6) (161.2)
Defined benefit pension scheme asset (net of (14.4) (14.4) (16.5) (16.5) deferred tax liability) Free deliveries (0.0) (0.0) (0.0) (0.0) Total - Tier 1 Regulatory Deductions (138.0) (125.4) (163.1) (177.7)
Total Tier 1 Capital (less regulatory deductions) 132.0 215.9 109.5 161.1
The Group’s Own Funds are identical to its Regulatory Capital Resources. Refer to Note 27 “Risk management” of the Group’s Annual Report and Accounts 2020 for further details of the Group’s regulatory capital requirements.
8
8.1. TIER 1 AND 2 CAPITAL
In 2020, the Group’s capital base comprised of Tier 1 Capital, being £161.1m (2019: £215.9m). This included:
• Share capital, share premium, shares to be issued, merger reserves and retained earnings; less • Own shares, intangible assets and defined benefit pension scheme assets (both net of deferred tax liabilities), and free deliveries.
The revaluation reserve is immaterial and is Tier 2 Capital.
9
9. REGULATORY CAPITAL REQUIREMENTS
The Group’s overall regulatory capital requirements are determined after performing Pillar 1 capital calculations, assessing Pillar 2 capital requirements and taking into account any Individual Capital Guidance (“ICG”) or fixed add-ons issued by the FCA.
The calculation of Pillar 1 and Pillar 2 capital requirements allows the Group to determine, and subsequently monitor, the appropriate amount of capital to be held based on its risk profile. The Group’s capital requirement is determined by taking the sum of:
i) the higher of Pillar 1 and Pillar 2 capital requirements; plus ii) if applicable, any additional ICG or fixed add-on proposed by the FCA.
During the financial year ended 30 September 2020, the Group maintained surplus capital resources at all times to satisfy minimum capital requirements.
9.1. PILLAR 1 REGULATORY CAPITAL REQUIREMENT
As per CRD IV, the Group is required to meet Pillar 1 capital requirements set out in the CRR, being £57.4m (2019: £52.4m). This is calculated as the higher of the: i) fixed overheads requirement and ii) sum of the market and credit risk capital requirements. Refer to Figure 4 below for further details.
Figure 4 – Pillar 1 Capital Requirement
As at 30 September 2019 As at 30 September 2020 BDL Group BDL Group (£'m) (£'m) (£'m) (£'m) Credit risk 11.4 11.2 13.1 14.7 Market risk 1.2 3.6 0.4 0.4 (A) Total 12.6 14.8 13.5 15.1 (B) Fixed overhead requirement 50.9 52.4 53.2 57.4 Higher of (A) & (B) - Pillar 1 Requirement 50.9 52.4 53.2 57.4
9.2. PILLAR 2 REGULATORY CAPITAL REQUIREMENT
Pillar 2 requires firms to assess the amount of internal capital they consider adequate to cover all of the risks to which they are, or are likely to be, exposed to. It also requires firms to consider the costs associated with winding down the Group (Orderly Wind Down) and various stressed scenarios (market-wide, idiosyncratic and combined stress tests).
Pillar 2 capital requirements are outside the scope of this disclosure document.
10
9.3. COMMON EQUITY RATIOS
As per CRR Article 92, the Group must at all times satisfy the following own fund requirements:
• Common Equity Tier 1 capital ratio of 4.5%; • Tier 1 capital ratio of 6%; and • Total capital ratio of 8%.
It requires these ratios to be calculated using the total risk exposure amount, being 12.5 multiplied by the Pillar 1 requirement, or £717.5m for the Group (2019: £655m). As at 30 September 2020, the Group’s total capital ratio of 22.5% (2019: 33%) was over the minimum requirement. Refer to Figure 5 below for details of the Group’s total capital ratio.
Figure 5 – Total Capital Ratio
As at 30 September 2019 As at 30 September 2020 BDL Group BDL Group (£'m) (£'m) (£'m) (£'m) Pillar 1 requirement 50.9 52.4 53.1 57.4 Risk weighted exposure 636.3 655.0 663.8 717.5 Own funds 132.0 215.9 109.5 161.1 TOTAL CAPITAL RATIO * 20.7% 33.0% 16.5% 22.5%
10. CREDIT RISK
Credit risk refers to the risk that a client and/or other counterparty, will default on its contractual obligations, thus resulting in financial loss to the Group. Exposures to credit risk arise principally from UK exposures surrounding:
• Firm cash deposited with banking counterparties (“banking counterparty risk”). Refer to section 10.1 for further details; and • Other credit risks such as clients and/or market counterparties ability to fulfil contractual obligations are primarily associated with trade and other receivables. Also included within other credit risk are deferred tax assets, trading investments, available-for-sale assets and property, plant and equipment and right of use assets. Refer to section 10.2 for further details.
Credit risk is calculated under the Standardised Approach as per Chapter 2, Section 1, General Principles, whereby the credit risk exposure of an asset is equal to its accounting value less credit risk adjustments. Credit risk adjustments are made for pending trade settlements, deferred tax, defined benefit pension scheme assets and intangible assets.
The Group uses credit assessments from the External Credit Assessment Institutions (“ECAIs”), Moody’s, Standard and Poor’s and Fitch, to assign each exposure to a credit quality step, from which a risk weight can be assigned. To achieve this, the Group follows the approach set out in Part 3, Title II, Chapter 2 of the CRR.
11
Figures 6 and 7 below detail the Group’s credit risk requirement by balance sheet item and exposure class.
Figure 6 – Analysis of the Group’s Credit Risk Capital Requirement by Balance Sheet Item
Balance Sheet as at 30 Risk Weighted Credit Risk Adjustment Credit Risk Exposure Balance Sheet Item September 2020 Exposure (£'m) (£'m) (£'m) (£'m) Trade and other receivables 245.0 (168.7) 76.3 76.3 Cash and cash equivalents 180.5 - 180.5 36.1 Property, plant and equipment 9.7 - 9.7 9.7 Trading investments 0.4 - 0.4 0.4 Available-for-sale assets 0.1 - 0.1 0.1 Intangible assets 174.7 (174.7) - - Defined benefit pension scheme asset 20.3 (20.3) - - Right of use assets 38.0 - 38.0 38.0 Total 668.8 (363.8) 305.0 160.6 TOTAL CREDIT RISK CAPITAL REQUIREMENT (8%) 12.8
Figure 7 – Analysis of the Group’s Credit Risk Capital Requirement by Exposure Class
Balance Sheet as at 30 Credit Risk Exposure by Credit Quality Step Category September 2020 (£'m) Step 1 Multiple Unrated Institutions 180.5 - 180.5 - Other 488.3 - - 124.5 Total 668.8 - 180.5 124.5
10.1. BANKING COUNTERPARTY RISK
Banking counterparty risk refers to the risk associated with the default of a banking counterparty. Banking counterparty risk is the most significant individual credit risk that the Group is exposed to.
The Group manages its credit risk to banking counterparties using a range of strategies, which are outlined in the Group’s Financial Risk Policy. The policy sets out a range of robust controls and procedures to help ensure that the Group deposits cash with credit worthy institutions. This includes, but is not limited to, the requirement for Firm Cash to be deposited across a range of banking counterparties with a long term credit rating produced by an ECAI of A3 (Moody’s), A- (S&P) and/or A- (Fitch). This is further supplemented through regular reviews of banking counterparties credit risk profiles using a range of metrics.
As per the Standardised Approach outlined in Part 3, Title II, Chapter 2 of the CRR, the Group’s Pillar 1 credit risk exposure to banking counterparties was £2.9m as at 30 September 2020 (2019: £3.6m). Refer to Figure 8 below for further details.
12
Figure 8 – Analysis of the Group’s Banking Counterparty Capital Requirement
Amount Risk Weighted Assets Risk Weight (£'m) (£'m) 20% 180.5 36.1 50% - - 100% - - 150% - - Total 180.5 36.1 TOTAL BANKING COUNTERPARTY CAPITAL 2.9 REQUIREMENT (8%)
10.2. OTHER CREDIT RISKS
Other credit risks primarily relate to trade and other receivables, deferred tax assets, trading investments, available-for-sale investments, prepayments, property, plant and equipment and right of use assets.
Trade receivables relating to fees owed by clients are considered to be past due when they remain unpaid after 30 days after the relevant billing date. Trade debtors that are older than 90 days, which are immaterial, are provided for unless collateral is held, which is minimal. Refer to Note 19 “Trade and other receivables” of the Group’s Annual Report and Accounts 2020 for further details of the maturity, and, if applicable, subsequent impairments of trade and other receivables balances.
As per the Standardised Approach outlined in Part 3, Title II, Chapter 2 of the CRR, the Group’s Pillar 1 capital requirement for other credit risks was £9.9m as at 30 September 2020 (2019: £7.6m).
11. MARKET RISK
Market risk refers to risks that the Group will incur a loss as a result of a change in foreign exchange rates, interest rates and equity and/or commodity prices.
11.1. FOREIGN EXCHANGE RISK
The Group is primarily exposed to foreign exchange risk, as a result of foreign currency trades executed on the behalf of its clients. Any material foreign exchange exposures are monitored, whereby any material positions are closed out at the end of each day. Foreign exchange risks surrounding costs, earnings and balance sheet items denominated in currencies other than the Group’s functional currency, being GBP, are deemed immaterial as Group revenues are primarily generated from UK domiciled entities.
The Group calculates the Pillar 1 foreign exchange risk requirement under the rules found in Articles 351 and 352 of the CRR. As at 30 September 2020 the foreign exchange risk requirement was £0.5m (2019: £3.6m).
13
11.2. INTEREST RATE RISK (ON POSITIONS NOT INCLUDED IN THE TRADING BOOK)
The Group is exposed to the risk that it will incur a loss due to adverse movements in interest rates. This primarily arises as a result of Firm Cash held with banking counterparties in the ordinary course of business. Interest income is also earnt by the Group on cash held within client portfolios therefore interest rate risk also occurs as a result of an indirect exposure to Client Money balances. These exposures are mitigated as both Firm Cash and Client Money are held on short term tenors. On a quarterly basis the Group reviews interest rates paid to clients to reflect the rates received from its banking counterparties. This is also reviewed intra- quarter if rates have change materially.
As per IFPRU 2.2.30, the Group performs an interest rate sensitivity analysis as part of the ICAAP to assess the impact of a change in interest rates on positions not included in the trading book. No material risks were identified following this analysis.
The Group does not have any bank borrowings and does not enter into any interest rate derivatives that require a “marked to market” valuation. The Group is therefore not exposed to any related interest rate risks.
11.3. SETTLEMENT RISK
Settlement risk is the risk that on settlement date a counterparty defaults on its contractual obligation to make payment for a securities transaction. The Group does not have a large exposure to this risk as settlements are executed on a Delivery versus Payment basis wherever possible, across a number of pre-approved counterparties. Settlements are also monitored daily and instances of failed trades are minimal. Collateral against trades is held in the Group nominee accounts in the form of cash, as well as equity and bonds, which are quoted on recognised exchanges.
The Group calculates the Pillar 1 settlement risk requirement under the rules found in Article 378 of the CRR. As at 30 September 2020, the Group’s settlement risk requirement was £0.3m (2019: £0.8m).
11.4. EQUITY AND COMMODITY RISK (ON POSITIONS NOT INCLUDED IN THE TRADING BOOK)
Equity and commodity risk refers to the risk that the Group will incur a loss due to an adverse movement in equity and/or commodity prices. This risk arises as a result of the Group’s trading and available-for-sale investments, which are held for strategic purposes in contrast to trading purposes. As per Article 94 of the CRR, these risks are calculated with accordance to the risk weighted exposure amounts for credit risk. Refer to section 10 and Note 27 “Risk management” of the Group’s Annual Report and Accounts 2020.
14
12. OPERATIONAL RISK
The Group defines operational risk as “the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events”.
The Operational Risk Framework sets how operational risks are identified, assessed, mitigated, managed, monitored and reported, and how assurance is provided. The Operational Risk Management Framework is supplementary to the Group Risk Management Framework which sets the approach to the management of risk.
The Group is not required to hold Pillar 1 capital under the FCA’s standardised approach for Operational Risk. The Group assesses Pillar 2 requirements by developing a range of scenarios that model the operational risk exposures of the Group.
13. LIQUIDITY RISK
Liquidity risk refers to the risk that the Group will be unable to meet its financial obligations as they fall due or access to liquid funds is not available on commercially viable terms. The Group maintains its capital in cash or near cash instruments and at a sufficient level to ensure the smooth operation of the business. At 30 September 2020, the Group had access to a revolving credit facility of £10m which had been in place since December 2018. Prior to this it had an unsecured overdraft facility of £10m.
To ensure that the Group is able to appropriately manage liquidity risks, the Group maintains a Financial Risk Policy that provides a high level framework and objectives for the management of liquidity and associated risks within the parameters set by the Group’s Risk Appetite. It also outlines the liquidity recovery plan and sets out adequate strategies to address any liquidity shortfall.
Liquidity stress tests are performed as part of the ICAAP and reviewed on a regular basis to ensure that the Group is able to maintain adequate liquidity buffers to withstand a range of stressed scenarios.
15
14. REMUNERATION POLICY
14.1. REMUNERATION GOVERNANCE STRUCTURE The Group has the following policies and practices for those staff whose professional activities have a material impact on the Group’s risk profile, Material Risk Takers (‘MRTs’), none of whom are employed by Brewin Dolphin Wealth Management Ltd (“BDWM”). BDWM Pillar 3 disclosures are published separately as it is regulated by the Central Bank of Ireland. BDL is categorised as a Level 3 firm under the FCA Proportionality guidelines.
The Group has a Remuneration Committee (the “Committee”). The Remuneration Committee is a committee of the BDH Board and has formal terms of reference which is published on the Group’s website. The Committee is chaired by an independent Non-Executive Director, and comprises two other independent Non-Executive Directors and the Board Chairman, who was determined to be independent upon his appointment. None of the Committee members have any personal financial interests in the Group (other than as shareholders), conflicts of interest arising from cross directorships or day-to-day involvement in running the business.
The Committee reports on its activities annually in the Directors’ Remuneration Report in the Group’s Annual Report and Accounts.
One of the Committee’s responsibilities is to review the Remuneration Policy and ensure that it, and its implementation, is consistent and continues to comply with the FCA Remuneration Code (SYSC 19a).
Advice is sought from external consultants Alvarez & Marsal (“consultants”). The consultants selected are independent and have no other connection with the Group.
14.2. EMPLOYEES DESIGNATION AS ‘MRT’ FOR THE PURPOSES OF THE FCA REMUNERATION CODE
As at 30 September 2020, MRTs were defined as all Directors of BDH/BDL, members of the Executive Committee, employees designated as holding Significant Influence Functions and all employees earning over €750,000 (total of fixed and variable remuneration). As at 30 September 2020, the number of MRTs was 25, of which two were Executive Directors (Executive MRTs).
14.3. POLICY ON REMUNERATION OF EXECUTIVE MRTS
The policy on variable remuneration differs for Executive MRTs and other MRTs. The annual bonus structure for Executive MRTs is designed to incentivise them to achieve objectives aligned with the Group’s strategy, in a way which is in the long-term interests of the Group’s clients, shareholders and employees.
For the 2019/20 performance year, bonus awards were made based on performance against a balanced scorecard comprising three Key Performance Areas: adjusted profit before tax (30% weighting), net discretionary funds inflows (30% weighting) and personal experience,
16 engagement and relationships with the Regulators, prudent risk management within risk appetite, employee engagement metrics and talent initiatives.
The maximum amount of annual bonus that can be awarded to each individual Executive MRT is 150% of fixed remuneration for the performance year.
The Committee sets the performance criteria for the Executive MRTs and assesses performance at the end of the year against the pre-agreed criteria to determine the bonus awards. There is also a general underpin that the Committee will assess the overall health of the business and whether prudent risk management has been applied. It may scale-back the award to zero if it is considered appropriate. The Committee seeks input from the Chief Risk Officer on any conduct events during the year that should be taken into account when determining bonus awards.
Mandatory deferral rates of annual bonus are set out in Figure 9 below. The deferred bonus is satisfied by the grant of a share award under the Deferred Profit Share Plan (“DPSP”). DPSP awards are ordinarily structured as nil cost options over BDH shares, although they may also be granted as a conditional right over shares or (exceptionally) as a deferred cash award. In each case, DPSP awards (including deferred cash awards) ordinarily vest three years after grant and are subject to forfeiture on a ‘bad leaver’ basis as defined in the plan rules.
Figure 9 – Recoupment Provision
Proportion of Variable Pay Fraction Deferred Up to £50,000 None Between £50,000 and 1 x fixed remuneration One third Above 1 x fixed remuneration Two- thirds
The awards are also subject to recoupment provisions (see below for more details).
14.4. POLICY ON REMUNERATION OF ALL OTHER MRTS EXCLUDING BUSINESS DEVELOPMENT MANAGERS
The Discretionary Annual Profit Share award (“Profit Share”) for other employees excluding Business Development Managers (including MRTs) is designed to reward employees for their performance over the year and to incentivise certain behaviours and outcomes in line with the Group’s strategy, and aligned to the Group’s culture and values.
The intended participants of the Profit Share are all employees excluding the Executive MRTs, Non-Executive Directors and Business Development Managers (BDMs). For the financial year ended 30 September 20 there were 1,822 participants, including 16 MRT’s. Non-Executive Directors are not eligible for any performance linked awards.
Profit share awards are discretionary, linked to performance and take into account consideration of conduct risk. For client facing Wealth Management employees, any profit share pool is primarily calculated with reference to the team’s profitability during the year. For other employees, the available pool is primarily linked to affordability. The allocation of all awards is subject to a line management assessment of performance and demonstrated behaviours and values during the relevant performance year.
17
Any individual awards are subject to additional calibration and adjustment, by senior management as appropriate. Final profit share awards for MRTs are reviewed and approved by the Remuneration Committee, taking into consideration any conduct events during the year.
The mandatory deferral rate of profit share is set out in Figure 10 below. The deferred profit share is satisfied by the grant of an award under the DPSP. DPSP awards are ordinarily structured as nil cost options over BDH shares, although they may also be granted as conditional rights over shares or (exceptionally) as a deferred cash award. In each case DPSP awards (including deferred cash awards) ordinarily vest three years after grant and are subject to forfeiture on a ‘bad leaver’ basis, as defined in the Plan Rules. These awards are subject to recoupment provisions (see below for more details).
Figure 10 – Mandatory Deferral of Profit Share
Portion of variable pay Fraction deferred Up to £50,000 None Above £50,000 One third
14.5. POLICY ON REMUNERATION OF BUSINESS DEVELOPMENT MANAGERS WHO ARE MRTS
The BDM Discretionary Annual Profit Share award (“BDM Profit Share”) is designed to provide a discretionary award to Business Development Managers which incentivises them to achieve objectives and behaviours aligned to the Group’s strategy.
The intended participants are Business Development Managers employed by BDL. The number of participants for the 2019/20 performance year was 19, of which 0 were MRTs.
BDM Profit Share is calculated by reference to new funds under management (FUM) introduced by them to the Group and line manager assessment of performance and demonstrated behaviours during the performance period. The BDM Profit Share is payable every 6 months (H1 and H2), with mandatory deferral applied to the payments as set out in Figure 11 below. The H1 deferred BDM Profit Share is satisfied by way of the grant of a deferred cash award, which is not linked to BDH shares. The H2 deferred BDM Profit Share is satisfied by the grant of an award under the DPSP. DPSP awards are ordinarily structured as nil cost options over BDH shares, although they may also be granted as conditional rights over shares or (exceptionally) deferred cash awards. In each case, DPSP award (including deferred cash awards) ordinarily vest three years after grant and are subject to forfeiture on a ‘bad leaver’ basis, as defined in the DPSP plan rules. These awards are subject to recoupment provisions.
Figure 11 – Mandatory Deferral of Profit Share
Portion of variable pay Fraction deferred Up to £25,000 None Above £25,000 One third
18
14.6. POLICY ON NON-EXECUTIVE DIRECTOR MRTS REMUNERATION All Non–Executive Directors, including the Chairman, serve under formal letters of appointment and either party can terminate on one month’s written notice or in accordance with the Articles of Association. Their remuneration is determined by the Board within the limits set by the Articles of Association and is based on benchmarking information and the skills and expected time commitment of the individual concerned. No Director is involved in the decision regarding their own remuneration. The Non-Executive Directors do not have any right to compensation on the early termination of their appointment. In addition to basic fees, fees for additional committee chairmanship duties, (with the exception of the Chairman who is paid an all-inclusive fee) and to the Senior Independent Director, are paid, to reflect the extra responsibilities attached to these roles. The Non–Executive Directors do not participate in any of the Group’s incentive plans or share plans and do not receive any other benefits. The fees are reviewed annually. Non- Executive Directors are encouraged to build an interest in the shares of the Company.
14.7. TYPES OF VARIABLE REMUNERATION
Annual profit share is paid in cash, subject to the deferral limits shown above. Additionally, the Group operates three share based incentive plans as follows:
Figure 12 – Share Based Incentive Schemes
Description Equity Award Plan Long Term Incentive Deferred Profit (“EAP”) Plan (“LTIP”) Share Plan (“DPSP”) Scheme purpose The Equity Award Plan Provides a compensation To allow the is a discretionary component which is linked mandatory deferral of arrangement under to the longer term delivery annual profit share which contingent share of the Company’s strategic into shares, over awards can be made to financial objectives. certain limits. selected employees within the Group below Board level, for example to reward exceptional performance on behalf of the Group, introducing new funds, or in certain circumstances to aid retention of key employees. Eligibility Employees excluding Executive Directors and All employees with Executive and Non- selected senior profit share awards Executive Directors employees. over the mandatory deferral limits.
Number of MRTs 0 14 16 with outstanding awards as at date
19
Structure of Conditional Share Conditional Share Awards. Nil cost options, awards Awards. conditional rights over shares or (exceptionally) deferred cash awards.
Description Equity Award Plan Long Term Incentive Deferred Profit (“EAP”) Plan (“LTIP”) Share Plan (“DPSP”) Length of vesting Shares will normally Vesting period is 3 years Awards vet after 3 period, and vest 3 years after from grant. A further 2 years. Subject to performance award. However year post vesting service conditions but period where awards made in holding period applies to no further applicable respect of introducing Executive Directors. performance new funds have phase Performance period of 3 conditions. vesting in thirds over financial years. The three years performance period commencing on the begins again with each first anniversary of grant. grant. Subject to service conditions but no further performance conditions. Performance n/a 50% adjusted diluted EPS n/a measure CAGR and 50% average annual discretionary FUM growth. Subject to annual review by the RemCo.
Approved by No – not required as Yes – February 2014. Yes – February 2019. shareholders Directors are excluded from participation and the plan is non- dilutive. Scheme expiry 2024 2024 2029
Recoupment Subject to malus and Subject to malus and Subject to malus and provisions clawback provision. See clawback provision. See clawback provision. below for detail. below for detail. See below for detail.
14.8. RECOUPMENT PROVISIONS
The Group’s share-based incentive plans contain recoupment provisions, as set out below.
Equity Award Plan & Long Term Incentive Plan
The Committee may decide at any time prior to the vesting of an Award (and/or at any time prior to the third anniversary of the date on which an Award vests (or is due to vest) in the case of Awards subject to performance based additional conditions) that the individual to whom the Award was granted (the "relevant individual") shall be subject to recoupment if:
• the Committee forms the view that the performance on which any variable pay awards, including but not limited to Awards granted under the Plan, have been made or have vested, was materially misstated or should have been assessed materially differently,
20
for whatever reason and that this has resulted either directly or indirectly in higher remuneration than would have otherwise have been the case; • the Committee forms the view that in assessing any additional conditions and/or any other condition imposed on the Award such assessment was based on an error, or on inaccurate or misleading information or assumptions and that such error, information or assumptions resulted either directly or indirectly in that Award vesting to a greater degree than would have been the case had that error not been made; • the Committee forms the view that there has been (i) a material failure of risk management and/or (ii) regulatory non-compliance and/or (iii) negligence, resulting in damage to the business or reputation of the Company; the Committee forms the view that the relevant individual has committed serious misconduct; or • in respect of Awards granted on or after 22 July 2019, the Company has suffered an instance of corporate failure resulting in the appointment of a liquidator or an administrator or the Company entering into a compromise agreement with its creditors.
Deferred Profit Share Plan
The Committee may decide at any time within the 3 year period following the grant of an Award, that the individual to whom the Award was made (the "Relevant Individual") shall be subject to the withholding or recovery of the award (“Recoupment”) if:
• the Committee forms the view that the performance on which any variable pay awards, including but not limited to Awards granted under this Plan, have been made or have vested, was materially misstated or should have been assessed materially differently, for whatever reason and that this has resulted either directly or indirectly in higher remuneration than would otherwise have been the case; and/or • the Committee forms the view that in assessing any condition imposed on the Award such assessment was based on an error, or on inaccurate or misleading information or assumptions and that such error, information or assumption resulted in either directly or indirectly in that Award vesting to a greater degree than would have been the case had that error not been made; • the Committee forms the view that there has been (i) a material failure of risk management and/or (ii) regulatory non-compliance and/or (iii) negligence, resulting in damage to the business or reputation of the Group; and/or the Relevant Individual commits serious misconduct; and/or • the Committee forms the view that the relevant individual has committed serious misconduct; and/or • in respect of Awards granted on or after 22 July 2019, the Committee has suffered an instance of corporate failure resulting in the appointment of a liquidator or an administrator or the Company entering into a compromise agreement with its creditors.
14.9. REVIEW OF REMUNERATION POLICY DURING THE YEAR
The Committee reviewed the Group’s Remuneration Policy during the year and received reports from the Group Human Resources Director on progress against plans to strengthen the alignment of reward and performance throughout the Group. This included enhancements to the performance management process and year-end remuneration processes for the 2019/20 performance year.
21
The Directors’ Remuneration Policy (“DRP”) was also reviewed, shareholders and proxy voting agents were consulted and the proposed DRP was included within the BDH Annual Report & Accounts for 2019. The policy was approved by shareholders at the AGM in February 2020.
14.10. INDEPENDENCE OF RISK AND COMPLIANCE EMPLOYEES
Control functions within Risk and Compliance report directly to the Chief Risk Officer, who is a member of the Group’s Executive Committee. This gives them the appropriate authority to conduct their role. The department is independent from the business that it oversees.
Variable remuneration for non-client facing employees, including those within the Risk and Compliance department, is set according to the profitability of the firm and the performance of the relevant department. The allocation of awards is subject to line management’s assessment of performance and demonstrated behaviours during the relevant performance year. Any individual awards are subject to additional calibration and adjustment by senior management as appropriate. Where an employee is both a member of the Risk and Compliance department and deemed an MRT, their remuneration is also reviewed and approved by the Committee.
The remuneration of Code Staff is reviewed by the Committee, which has the authority to adjust individual profit share and bonus awards. Code staff within the Risk and Compliance function attend Board meetings from time to time to present reports and have direct access to the Executive Directors and independent Non-Executive Directors. The remuneration of those employees is reviewed by the Committee who has the authority to adjust the individual profit share payments.
14.11. QUANTITATIVE DISCLOSURES
The Committee met 6 times during the year to 30 September 2020. The members of the Committee were paid as part of their standard Non-Executive Fees, in accordance with Figure 13 below:
Figure 13 – Non-Executive Fees
Annual Fee (£) Board Chairman £200,000 Base fee for Non-Executive Directors £62,000 Committee Chairman £15,000 Senior Independent Director fee £10,000
There were 17 MRTs who received a variable remuneration award during the financial year. There was one guaranteed cash payments awarded to a MRT during the year totalling £125,000. No severance payments were made to MRTs during the financial year.
Deferred remuneration outstanding at the end of the financial year consisted of share awards issued to MRTs under the DPSP, conditional share awards issued under the EAP and LTIP as well as an ad hoc share award made under a Share Award Agreement (“SAA”).
22
Figure 14 – Outstanding deferred remuneration
Gross value based on the share price at 30 Share awards Outstanding shares September 2020 (£2.335) DPSP 1,111,954 £2,596,413 EAP and LTIP 2,058,469 £4,806,525 SAA 85,375 £199,350
The remuneration awarded to MRTs in the 2019/20 financial year was:
Remuneration Amount (£m) Variable remuneration paid in cash £3.5m Variable remuneration deferred £4.3m Total Variable Remuneration £7.8m Fixed Remuneration £3.2m
Figure 15 – Remuneration Awards
The variable remuneration paid in 2019/20 financial year to be deferred in share options under the DPSP will become exercisable in December 2022, and the awards to be made under the LTIP will vest in December 2022 subject to satisfaction of performance criteria.
15. DIVERSITY AND INCLUSION
15.1. SELECTION OF MEMBERS OF THE MANAGEMENT BODY
The Nomination Committee considers the succession planning for the Board as well as receiving the executive succession plan for review and challenge. As part of this process, diversity is considered in respect of race, gender, ability, background and thought as well as the required skillset and experience to ensure that the most suitable appointment is made. We are aware of the recommendation of the Parker Review to increase ethnic diversity on UK Boards and participated in the survey issued by the Department of Business Energy and Industrial Strategy. Ethnic diversity is considered as part of recruitment and succession, however, we currently have no members of the Board who fulfil the ethnic diversity criteria as stipulated in the review.
The Hampton Alexander Review is committed to achieving a 33% target for women on boards and in leadership teams of FTSE 350 companies by 2020. In the FTSE 250 the percentage of women on Boards in 2019 was 29.6%. The percentage on Executive Committees and their direct reports in 2019 was 27.9%. We are pleased to confirm that we ranked 6th in the FTSE 250 for our representation of women in senior leadership roles, our Board currently is at 44% and our Executive Committee and direct reports at 40%.
15.2. MANAGEMENT BODY OBJECTIVES
The Remuneration Committee sets annual objectives against which each of the Executive Directors are assessed. The objectives span financial and non-financial criteria, including continuing to build and deliver the Group Diversity and Inclusion initiatives. Recent achievements against this objective include:
23
• The Chairman and Chief Executive Officer are members of ‘The 30% Club’. The Group have already reached this initiative’s initial target for both our Board and senior management team and have committed to the 30% Club’s updated objectives to include increasing ethnic diversity at Board and senior levels. • Ranked 6th out of the companies in the FTSE 250 for the proportion of women on its Board and senior management team by the most recent Hampton Alexander review. • Signatory of the ‘Women in Finance Charter’, increasing gender diversity at senior management and leadership levels. • Signatory of the Government’s ‘Disability Confident Scheme’. • Membership of other organisations promoting diversity in several forms, including the ‘Business Disability Forum’, ‘Business in the Community’ and the LGBT+ business network ‘myGwork’. • Signatory of the ‘Race At Work Charter’, ensuring organisations address barriers to recruitment and progression. • The Executive Committee are now participating in reverse mentoring with colleagues from ethnic minority backgrounds. • Founding partner of the ‘WealthiHer’ network, committed to championing, empowering and supporting female clients. • The Group Diversity and Inclusion Committee (“GDIC”) has a programme of work to ensure that we are focused on diversity in all aspects. The GDIC’s activities underpin several organisation-wide initiatives, including workshops on topics such as LGBT+ awareness and ‘Let’s talk about Race’. • The GDIC have facilitated a number of focus groups with employees from ethnic minority backgrounds to better understand their experiences of working at Brewin Dolphin and to inform how we continue to build an inclusive culture. • The Group also run Diversity & Discrimination training for all managers to create awareness of challenges they may encounter in the workplace and to foster an inclusive work environment.
24