This document sets out the CCLA Group Pillar 3 disclosures on risk management and capital adequacy as at 31 March 2021. It fulfils the regulatory disclosure requirement of the European Union Capital Requirements Regulation (“CRR”) and the Capital requirements Directive (“CRD”) referred to collectively as CRD IV.

CRD IV created a revised regulatory capital framework and introduced consistent capital adequacy standards across the EU with the aim of seeking to reduce the likelihood of market disruption or consumer loss as a result of prudential failure. It does so by trying to ensure that the financial resources held by a firm are commensurate with the risks associated with its business profile and control environment.

The framework consists of three ‘pillars’:

• Pillar 1 specifies the minimum capital requirements that a firm is required to hold to cover the risks arising from credit, market and operational risk;

• Pillar 2 requires an assessment to be made of whether additional capital should be held against risks not captured by Pillar 1. This is achieved though the Individual Capital Adequacy Assessment Process (“ICAAP”); and

• Pillar 3 requires the disclosure of specific information about the underlying risk management controls and the capital position of the firm.

1.2 Structure of CCLA

CCLA Investment Management Limited (“CCLA IM”) and its wholly owned subsidiary, CCLA Fund Managers Limited (“CCLA FM”), together the CCLA Group (“CCLA”), are authorised and regulated by the Financial Conduct Authority (“FCA”).

CCLA IM is categorised under the FCA rules as a Collective Portfolio Management Investment Firm (“CPMI Firm”), whose key activities are those typical of an investment manager. It is classified as an IFPRU Limited Licence firm. It currently acts as the investment manager to a number of collective investment schemes including Common Funds established under the Church Funds Investment Measure 1958, and a UCITS money market fund, as well as the discretionary investment manager to some segregated mandates.

CCLA FM is categorised under the FCA rules as a Collective Portfolio Management Firm (“CPM Firm”). It primarily acts as the AIF Manager for a number of Common Investment Funds established under Charities legislation, and two Non-UCITS Retail Funds, falling within the scope of AIFMD. CCLA FM also operates as the Authorised Contractual Scheme (“ACS”) Manager for the CCLA Authorised Contractual Scheme. CCLA FM delegates the investment management of these funds to CCLA IM.

The Pillar 3 disclosures have been prepared on a consolidated basis.

1.3 Frequency and Means of Disclosure

The information within the scope of these Pillar 3 disclosures is published on an annual basis and is based on CCLA’s financial position as at its year end, 31st March. The disclosures are required to be published in conjunction with the date of publication of the financial statements. The disclosures have not been audited by CCLA’s external auditors, do not constitute any form of audited financial statement and have been produced solely for the purposes of the Pillar 3 disclosure obligations and are not used by management for any other purpose. The disclosures should not be relied upon in making judgements about CCLA.

CCLA’s Board of Directors are ultimately responsible for the systems and controls and for reviewing the effectiveness of those arrangements. These disclosures have been reviewed and approved by the Board. 

2.1 Principles and Risk Governance

CCLA places the highest degree of emphasis and focus on managing risks faced by its business. CCLA operates a robust Enterprise Risk Management Framework to ensures there is an effective system of controls and monitoring measures in place to mitigate or manage business risks so that the business objectives are achieved.

CCLA has logically arranged its risks and risk types by developing a company-wide risk taxonomy structure.  Top down “Level 1 risks” which drive the risk appetite statements and business strategy are directly linked and mapped from bottom up “Level 2” and “Level 3” risks faced at the functional business area levels.

Level 1, Level 2, and Level 3 risks have been identified from a number of sources, including,

The annual Risk and Control Self-Assessments (RCSAs)

• The Risk Event and Near Miss management process
• The Risk Appetite Framework (including metrics and limits)
• The Key Risks Analysis
• Ongoing Executive Committee, Risk Committee and Audit and Risk Committee engagement
• The inputs and assumptions included within the Enterprise Risk Management Policy
• Key internal and external issues (and their associated risks) facing the Company and the wider Investment Management Community
• Discussions held with Internal Audit (including but not limited to AAF output, and specific business area Audit output findings)

There continues to be a robust enterprise risk management process in place within CCLA to support the identification and reporting of risks.

CCLA’s appetite for risk forms part of the basis against which business and financial decisions are taken. CCLA has a fairly conservative appetite for risk and seeks to manage its risks through effective processes and controls. Senior management determines the business strategy and risk appetite of the company, focussing on the main areas of operational and non-operational risks, and having regard to relevant laws and regulatory requirements. The senior management team meets on a regular basis to discuss key business issues, regulatory capital management, business planning and risk management.

The CCLA Board meets on a calendar quarterly basis and are provided with relevant information to enable the Directors to understand and assess CCLA’s ongoing risks and control functions as well as its capital and liquidity controls.

The CCLA Board has established several committees to oversee the control functions within the business. One of the committees of the Board is the Audit and Risk Committee which meets at least four times a year and is tasked with oversight of CCLA’s control environment. An Executive Committee has also been established which meets regularly and as part of its standing agenda, assesses the key emerging risks and issues and how these are being mitigated. An internal Risk Committee meets quarterly to review operational activity, compliance monitoring findings, internal audit and risk assessments.

2.2 Credit Risk

Credit risk is the exposure to loss arising from a counterparty’s failure to meet its contractual obligations, either because of business failure or intentional withholding of amounts due. CCLA’s main credit risk exposure is of custody and administration fees not being collectable, and cash held with banks. Management fees are taken from the client’s accounts and therefore non-payment does not represent a material risk.

A minimal amount of income is derived from invoiced services, primarily generated through financial assessment advice and the hiring-out of CCLA’s facilities, where the credit risk is not material.

CCLA’s principal financial assets, and therefore its primary source of credit risk, are its cash balances. Credit risk occurs through exposure to default of institutional counterparties, in this case banking institutions. This is mitigated by CCLA spreading its cash across several high-quality institutions with high credit ratings (a minimum short-term Fitch credit rating of at least F1) which are regularly reviewed. Market transactions are restricted to investments in short-term cash deposits via a money market fund managed by CCLA itself. Credit risk exposure is monitored through monthly reports to the Executive Committee which include details of cash amounts placed with counterparties.

CCLA does not have a history of bad debt with suppliers and does not consider such risk material.

2.3 Market Risk

Market risk is the risk that the value of, or income arising from, CCLA’s business activities varies as a result of fluctuations in stock markets, interest rates or exchange rates. Market fluctuations can, however, affect client activity and Assets Under Management (AUM). CCLA’s fee income is directly affected by market movement due to levying fees as a percentage of AUM.  Consequently, market risk is considered to have the greatest potential impact on CCLA’s performance; however, the product range offered is well diversified, therefore maintaining a steady revenue stream.

CCLA does not trade on its own account so exposure to market position risk is not applicable.

2.4 Liquidity Risk

Liquidity risk is the risk that CCLA cannot meet its liabilities as they fall due. Liquidity requirements arise from day-to-day financial activities including accounts payable and payroll. Cash forecasting is used to minimise cash volatility, while CCLA also retains a substantial cash balance. CCLA’s policy is to ensure that it has liquid cash resources which exceed its capital requirements.

Financial instruments held by CCLA consist of short-term sterling cash deposits designed to ensure that, along with cash held in bank accounts, CCLA has sufficient available funds to meet its operational needs. CCLA is confident of settling transactions and being able to continue operations in normal circumstances.

2.5 Operational Risk

Operational risk is the risk of a loss resulting from inadequate or failed internal processes, people, and systems or from external events, potentially resulting in financial, legal, regulatory or reputational harms to CCLA and its clients. CCLA seeks to mitigate or manage its operational risks to acceptable levels by maintaining a strong control environment, operating robust policies and procedures throughout the company, ensuring that employees have appropriate skills, competence and training, and by establishing an effective management structure. CCLA also carries professional indemnity insurance in excess of the minimum FCA requirement.

CCLA is exposed to a number of operational risks, including:

Regulatory including Conduct risk;

Third-party service provider risk;

Information security risk;

Fraud risk;

Technology including cyber risk;

Process risk.

A periodic assessment of all risks and controls throughout the business is carried out as part of the enterprise risk management process.

2.6 Leverage

CCLA does not have any leverage exposure.

2.7 Other Risks

• Interest rates

Changes in interest rates do not materially affect CCLA’s earnings, which are primarily linked to performance of AUM and not interest income. Although CCLA does earn interest from the investment of surplus corporate cash, it does not rely on interest income to fund operations and does not have any material debt which would be affected by a change in interest rates. The present value of future cash flows or the underlying value of CCLA’s assets and liabilities would not be materially impacted by a change in interest rates (except in respect of defined benefit pensions, please see below). Any rise or fall in interest rates will affect profit margins but this is not considered to be critical to CCLA’s overall profitability. Therefore, CCLA does not consider interest rate risk to be material.

• Business Risk

Business risk is managed with a long-term focus and by development of rolling three-year business plans, appropriate management oversight and an embedded corporate governance framework. 

• Pension obligations

CCLA IM, as the employing entity for CCLA, operates defined contribution pension schemes for its employees, mainly through the Church of England Pension Builder 2014 Scheme and the CCLA Personal Pension Scheme operated by Legal and General. CCLA IM also has a share of assets and liabilities in the Church of England Defined Benefit Scheme (“DBS”). Action was taken by CCLA to mitigate future exposure to pension risk by closing the DBS to future accrual for all employees from 1st October 2012. The DBS is a multi-employer scheme, for which sufficient information to follow defined benefit pension scheme accounting is not available; accordingly, the net assets or liabilities of the DBS are not required to be shown on CCLA IM’s balance sheet. The DBS is reviewed triennially by an independent actuary to determine if any deficit exists which requires further funding by participating employers. If so, any deficit requiring funding by CCLA IM is recognised in full in CCLA IM’s accounts on production of the actuary’s report.

CCLA’s capital resources are primarily constituted of share capital and retained earnings and therefore are a high quality of capital resource, referred to as Tier 1 capital.

FCA Capital Resources

(Consolidated Basis)

3.1 Own Funds

As a CPMI Firm and an IFPRU Limited Licence Firm, CCLA IM must maintain, at all times, capital resources equal to or in excess of the base own funds requirement of €125,000.

As a CPM Firm, CCLA FM must maintain, at all times, capital resources equal to or in excess of the base own funds requirement of €125,000.

4.1 Individual Capital Adequacy Assessment Process

CCLA’s overall approach to assessing the adequacy of its internal capital is set out in its ICAAP. The ICAAP is an integral part of CCLA’s risk management framework and is reviewed and updated at least annually. CCLA takes the ICAAP process seriously and understands the importance of the ICAAP process both for internal purposes, its clients and meeting regulatory obligations.

The ICAAP process is an established and important activity owned by the CCLA Executive Committee. The components that feed and inform the ICAAP are derived from several well embedded frameworks, processes and systems operated across CCLA.

Both bottom up and top down enterprise risk management tools are used to formulate the key risks adopted by the ICAAP. Formulating the key risks involves significant and valuable input from the Executive Committee, Audit and Risk Committee and at least 22 business areas within CCLA. The Company believes that the key risks that drive the ICAAP scenarios are relevant, logical, and taken seriously by CCLA employees.

The key risks are reviewed and updated where appropriate on at least an annual basis or whenever there is a material change to CCLA’s business processes, operating model or to the macro environment which may adversely impact the company.

CCLA considers quantifies the level of capital it needs to cover risks addressed within the ICAAP. CCLA also considers the future plans of the business to determine the impact that any future development or growth of the business might have on the levels of capital it needs to hold. Projections for stress testing, wind-up scenarios and capital planning forecasts are produced and the liquidity impact of the results is assessed.

The key risks to the business were discussed and agreed by the Executive Committee and the ICAAP was subsequently formally challenged and approved by the Audit and Risk Committee on 23 June 2021 and ratified by the CCLA Board on 5 July 2021.

CCLA’s Pillar Two capital requirement as at 31 March 2021 was £15,096,000. In accordance with FCA requirements, CCLA holds sufficient capital resources to cover its Pillar Two capital requirement.

4.2 Capital Requirements

As at 31 March 2021, after audit, the internal capital to be held against CCLA’s Pillar 1 requirement has been calculated as £7,493,000 which represents the Variable Capital Own Funds Requirement (as defined in the FCA’s rules). The Pillar 2 capital requirement has been calculated as £15,096,000. CCLA’s minimum internal capital requirement is £22,644,000, being 150% of the greater of the Pillar 1 and Pillar 2 requirements.

As at 31 March 2021, after audit, CCLA held, on a consolidated basis, Tier 1 Capital of £34,985,000. Taking account of the minimum internal capital requirement of £22,644,000, there is a surplus of £12,341,000. The CCLA Board therefore considers there is sufficient capital to ensure CCLA can continue to meet its requirements.

5. Remuneration Disclosures

The objective of the FCA’s Remuneration Codes is to ensure that all regulated firms have risk-focussed remuneration policies which are consistent with and promote effective risk management and do not expose the firms to excessive risk. Firms are expected to have robust governance arrangements in place, have established remuneration controls for employees whose professional activities could have a material impact on the firm’s risk profile and disclose relevant information about their remuneration policies and practices.

In accordance with the remuneration disclosure requirements of the CRR, and as further elaborated in the FCA’s ‘General Guidance on Proportionality: The Remuneration Code & Pillar 3 Disclosures on Remuneration’, CCLA IM, as the employing entity, falls within proportionality level 3 and is required to provide the following disclosures in relation to its remuneration policy and practices for staff whose professional activities have a material impact on CCLA’s risk profile.

CCLA IM has established a remuneration policy and a remuneration committee in accordance with the FCA’s Remuneration Codes. The committee is chaired by CCLA IM’s Chairman and is responsible for establishing, implementing and maintaining remuneration policies, procedures and practices that are consistent with and promote sound and effective risk management. In particular, the committee is responsible for ensuring CCLA IM’s compliance with the UK FCA’s Remuneration Codes, as well as compliance with other applicable laws and regulations. To aid in the process, market data on remuneration levels is also received from an independent source.

CCLA IM uses a combination of fixed and variable compensation. The variable element takes into consideration individual performance, performance of the individual’s business unit and CCLA’s overall performance. A performance review is conducted and documented, at least annually, measuring performance against agreed objectives, whilst also considering the employee’s promotion of sound and effective risk management where appropriate.

Those staff members whose professional activities have a material impact on CCLA’s risk profile are classified by CCLA IM as ‘Code Staff’ in respect to the FCA’s Remuneration Codes. During the financial year ended 31 March 2021, the aggregate remuneration of CCLA IM’s Code Staff was £3,323,000.

December 2021