Market, credit, liquidity and capital risks

We face market, credit, liquidity and capital risks from movements in the financial markets in which we operate, arising from holding investments both as principal and agent. Notes 19 and 20 to the accounts on (PDF:) pages 129 to 135 set out the Group’s approach to the management of financial instrument risk, where we act as principal, together with the Group’s approach to hedging.

Key risk

 

Description

 

How we manage risk

10. Market risk

 

Market risk arises from market movements, which can cause a fall in the value of principal investments and a decline in the value of AUM.

Operating capital, fee income and expenses related to the Group’s overseas subsidiaries are denominated in a range of currencies and, therefore, subject to exchange rate risk.

 

Our geographically-diversified, broad product range helps to mitigate market risk in a variety of market conditions and serves to diversify individual market dependencies. The Group’s Investment Risk Framework also provides review and challenge of market risks.

The Group Capital Committee, chaired by the Chief Financial Officer, regularly reviews all principal assets held for investment or seed capital purposes. The Group’s seed capital investments are hedged in respect of market risk and currency risk, where practical.

We use forward foreign exchange contracts to mitigate transactional and investment exposure to currency movements.

The Wealth Management Executive Committee monitors and manages market risk in the Group’s banking businesses, which is primarily interest rate risk in the banking book.

11. Credit risk

 

We face credit risk as a result of counterparty exposure arising from client and principal investment holdings, including derivative exposures. The assets we manage are also exposed to counterparty risk.

We also face credit risk through Wealth Management lending activities, in addition to client transactional counterparty risk.

 

We assess counterparty creditworthiness and set limits for both our principal and agency counterparties.

We seek to diversify our exposure across different counterparties. The creditworthiness of counterparties and borrowers is monitored, as is usage against relevant credit limits.

In Wealth Management, we seek to mitigate credit risk within lending activities, as appropriate, through collateralisation in the form of cash, portfolio investments or real estate. Credit risk is monitored and managed against approved limits and collateral.

12. Liquidity risk

 

Liquidity risk is the risk that the Group or any of its subsidiaries cannot meet its contractual or payment obligations in a timely manner.

Liquidity risk in relation to client portfolios may arise in difficult market conditions from the inability to sell the portfolio’s underlying investments for full value, or at all. This could affect performance and also prevent cash or other assets from being readily available to meet redemptions or other obligations.

 

The Group Capital Committee reviews the Group’s liquidity needs, considering the current liquidity position, future cash flows, regulatory requirements and potential stress scenarios.

Liquidity is also considered at a legal entity level based on the specific circumstances and regulatory requirements of each company. The Wealth Management Executive Committee monitors and manages liquidity risk in the Group’s banking businesses.

We seek to match liquidity of underlying investments with the anticipated redemption requirements in client portfolios. We have an established process to assess and monitor the liquidity risk profile of funds on an on-going basis.

We also review products and portfolios on a regular basis to identify and manage possible capacity constraints.

13. Risk of insufficient capital

 

The risk of insufficient capital would arise if the Group was unable to support its strategic business objectives beyond its minimum regulatory capital requirements.

 

Maintaining a strong capital base is important to our business and is a core part of our strategy. We ensure each of our regulated subsidiaries, and the Group as a whole, meet their minimum regulatory capital requirements. The Group maintains a prudent level of capital, including a significant buffer over the minimum regulatory capital requirement, which allows us to conduct our business and invest in new business opportunities that may arise.

The Group Capital Committee supports the Chief Financial Officer in exercising responsibility for the management of the Group’s capital.

The Group performs a thorough assessment of the adequacy of its capital through the ICAAP. In addition, Wealth Management in London and the Channel Islands also perform an ICAAP.