Regulatory captial and risk management
Regulation
The Principal Group has two subsidiaries, Principal Investment Management Limited (PIM) and Border Asset Management Limited (BAM), which are regulated by the Financial Services Authority (FSA). The Group is part of the Sanlam Limited Group for regulatory capital purposes, though PIM and BAM are still required to meet their own regulatory capital requirements.
PIM is classified as a BIPRU 125k limited licence firm and its Pillar 1 capital resources requirement is set at the higher of €125k, its Fixed Overheads Requirement of £1,843k, or the sum of its Credit Risk and Market Risk requirements of £308k. PIM held Tier 1 capital totalling £3.5 million as at 31 December 2010 and after deducting illiquid assets, this exceeded the Pillar 1 requirement by 52%.
BAM is classified as a BIPRU 50k limited licence firm and its Pillar 1 capital resources requirement is set at the higher of €50k, its Fixed Overheads Requirement of £395k, or the sum of its Credit Risk and Market Risk requirements of £97k. BAM held Tier 1 capital totalling £1 million as at 31 December 2010 and after deducting illiquid assets, this exceeded the Pillar 1 requirement by 229%.
The Group has carried out its own assessment of the amount of capital required to cover its business needs and risks, as required to determine its Pillar 2 capital resources requirement. Based on this assessment the Group has sufficient capital to meet its Pillar 1 and 2 capital resources requirements.
Risk Management
The Group has established a risk management framework. This assesses each risk for the likelihood of its occurrence and its impact, after allowing for the controls in place. The Group continually monitors its current and future capital requirements through this risk management framework.
Market risk
The principal risk to the ongoing success of the Group is a major and sustained downturn in stockmarket levels, which would adversely impact revenue streams. The Directors believe that, whilst the market conditions remain challenging, this presents a number of opportunities for a well-run and profitable business and that the Group will continue to win significant levels of new business whilst retaining tight control of expenditure.
The other significant risks faced by the business
Reputational risk
The Group has an excellent reputation as a provider of high quality investment management services. There is a risk that significant damage to reputation could arise from poor client service or regulatory censure and lead to the loss of existing clients as well as impacting on the ability to gain new clients. This risk is minimised through the maintenance of a culture of high ethical and professional standards. The Group's compliance department ensures conformity with the relevant regulations and statutes in its dealings with clients and the Group's processes and controls are also reviewed by the Sanlam Group internal audit function.
Regulatory risk
The Group's business is highly regulated and a breach of regulations could lead to a fine or disciplinary action against the Group or its staff. The Group monitors actual and impending changes in regulation in order to assess the impact on its business and plans to ensure any changes are implemented in a timely manner.
Competition risk
The Group operates in a competitive environment and faces the risk of client loss from a failure to respond to market changes. The Group seeks to minimise this risk through its investment in its staff. The Group regularly reviews and benchmarks its remuneration packages in order to retain and recruit high quality staff.