Pillar 3 Disclosure

Square Mile Investment Services Limited - MIFIDPRU 8 Disclosure

Background

This document sets out the disclosures required under MIFIDPRU 8 for Square Mile Investment Services Limited (“SMIS”, “Firm”) as at 31 December 2022, which is the end of the Firm’s last accounting period.

SMIS is authorised and regulated by the Financial Conduct Authority (FRN: 625562) and is categorised as a non-small non-interconnected (“Non-SNI”) MIFIDPRU Investment Firm.

This disclosure has been prepared on a solo basis and is proportionate to the size, internal organisation and nature, scope and complexity of SMIS’s activities.   SMIS does not fall within MIFIDPRU 7.1.4R and as such MIFIDPRU 8.7 (Investment Policy) does not apply to it.

This disclosure will be made annually and updated if there are any significant changes during the intervening period.   All MIFIDPRU 8 disclosures will be made on the Firm’s website.  

Governance Arrangements

The governing body of SMIS is the Board of Directors and this body has overall responsibility for the Firm and approves and oversees the strategy and governance of the Firm.  Full details of the Board and the other relevant committees are set out below.

SMIS has the following committees in place which together form the Firm’s governance arrangements:

• SMIS Board – this Board has 3 executive members (the CEO, COO and CIO) and meets at least quarterly.   The Board has overall responsibility for ensuring that SMIS is effectively managed in line with FCA regulations.   It delegates some functions to the other Committees detailed below.  
• Executive Management Team – this Committee is made up of the senior management of the firm and is in place to lead the business on a day-to-day basis.   In addition, the EMT is responsible for implementing and monitoring the process of risk management.  The committee meets formally on a monthly basis and informally on a weekly basis.
• Finance Risk and Compliance Committee – this Committee comprises the CEO, COO and Financial Controller and meets monthly.   It is responsible for oversight of finance, compliance matters, operational risk management and the systems and controls in place at the Firm.  
• In addition to the above Committees, the SMIS Board reports into the Board of its parent company Square Mile Investment Consulting and Research Limited (“SMICR”) which comprises 3 non-executive directors and 3 executive members (the CEO, COO and CIO), the Audit and Risk and Remuneration Committees.

All Committees have a documented Terms of Reference and standing agenda to ensure that all relevant matters are discussed at the relevant Committee meeting.   This enables the Firm to ensure that it has effective and prudent management, including segregation of duties and the prevention of conflicts of interest.   SMIS ensures that it promotes the integrity of the market and the interests of clients in any activities it undertakes.  

Risk Committee

In accordance with MIFIDPRU 7.1.4R, the Firm is not required put in place a Risk Committee.   Risk Management is the responsibility of the Executive Management Team and is regularly assessed at the Finance, Risk and Compliance Committee and Board meetings and as part of the risk management process.  

Number of Directorships

The following table sets out the directorships held by the directors of the SMIS Board.  

As per MIFIDPRU 8.3.2R, the Firm has not included directorships where they are either held in organisations which do not pursue predominantly commercial objectives or those held within the same group.

Diversity

The Firm values diversity in all its forms, including cognitive diversity. Our belief is that bringing together a diverse range of people with different perspectives leads to the best outcomes for the business and our clients. We also seek to ensure all our people are respected, valued and listened to and are able to make a contribution to the business. This approach to diversity applies to the whole firm including the management body.  

Our belief is that meeting the on-going needs of our people can only be achieved by developing a working environment and culture that allows us to build a competitive and sustainable advantage in the market.

We will seek to achieve this through:

• Open and honest communication.
• Employing good people who are focused on getting the job done and done well.
• Providing clear leadership on what the business is seeking to achieve and why.
• Making decisions quickly whilst being able to demonstrate why decisions have been made and their intended consequence.
• Providing opportunities for existing Employees to challenge themselves and grow their experience and skill sets.
• Support employees who are prepared to take risks with their own careers and goals.
• Providing, where at all possible, the opportunity to align personal objectives with business ones.

The Firm believes it is currently meeting the objectives and targets set in relation to diversity.  

Risk Management Objectives and Policies

The Board of SMIS is responsible for the total process of risk management, as well as forming its own opinion on the effectiveness of the process.  The Board, in liaison with the executive directors and senior management, sets the risk strategy policies.  The Board decides SMIS’s appetite or tolerance for risk, which is set out in the ICARA, and confirms those risks it will accept and those it will not take in the pursuit of its goals and objectives, which is determined by the net risk rating of each individual risk.  In addition, the Board ensures that SMIS has implemented an effective, on-going process to identify risk, to measure its potential impact against a broad set of assumptions and then to ensure that such risks are actively managed.  All risks are documented in the risk matrix and responsibility for all risks are assigned to a member of the senior management team.  Risks are all reviewed regularly depending on their risk rating.  

The Board will, at least annually, conduct a review of the effectiveness of SMIS’s system of internal controls.  The review will cover all material controls, including financial, operational and compliance controls and risk management systems.

As noted above the Firm is not required to put in place a Risk Committee. 

MIFIDPRU 4  (Own Funds) Risks

The level of own funds held by the Firm reflects the potential harms that might impact SMIS including those related to its clients and the market in which it operates.   The Firm has considered all harms highlighted by FCA and the following were deemed to be applicable to SMIS:

1. breach of an investment mandate, resulting in the portfolios and clients being exposed to risks outside of the specified tolerance or to investments which are otherwise unsuitable for the model’s mandate;
2. trading or dealing errors that result in losses to clients;
3. outages in, or other problems with, the Firm’s systems that cause disruption to the continuity of the Firm’s services (for example, by preventing the Firm being able to issue trading instructions), leading to financial losses for clients;
4. provision of unsuitable investment advice, resulting in clients suffering losses;
5. failure of significant clients/counterparties which the Firm relies on to generate significant proportion of revenue;
6. significant operational events (e.g. failure of key systems/internal fraud);

All these harms and the likelihood of a risk crystallising have been assessed and the Firm has determined that it will hold additional capital to cover potential dealing losses. 

MIFIDPRU 5 (Concentration Risk)

The Firm monitors and controls all sources of concentration risk and those that are relevant to SMIS are:

• Earnings Concentration Risk

This is the risk that the Firm generates a significant proportion of its revenue from a small number of clients and therefore the impact should it lose one or more of those clients.The Firm regularly reviews this concentration risk and at present does not have any concerns.

• Deposits Concentration Risk

Firms are exposed to concentration risk when depositing cash with a narrow range of credit institutions.SMIS annually reviews where it holds it cash deposits, and as part of this review considers the concentration risk.Due diligence is undertaken on any third party with whom the Firm holds cash deposits.

The Firm does not have any material concentration risks at present.  

MIFIDPRU 6 (Liquidity)

This is the risk that the Firm does not have sufficient resources available to meets its obligations as they fall due.  

The Firm’s cash is either held within a UK bank account or a money market fund and is not encumbered.   All assets and liabilities are denominated in Sterling.  

The Firm does not believe that it is materially exposed to any of the following material harms:

• currency conversion risk;
• restrictions on the Firm’s ability to access cash in a timely manner;
• mismatch between maturity of assets and the liabilities the Firm has;
• intra day obligations; or
• any requirements due to off-balance sheet arrangements.

The Firm does not rely on any debt to satisfy its liquidity needs and reviews the liquidity position as part of the monthly reporting on finances.

Own Funds

As at the year end of 31 December 2022, SMIS had own funds of £2,480,586 which was made up of fully paid up ordinary share capital and audited reserves.  

Own Funds Requirement

Note:  SMIS only has a K-AUM requirement as all other requirements are not applicable. 

The Firm regularly monitors whether it has sufficient own funds to meet its own funds requirement and in addition to this to cover the own funds threshold requirement, to ensure it meets the overall financial adequacy rule.

Remuneration Policies and Practices

Qualitative Disclosures

Overview

The Board of the Parent Company, SMICR, has appointed a Remuneration Committee whose membership consists of three Non-Executive Directors and one Executive Director and operates within a defined Terms of Reference and meets at least annually.   The Remuneration Committee is ultimately responsible for ensuring there is a robust remuneration policy (which is a Group level policy) and the remuneration practices are aligned with its risk tolerance.  The Compliance Officer will ensure that the Square Mile Group’s Remuneration Policy complies with the relevant legislation and regulations and in addition the policy is reviewed by an independent compliance consultant.

In order to support the long-term business strategy, the remuneration strategy adopts a top-down multi-year framework.  Variable remuneration is only paid based on the performance of the Group’s business as a whole and on the judgement of the Remuneration Committee.   In addition, the performance of the business line and individual are considered but only after the liquidity and own funds requirements for the Firm have been considered based on 12-month forecasts and current and future risks have been considered.

The schedule of activities for the Remuneration Committee includes:

• Confirmation of basis for bonus schemes for all staff
• Review and approval of Sales Incentive Scheme
• Review and approval of any long-term incentives for staff
• Confirmation that decisions on remuneration changes or bonus schemes align to the requirements of this policy
• Review of risks identified on the Risk Matrix which relate to remuneration
• Review of whether remuneration is aligned with the group’s business strategy
• Whether this policy complies all relevant legal requirements.

The Firm does not apply the following provisions as it meets the conditions in SYSC 19G.1.1R(2):

• Shares, instruments and alternative arrangements
• requirement to have a retention policy
• deferral
• discretionary pension benefits

Types of Remuneration

Fixed remuneration is staff’s salaries and primarily reflects a staff member’s professional experience and organisational responsibility as set out in the staff member’s job description and terms of employment. It is pre-determined, non-discretionary and not dependent on performance.

Variable remuneration includes:

• Bonus payments which are based on performance and should reflect long-term performance, as well as performance above and beyond their job description.  All bonus payments are in cash. 
• A Sales Incentive Scheme for selected members of the distribution team which provides a share of revenues received from clients won and retained, with the objective of providing an incentive to promote and retain Square Mile services to clients.  This is paid predominantly in cash with a proportion paid in shares in the parent company to ensure alignment of long-term interests.

The Firm will ensure that the fixed and variable components of the total remuneration are appropriately balanced, including ensuring that the fixed component represents a sufficiently high proportion of the total remuneration. This allows full flexibility in relation to variable remuneration, including the ability to pay no variable remuneration.

In the assessment of performance and determining the level of variable remuneration the Firm will consider:

• Financial metrics – these will look at the performance of the Group, Firm, business unit as well as the performance of the individual.   Long term performance and consideration of risks will also be taken into consideration.
• Non-Financial metrics - conduct is crucial to the compliance culture of the Group, if an employee shows poor conduct, this may override their performance in financial areas. Conduct is therefore the biggest metric within non-financial considerations. Other non-financial metrics the Group may consider include:
  • the building and maintenance of positive customer relationships and outcomes;
  • alignment with the Group’s strategy or values, for example by displaying leadership, teamwork or creativity.
  • adhering to the Group’s Compliance Policies & Procedures; and
  • meeting other non-financial targets relating to environmental, social and governance factors and diversity and inclusion.

All variable remuneration is adjusted for risk (both financial and non-financial), including both current and future risks and taking into account the liquidity and capital.  

All variable remuneration is subject to in-year adjustments or clawback arrangements. These will specifically apply where a Material Risk Taker was involved in or was responsible for conduct that meant the Group suffered financially or where the Material Risk Taker failed to meet the standards of fitness and propriety expected of them. This would include cases of fraud or negligence against the Group, its clients or services. 

The Group will set different clawback periods and criteria for different Material Risk Takers based on the nature of their role at the Group, the risks impacted by that role and the time frame over which the risks could materialise.

The Group will in a very limited number of circumstances pay guaranteed variable remuneration, namely:

• Sign on Bonuses

The Group will only pay these in the year the person joined the Group and must have a strong capital base to do so and it must only make these payments on rare occasions, such as when a new joiner has lost their bonus by leaving their previous employment

• Retention Bonuses

These can only occur at a specific point in time or after a defined event.This could for example be after a restructuring or specific project and may be subject to the individual meeting certain performance objectives.

• Severance Payments

The Group’s policy for making severance payments is that the Group will start with the statutory minimum that would be due to that individual and then there will be negotiations with individuals to determine the amount due.The Group does not set a maximum or limit and will ensure severance payments reflect the individual’s performance over time and do not reward failure or misconduct.

• Buy out awards

If the Group offers remuneration packages buying out a Material Risk Taker’s previous employment contract, it must align with the Group’s long-term interests. There will also be provisions on periods of retention, deferral, vesting and risk adjustments that correspond to outstanding, unvested variable remuneration under their previous employment contract.

Material Risk Takers

The Material Risk Takers of the Firm, which are those individuals whose professional activities have a material impact on the risk profile of the Firm/Group, are the Chief Executive Officer, Chief Operating Officer, Chief Investment Officer and prior to him leaving the business in April 2023 Chief Distribution Officer.

When determining which staff fall within the definition of Material Risk Takers the Firm consider the ability of an individual to impact risk within:

• Operational procedures, systems and controls;
• The market in which the Group operates;
• The conduct and culture of the Group, including its reputation; and
• The Square Mile Group’s financial standing and capital requirements.

Quantitative Disclosures

In accordance with MIFIDPRU 8.6.8R the Firm confirms the following for the period 1 January 2022 to 31 December 2022.