RECORD PLC

CAPITAL REQUIREMENTS DIRECTIVE

PILLAR 3 DISCLOSURES - JULY 2020

Background

This document sets out the Pillar 3 disclosures on risk management, capital adequacy and remuneration for Record plc and all of its subsidiary companies (together 'Record' or the 'Group') as at 31 March 2020.

The disclosures were prepared in accordance with the Capital Requirements Directive ("CRD III"), the aim of which is to reduce the probability of consumer loss or market disruption as a result of prudential failure. It does this by seeking to ensure that the financial resources held by a firm are commensurate with the risks associated with its business profile and control environment.

The CRD III framework consists of three pillars:

  • Pillar 1 sets out the rules-based minimum capital requirements;
  • Pillar 2 requires the Group to assess capital adequacy in relation to actual risk profile in order to determine whether additional capital is required to cover the additional risks. This assessment is performed through the Group's Internal Capital Adequacy Assessment Process (ICAAP); and
  • Pillar 3 requires public disclosure of the Group's risk profile, risk management, capital, and remuneration.

This document describes and discloses information in relation to Record unless such information has been determined as immaterial or of a proprietary or confidential nature, as follows:

  1. Risk management;
  2. Capital requirements;
  3. Remuneration; and
  4. Financial resources and capital adequacy.

The disclosures in this document are in accordance with the BIPRU rules and are intended to show the risks that are relevant to Record and the steps Record takes to manage such risks. In particular the document discloses how Record has satisfied itself that it has sufficient capital in respect of those risks. Record plc wholly owns a subsidiary, Record Currency Management Limited, which is authorised to undertake regulated business under the Financial Services and Markets Act 2000 (as amended by the Financial Services Act 2012 and 2016) and is regulated by the FCA. The Group is a UK consolidation group and is subject to consolidated supervision. The risk management and control framework is operated at the Group level. This report is therefore prepared on a consolidated basis for Record plc and all of its subsidiaries.

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Basis and means of disclosure

The method of consolidation used for prudential purposes is the same as that used for the Group's consolidated financial statements. The Pillar 3 disclosures are published on the Group's website at: https://ir.recordcm.com/reports-and-accounts.

Frequency

This report will be made at least on an annual basis. The disclosures will be as at the Accounting Reference Date (ARD) of 31 March, and will be published within four months of the ARD. These disclosures are made for the Group as at 31 March 2020.

Verification

The Pillar 3 disclosures are subject to internal review procedures consistent with those undertaken for unaudited information published in the Annual Report; they have not been audited by Record's external auditors.

The disclosures have been prepared purely for explaining the basis on which Record has assessed certain capital requirements and information about the management of certain risks and for no other purpose. They do not constitute any form of financial statement and must not be relied upon in making any judgement on Record.

1. Risk management

The Board has ultimate responsibility for risk and the oversight of the risk management process within the business. Recognising that risk is inherent in all of the Group's business dealings, and in the markets and instruments in which the Group operates, it places a high priority on ensuring that there is a strong risk management culture embedded throughout the Group, and accountability at all levels within the business.

Risk management framework

Effective risk management and strong internal controls are fundamental to the Group's business model and are reflected in the risk management framework adopted by the Board. The risk management framework defines risk management objectives, responsibilities and the process for identifying, assessing and controlling risks within acceptable limits that impact the Group.

Such limits are defined in the "risk appetite statement" approved by the Board and include full consideration of the following:

  • the activities of the business, and the capabilities of the firm in each of these activities;
  • the objectives for the business, and the plans in place to meet these objectives;
  • the regulatory environment in which the firm operates; and
  • external factors that may affect the business.

The Board has delegated certain responsibilities to various Board and executive sub-committees, as follows:

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Audit and Risk

Provides oversight and independent challenge in relation to internal controls,

Committee

risk management systems and procedures, and external financial reporting.

Executive Committee

The decision-making body for the day-to-day operation of the business and

responsible for the identification of strategic opportunities and business

threats (i.e. business risks) to the Group.

Investment

Responsible for assessing the risks associated with changes to the Group's

Committee

investment processes or products and for ultimate approval prior to

implementation.

Risk Management

Continually reviews existing and new operational risks and maintains,

Committee ("RMC")

reviews and updates the Group's comprehensive risk register. The RMC

also reviews the nature and reasons for any operational incidents with the

objective of ensuring adequate systems and controls are in place to minimise

and preferably eliminate such incidents and their impact on clients and the

Group.

The Group's risk management framework is underpinned by the three lines of defence, as follows:

First Line: Risk Management

The first line of defence rests with Record's senior managers and business operations being responsible and accountable for the identification, assessment, management, monitoring and reporting of the individual risks and associated controls within their areas of responsibility.

Second Line: Risk Oversight

The second line of defence is provided by oversight functions such as Finance, Legal, Compliance and Risk, and Front Office Risk Management monitoring activity against defined policies and procedures.

Third Line: Risk Assurance

The third line of defence is independent assurance on the adequacy and effectiveness of the Group's risk management, control and governance processes, and is provided by Deloitte LLP as the Group's appointed internal auditor.

Additional external independent assurance for shareholders is gained through the annual statutory external audit, currently performed by PricewaterhouseCoopers LLP, and the service auditors report on internal controls provided by RSM Risk Assurance Services LLP.

Risks are also mitigated by the recruitment and retention of highly trained staff, clear reporting lines, appropriate segregation of duties and clearly defined procedures and policies. Ownership of risks is clearly identified and the Board encourages a culture of transparency and openness in all activities. Further information on Record's risk management framework is included in Record's 2020 Annual Report at: https://ir.recordcm.com/reports-and-accounts.

Risk management process

All staff, line managers and senior management have a responsibility for identifying current or emerging risks. Once identified, the risk must be clearly defined and ownership assigned and an assessment of the gross risk is made by considering the likelihood that the risk will materialise, and the impact should the risk materialise.

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Following review by the relevant committee of the controls established to manage the risk, the risk assessment process is repeated incorporating the changes to the control environment to establish the net risk position, which is monitored against the Board's risk appetite.

The Group maintains a Risk Register which records identified risks, risk owners and the gross and net risk positions, which is reviewed regularly by management. Risk owners are also responsible for ensuring the timely escalation to the appropriate forum where the risks are exceeding, or in their opinion are likely to exceed the Board's approved risk appetite.

Senior management receive regular management information on the Group's principal risks via Key Performance Indicators (KPIs), the Management Information Pack (MIP), the Risk Monitoring Matrix, and regular reports and updates from the Compliance and Risk, HR and IT directors.

In the event of an incident arising as a result of a risk materialising, the reasons for the incident will be reviewed in accordance with the Incident Management Policy to identify whether management needs to take any additional mitigating activity to prevent recurrence of any such incident. Furthermore, analysis of trends in risks and incidents is regularly undertaken within the Compliance and Risk department to identify patterns of risk behaviour that may require further investigation.

Risk categories

All identified risks are set out in the risk register, and the exposures to key risks as identified by the Board are analysed in detail in the ICAAP document, which confirms the capital requirements in light of that analysis.

The risks assessed by the business and included within the ICAAP document include: capital adequacy, conduct, reputational, strategic, business, market, credit, operational, investment, interest rate, liquidity, residual, securitisation and pensions obligation risk, where applicable.

In respect of this Pillar 3 disclosure, the Board's assessment of the principal risks to the business are set out in brief on the following page below. Further detail can be found in Record's 2020 Annual Report at: https://ir.recordcm.com/reports-and-accounts.

The Board also considers capital adequacy risk, conduct risk and reputational risk, and further information for each is given below:

Capital adequacy risk

Capital adequacy risk is the risk that the Group is unable to support its strategic business objectives due to its minimum regulatory capital restrictions. The Group has a capital and dividend policy, which seeks to ensure that capital retained is broadly equivalent to one year's worth of estimated future overheads (excluding variable remuneration), in addition to capital assessed as required for regulatory purposes, for working capital purposes and for investing in new opportunities for the business. This policy ensures a significant capital buffer over regulatory requirements, and consequently capital adequacy risk is not considered a significant risk in terms of the principal risks noted above.

The business is also exposed to more overarching risks, being conduct risk and reputational risk:

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Conduct risk

Conduct risk is defined as the risk of causing detriment to a client or damaging the integrity of the market because of poor systems or processes, or inappropriate judgement by staff in execution of the Group's business. The conduct of our staff and the strength of our internal control systems and processes are fundamental to the effective operation of the Group's risk management framework. Conduct risk is therefore evident and managed within each individual category of risk, and when combined equates to the overall conduct risk of the Group. Consequently, conduct risk is not considered as a separate risk category within the principal risks noted above.

Reputational risk

Reputational risk is the risk of loss or adverse impact arising from an unfavourable perception of the Group on behalf of clients, counterparties, employees, regulators, shareholders or other stakeholders. Reputational risk can manifest as a consequence of an occurrence of any of the Group's principal risks, either in isolation or together with other risks, and is therefore considered to form an integral part of each of the Group's principal risks. For this reason, reputational risk is not considered as a separate risk category within the principal risks noted above.

Principal risks

Strategic risk

The risk that the Group is unable to meet its strategic objectives due to

internal or external factors, such as poor business decisions, poor

implementation, inadequate resourcing or failure to respond to changes in

the business environment.

Business risk

The risk of failure of the business to generate fee income and control costs

in line with business plans due to internal and external factors including

concentration risk, people and employment risk, and the risk posed by

regulatory change.

Operational risk

Operational risks are inherent in all activities and processes performed

across the business and include the risk of loss or other impacts arising from

operational flaws including fraud or error and weaknesses in systems and

controls.

Investment risk

The risk that long-term investment performance is not delivered compared

to benchmarks, objectives or competition.

Coronavirus ("covid-19")

Covid-19 struck the business during the final quarter of the financial year ended 31 March 2020, moving from an emerging risk to a full business continuity risk, the speed and scale of disruption of which is unprecedented.

Record's business responded well to the changes enforced by the covid-19 pandemic, with continuity in operational and client servicing matters, and maintaining a full team without the need for additional

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funding or Government assistance. The business remains fully independent and capable of continuing to operate effectively under such prolonged circumstances as is necessary.

A full review of the impact of covid-19 on our business including our market, clients, people, technology and operations, governance and oversight, and our business model is provided in the 2020 Annual Report on pages 21 and 40: https://ir.recordcm.com/reports-and-accounts.

2. Capital Requirements

The Group consists of nine legal entities with UK regulated activities conducted through Record Currency Management Limited ("RCML"), the Group's FCA regulated subsidiary. The US subsidiary is registered with the SEC and CFTC in the US although regulatory compliance systems, procedures and processes are controlled centrally and supervised from the UK. Record generated £7.7m in pre-tax profits from revenue of £25.6m for the year ended 31 March 2020. Further details on the group subsidiaries are included in Note 14 of the financial statements section of the 2020 Annual Report.

Record's overall approach to assessing the adequacy of internal capital is set out in the Internal Capital Adequacy Assessment Process ("ICAAP") document. The ICAAP process involves separate consideration of risks to capital, combined with stress testing using scenario analysis. Record's regulated subsidiary is a BIPRU €50k Limited Licence firm which is subject to FCA rules under BIPRU/GENPRU, and subject to the capital requirements under CRD III. The Group is a UK consolidation group and is subject to consolidated supervision.

The Group's overall regulatory capital requirement is calculated as the highest of:

  1. The Pillar 1 capital requirement; or
  2. The Pillar 2 capital requirement; or
  3. The estimated wind-down cost.

Pillar 1 capital requirement

Record's Pillar 1 capital requirement is the higher of:

  1. €50k; or
  2. the fixed overhead requirement; or
  3. the sum of credit and market risks.

The fixed overhead requirement is calculated as one quarter of the fixed overhead costs of the preceding year.

Pillar 1 - Market risk

The Pillar 1 market risk requirement is calculated in accordance with CRD III and relates to the foreign currency position risk requirement in respect of its balance sheet exposures denominated in foreign currencies. Record's Pillar 1 Market Risk requirement at 31 March 2020 was £0.7 million.

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Pillar 1 - Credit/Counterparty risk

Credit/counterparty risk is the risk that a counterparty will not meet its obligations leading to a financial loss to the Group. The Group's exposures to credit risk arise from its trade receivables, deposits with banks, seed investments and derivatives used for hedging. Record's Pillar 1 Credit Risk requirement at 31 March 2020 was £1.5 million.

Pillar 1 Capital requirement

As at 31 March

2020

£m

Market risk

A

0.7

Credit risk

B

1.5

Sum of Market and Credit risk

C

2.2

Fixed Overhead Requirement1

D

3.6

Pillar 1 capital requirement (higher of C and D)

3.6

The Pillar 1 Capital for Record is the fixed overhead requirement, being £3.6 million as at 31 March 2020.

Pillar 2 capital requirement

Through the ICAAP, the Pillar 2 requirement uses a risk-based approach focused on more specific risk exposures identified by the business, including risks not covered by Pillar 1.

As at 31 March 2020, the Pillar 2 capital requirement was assessed to be £9.4 million.

Since the Pillar 2 capital requirement is higher than the Pillar 1 requirement and the estimated wind- down costs, this forms the basis for the Group's overall capital requirement.

Further information on Record's capital management is included in Record's 2020 Annual Report at: https://ir.recordcm.com/reports-and-accounts.

3. Remuneration

Remuneration Committee

The Remuneration Committee, comprising three independent non-executive Directors is responsible for agreeing the remuneration policy for the Group including the Group Profit Share Scheme ("GPS"), the Share Scheme, the Share Incentive Plan and the principles for salary awards and performance related pay; all factors which are considered by the Committee when determining Directors' remuneration.

1 The FOR is based on the audited expenditure attributable to the financial year ended 31 March 2020.

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Remuneration principles and policy - overview

The Group has a well-established approach to remuneration which has evolved over a number of years and has been published and communicated explicitly to shareholders.

Record's approach to remuneration is driven by long term thinking. Identifying, developing and appropriately compensating our high performers, at all levels of the business, is critical to long term business success and is aligned to both clients' and shareholders' interests.

Our key remuneration principles are:

  • A consistent remuneration structure for all employees, not just Directors, which is transparent and straightforward;
  • Our remuneration structures should reward and incentivise profitable business growth.
  • Remuneration should comprise two components: (i) a fixed salary and (ii) a variable component based on individual performance.
  • Directors' remuneration should include a deferred element which is satisfied by paying it in the form of equity.

Record's remuneration policy is designed to promote the long-term, sustainable growth of the Group, and to be consistent with the prudent management of risk. In considering the remuneration policy, the committee seeks to ensure remuneration is structured in a way that attracts, motivates and retains high calibre staff, rewards individual and corporate performance and is aligned with appropriate risk and compliance standards and the long-term interests of shareholders, clients, employees and other stakeholders.

The three-year remuneration policy in place on 31 March 2020 was approved by shareholders at the AGM in 2017. As required after a three-year cycle, the Directors are presenting their Remuneration Policy to shareholders for approval at this year's AGM on 4 August 2020, which includes four new features:

  • Commission - a commission scheme for senior employees, but not Directors, in which they are rewarded for the introduction of sustainable new business.
  • Pension - the alignment of pension contributions across all employees of the Group by April 2022, at a level of 11%.
  • GPS - a tighter gearing of the Group Profit Share to the Company's operating performance.
  • Share Option Scheme - a holding requirement such that for any options exercised between the third and fifth year, shares would be held until the end of the fifth year.

The Directors believe that the modified Remuneration Policy is more closely aligned to the strategic objectives of the Board.

The different remuneration elements are described in further detail under the Remuneration Policy section below.

The vast majority of our colleagues are shareholders and have a personal and vested interest in the long-term success of Record through equity ownership and the majority of shares in Record are currently owned by employees. It remains our policy to discuss any material changes proposed to Executive Directors' remuneration with major institutional shareholders in advance of any implementation.

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Remuneration and Risk Management

The Group has a prudent approach to risk management and meets the required standards under the FCA Remuneration Code. In accordance with the Code the Group has a remuneration policy statement and has defined a Remuneration Code Staff List. The remuneration policy promotes effective risk management and incentivises sustained long-term value creation consistent with the Group's strategic goals and does not encourage excessive short-term risk taking. All staff defined as Code Staff are required to take a significant proportion of variable remuneration in share-based payments that are required to be held for up to three years (except for the Chairman, Neil Record who already has a significant shareholding in Record plc and does not receive variable remuneration). Furthermore, the links between conduct risk, conflicts of interest and remuneration are reflected in the Group's Conduct Risk framework.

Differences in remuneration policy for Executive Directors compared to other employees as at 31 March 2020

There are common remuneration structures for Executive Directors and employees, those being base salary, benefits, pension, Group Profit Share Scheme and the Share Scheme. There are, however, different performance conditions and different requirements for share deferral and clawback provisions.

The commission scheme being proposed for approval at the AGM on 4 August for rewarding the introduction of sustainable new business will not include Directors, and pension contribution rates for Directors and employees will be aligned by April 2022.

Remuneration Policy as at 31 March 2020 - Code Staff

The following disclosures should be read in conjunction with the Remuneration Report on pages 70 to

85 of the 2020 Annual Report and Accounts (available on the Group's website: http://ir.recordcm.com/reports-and-accounts).

BIPRU 11.5.18 requires disclosure of remuneration policy and practices for those categories of staff whose professional activities have a material impact on a firm's risk profile in a manner that is appropriate to the size, internal organisation and the nature, scope and complexity of its activities. Record deems such personnel to be the Code Staff within the business (including, but not restricted to, Board Directors and other Executive Committee members). The main elements of the remuneration policy for Code Staff are given below.

Fixed Pay

Base Salary/Fees- all Code Staff receive either a salary (for employees and the Chairman) or fees (for non-Executive Directors), which are commensurate with the incumbent's role, responsibilities and experience and with reference to competitive market rates in the industry.

Benefits and Pensions- all salaried Code Staff are entitled to receive a range of benefits, which are provided in line with all other employees across the Group. Similarly, all salaried Code Staff are entitled to join the Group Personal pension scheme, with the choice of receiving their employer pension contributions as cash if they elect not to make contributions into the scheme. Non-salaried Code Staff do not receive any additional benefits and are not entitled to join the pension scheme.

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Variable Pay

Short-Term Incentives

With the exception of the Chairman, all salaried Staff are entitled to join the Group Profit Share Scheme, which rewards individual and collective performance and is set within a range of 25% to 35% of pre- profit share operating profit. Code Staff are required to take a proportion of their payment in shares, with the option to elect a further proportion in shares - all shares are subject to a lock-up restriction for up to three years. The Group Profit Share Scheme rules contain clawback provisions which allow for the repayment of profit share payments in the event of a material breach of contract, material misconduct or a restatement of financial accounts which would have led to a reduction in any Profit Share award.

Long-Term Incentives

All salaried staff are eligible to participate in the Record Share Scheme, which allows the Remuneration Committee to grant options over up to 2% of the market capitalisation of Record plc per annum.

Performance conditions applicable to options granted to Executive Directors differ from those granted to other Code Staff and employees. The former are subject to performance conditions based on Record's annual cumulative Earnings per Share (EPS) growth and vest on a stepped basis from three to five years, and are also subject to clawback provisions. For other employees and Code Staff, performance conditions for options are based on the employee being in employment on the relevant vesting date and to the extent personal performance conditions have been satisfied. All awards made to staff other than Executive Directors vest between one and four years from grant, subject to the performance conditions being met and are not subject to clawback provisions.

Non-salaried Code Staff and the Chairman are not entitled to join the Share scheme.

Quantitative information on remuneration of Code Staff - Year Ended 31 March 2020

The business considers that it operates in one business area, that of an asset manager providing currency management services. Aggregate remuneration paid to Code staff in the year was £3.6m (comprising salary and/or fees, plus pre-deferral profit share, and employer pension contributions), which was paid to 13 members of senior management

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4. Financial Resources and capital adequacy

The table below summarises the composition of regulatory capital for the Record Group based on the audited financial statements as at 31 March 2020, and excluding non-controlling interests. The capital comprises share capital, share premium, profit and loss and other reserves - the Group does not hold additional Tier 1 or Tier 2 capital. Further information on Record's capital management and financial resources is included in Record's 2020 Annual Report at: https://ir.recordcm.com/reports-and-accounts.

Financial Resources: 31 March 2020

£m

Issued share capital

0.1

Share premium account

2.3

Retained earnings1 and other reserves

25.6

Tier 1 Capital before deductions

28.0

Deductions from Tier 1 Capital

(0.4)

Tier 1 Capital after deductions

27.6

Capital adequacy - Pillar 1

£m

Tier 1 Capital after deductions

27.6

Pillar 1 capital requirement

(3.6)

Pillar 1 (rules-based) surplus

24.0

Capital adequacy - Pillar 2

£m

Tier 1 Capital after deductions

27.6

Pillar 2 capital requirement

(9.4)

Pillar 2 (risk-focused) surplus2

18.2

  1. Retained earnings include those audited earnings attributable to the year ended 31 March 2020.
  2. Final and special dividends totalling £3.1m for the year ended 31 March 2020 are due to be paid on 11 August 2020, subject to approval of the final proposed dividend at AGM on 4 August. These have not been deducted from the financial resources as at
  1. March 2020 above.

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Record plc published this content on 28 July 2020 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 28 July 2020 16:40:04 UTC