ANNUAL REPORT AND FINANCIAL STATEMENTS 2012 | 101
35. Financial risk management
Overview The Group has exposure to a number of business risks. The Board of Directors has overall responsibility for the Group’s risk management arrangements, but has delegated the implementation and operation of the Board policies to management. The Group’s risk management policies and the risk management framework for identifying, monitoring and managing risks across the Group, including strategic and operational risks, are outlined in the Directors’ Report on Corporate Governance on page 31 and the key risks facing the Group, together with actions taken to mitigate these risks are outlined on pages 10 and 11 of the Business Review.
The Directors consider it appropriate to differentiate between those financial risks which directly impact the Group and those which indirectly impact the Group due to the risks borne by our clients and the consequential impact on the Group’s assets under management and revenues. The Group’s direct or indirect exposure to financial instruments arises from the following financial risks:
• Credit risk • Liquidity risk • Market risk, which comprises: – Market price risk – Foreign currency risk – Interest rate risk
This note presents information on the Group’s direct or indirect exposure to each of the above risks, the Group’s objectives, policies and processes for measuring and managing risk and the management of the Group’s capital. Note 36 provides numerical analysis of the Group’s financial instrument exposure to such risks, including relevant sensitivity analysis, at the reporting date.
Indirect earnings risk through client assets As an active fund manager, the Group is responsible for managing assets in accordance with the mandates specified by our clients. The assets managed by the Group are, to varying degrees, subject to the financial risks outlined above. While these risks could result in financial loss or gain through a change in asset value, these risks and rewards are fully borne by, or fall to the benefit of, our clients.
However, as the majority of the Group’s revenues are quantified as a percentage of assets under management (generally on a quarterly, monthly or daily basis), the Group’s income is impacted by movements in client assets which are caused by the exposure to financial risks. As a result of the direct link of revenues to the value of client assets, the Group’s interests are aligned to those of our clients.
A key risk to our business is that of poor investment performance, which could lead to the subsequent loss of client mandates. A key role of the heads of F&C’s investment functions is to monitor the fund performance achieved by our investment professionals. Where it is considered necessary, actions are taken to change process or personnel with a view to attaining top quartile performance. The Group has the ability to earn performance fees from a number of our clients based on absolute performance or where out-performance of the benchmark or set objective is achieved. These arrangements reinforce the alignment of the Group’s interests with those of our clients.
Direct earnings and capital exposure The Group has direct exposure to the following risks in respect of financial instruments on the Statement of Financial Position:
• Credit risk – is the risk of financial loss to the Group if a client or counterparty to a financial instrument is unable to pay, in full, amounts when due, and arises principally from the Group’s cash and cash equivalents and trade debtors and accrued income.
• Liquidity risk – is the risk of the Group failing to maintain adequate levels of financial resources to enable it to meet its financial obligations as they fall due, or can only do so at a significantly increased cost.
• Market price risk – the risk that the fair value or future cash flows of financial instruments will change due to movements in market prices, other than foreign exchange rates or interest rates.
• Foreign currency risk – the Group is exposed to foreign currency risk from the Sterling value of cash flows arising from transactions denominated in a foreign currency. In addition, foreign currency risk arises from translating balances denominated in a currency other than Sterling and therefore the Sterling value of those balances could vary adversely.
•
Interest rate risk – the Group is exposed to interest rate risk primarily through the variable-rate interest received on cash deposits and through borrowing at fixed and floating rates.
A fuller analysis follows of the financial risks associated with the Group’s financial instruments, together with the objectives, policies and processes to manage the Group’s exposure to those risks.
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48 |
Page 49 |
Page 50 |
Page 51 |
Page 52 |
Page 53 |
Page 54 |
Page 55 |
Page 56 |
Page 57 |
Page 58 |
Page 59 |
Page 60 |
Page 61 |
Page 62 |
Page 63 |
Page 64 |
Page 65 |
Page 66 |
Page 67 |
Page 68 |
Page 69 |
Page 70 |
Page 71 |
Page 72 |
Page 73 |
Page 74 |
Page 75 |
Page 76 |
Page 77 |
Page 78 |
Page 79 |
Page 80 |
Page 81 |
Page 82 |
Page 83 |
Page 84 |
Page 85 |
Page 86 |
Page 87 |
Page 88 |
Page 89 |
Page 90 |
Page 91 |
Page 92 |
Page 93 |
Page 94 |
Page 95 |
Page 96 |
Page 97 |
Page 98 |
Page 99 |
Page 100 |
Page 101 |
Page 102 |
Page 103 |
Page 104 |
Page 105 |
Page 106 |
Page 107 |
Page 108 |
Page 109 |
Page 110 |
Page 111 |
Page 112 |
Page 113 |
Page 114 |
Page 115 |
Page 116 |
Page 117 |
Page 118 |
Page 119 |
Page 120 |
Page 121 |
Page 122 |
Page 123 |
Page 124 |
Page 125 |
Page 126 |
Page 127 |
Page 128 |
Page 129 |
Page 130 |
Page 131 |
Page 132 |
Page 133 |
Page 134 |
Page 135 |
Page 136 |
Page 137 |
Page 138 |
Page 139 |
Page 140 |
Page 141 |
Page 142 |
Page 143