104 | FINANCIAL STATEMENTS | Notes to the Consolidated Financial Statements


35. Financial risk management continued At 31 December 2012,the Group had some £142m of Guaranteed Fixed Rate Loan Notes which mature in December 2016 together with some £116m of Fixed/Floating Rate Subordinated Notes in issue. The earliest repayment date for these Subordinated Notes is 2016, but this can be extended at the option of the Group to 2026. In addition, the Group has the option to defer interest payments on this subordinated debt, but if it elects to do so then no dividend can be paid to Ordinary Shareholders until the cumulative amount of any unpaid interest due on the subordinated debt is settled in full. No such interest payments have been deferred.


The Board Reserved List prohibits the use of derivatives including futures, options and forward contracts, in respect of the Group’s net assets, without prior Board approval, recognising the general principle of seeking to minimise capital loss.


Regulatory capital requirements The Group is required to maintain a minimum level of capital in accordance with the Capital Requirements Directive (CRD) prescribed in the UK by the Financial Services Authority (FSA).


The Group has a waiver, granted by the FSA, from meeting any minimum capital requirements under the consolidated supervision rules of the CRD. This waiver expires in April 2016.


At 31 December 2012, there were 14 regulated companies in the Group, of which 10 are registered in the United Kingdom and are subject to regulation by the FSA. This includes F&C MPF which, being a regulated insurance firm, as opposed to an investment firm, is not part of the consolidation Group for regulatory capital reporting purposes. Overseas regulated companies, registered in the Republic of Ireland, The Netherlands, Portugal and Hong Kong are subject to regulatory capital requirements set out by their respective local regulatory authority, as embedded within the legislation of those jurisdictions.


Regulations set out the measurement of Capital Resources and Capital Resources Requirements (CRR) to determine the regulatory capital surplus or deficit. This CRR is referred to as the Pillar 1 capital requirements under CRD.


For the UK-regulated investment firms, the CRR is the higher of: • •


the sum of the ‘credit risk capital requirement’ and the ‘market risk capital requirement’; and the ‘fixed overhead requirement’.


Credit risk represents the risk of a party being unable to meet its obligations to a firm and is calculated using risk weighted percentages applied to the various exposure amounts. The market risk for F&C represents the risk of loss from fluctuations in exchange rates and is calculated as a percentage of the total of the long or short positions, denominated in foreign currencies, whichever is the greater. The fixed overhead requirement is calculated as a quarter of a firm’s relevant fixed annual expenditure in the previous year’s audited Financial Statements.


The regulated companies are required to submit financial returns to the FSA, or the local regulatory authority for overseas companies, setting out the calculation of the regulatory capital surplus (or deficit). The Group’s regulated companies are required to submit financial returns monthly, quarterly or semi-annually and the Group must submit a consolidated return semi-annually.


The CRD requires the Group to conduct an Internal Capital Adequacy Assessment Process (ICAAP), referred to as Pillar 2 capital requirements. The objective of this process is to ensure that companies have adequate capital to enable them to manage risks not deemed to be adequately covered under the Pillar 1 minimum requirements. This is a forward-looking exercise which includes stress-testing key risks, considering how the company would cope with a significant market downturn for example, and an assessment of the Group’s ability to mitigate the risks.


All of the Group’s regulated entities maintained surpluses of regulatory capital throughout 2011 and 2012.


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