10 | BUSINESS REVIEW|
Managing risk
The Directors are committed to a strong control environment throughout the Group. F&C has a culture that emphasises the importance of rigorous disciplines and procedures to safeguard the interests of our clients and other key stakeholders.
Effective execution of strategy Key Risk The success of the Group depends upon the successful formulation, articulation and execution of its strategy and the ability to adapt to changes in the business environment to ensure it remains competitive. Growth in third-party institutional and consumer AUM and, more critically, revenues, is key to the successful delivery of strategy. Poor execution may lead to a lack of growth and competitiveness and reduced profitability.
Mitigation The Group has the articulated objective of achieving competitive scale in areas of strategic focus through consistent investment in products, channels and human resources. The Group has sought to ensure that its product development, distribution and investment processes are aligned, positioning it to deliver a competitive product offering in areas of key focus. Clearly defined distribution targets allow management to monitor progress in AUM and revenue growth.
Uncertain economic outlook Key Risk The UK and global macroeconomic outlook remains uncertain. Client investment preferences, and the Group’s AUM and revenues, may be impacted by underlying economic and market conditions. In addition, a substantial proportion of the Group’s revenues are denominated in Euros. Adverse market conditions in one or more asset classes or changes in economic factors may lead to a reduction in AUM and/or revenues. In addition, actual or perceived changes in market or economic outlook may lead clients to alter their allocations to particular products or asset classes.
Mitigation The Group offers competitive products across a wide range of asset classes, including equity, fixed income, property and Multi-asset, limiting its exposure to the impact of market volatility in any one market or asset class. Further, a number of the Group’s investment-solutions products are much longer term in nature, and their performance and marketability is less impacted by short-term market volatility. The Board periodically consider hedging the Group’s Euro-denominated cashflows.
Investment performance Key Risk The delivery of strong investment performance depends upon the successful management of client portfolios against targets, benchmarks and/or peer groups. Failure to meet these objectives could lead to outflows, may impact the Group’s ability to win new mandates or assets and may potentially expose the Group to greater risk of mandate or regulatory breach.
Mitigation Fund Managers are responsible for interpreting and effectively managing performance and risk associated with trading ideas/strategies. The Group operates an independent Investment Risk Oversight team which monitors and challenges risks within client portfolios and provides appropriate management information.
The Group Performance and Risk Review Committee meets regularly (normally monthly) to ensure an appropriate level of oversight is applied to investment performance and risk.
Loss of key employees
Key Risk The success of the Group depends on the support of its employees in key areas including investment, distribution, marketing and product development. Over the last eighteen months, the Group has rationalised its business and headcount in line with its strategic goals and ambitions. The loss of key employees may prevent the Group from winning new business or meeting its strategic goals, and may lead to client outflows and the loss of key mandates.
Mitigation The Group’s compensation model targets the retention of key employees, through competitive cash and long-term remuneration. All employees receive an annual appraisal which reviews their performance against clearly defined objectives with the aim of encouraging strong performance. Reliance on key individuals is mitigated by the Group’s team-based approach to investment management. Moreover, we seek to reduce our dependence on key staff through the recruitment of suitably skilled individuals and by ensuring succession plans are in place for senior roles to provide emergency or immediate coverage.
Breach of client or portfolio limits
Key Risk Many of the Group’s investment mandates include specific limits, restrictions and/or exclusions on the construction or content of portfolios agreed with the client. In addition, certain pooled fund products may be subject to specific regulatory or fiscal limits, restrictions and/or exclusions. Any breach of client mandate may render the Group liable to pay financial compensation.
Mitigation AGroup-wide database is utilised to record all mandate-related rules. Fund managers provide the Group’s first line of defence in ensuring that funds are managed within mandate. In addition, a control function provides a regular review of mandate compliance.
Regulation
Key Risk The UK, European and Global regulatory environments are rapidly evolving. The expectations of financial regulators are changing and regulated Groups must embed regulatory compliance in their business models to an even greater extent than previously required. Regulation has become, in many areas, more complex and onerous and regulated entities are faced with shorter timelines to interpret and implement new regulation. There is substantial complexity from overlapping regulatory directives. Regulatory change may lead to consolidation in the marketplace, the launch of new products, withdrawal or commoditisation of existing products and increased reliance on specialist third-party service providers as
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