Pillar 3 Disclosure 2013 - Raphaels Bankcompliance with all laws and regulations. In particular this includes maintaining adequate levels of capital and liquidity. The Board meets

CAPITAL REQUIREMENTS DIRECTIVE Pillar 3 Disclosure Document 2015

(As at 28th February 2015)

R. Raphael & Sons plc Pillar 3 Disclosures 2015

Contents 1. Introduction ............................................................................................................................................. 1

2. Risk management objectives and policies ............................................................................................... 2

2.1 Principal risks and uncertainties ........................................................................................................ 2

2.2 Credit risk ........................................................................................................................................... 2

2.3 Operational risk ................................................................................................................................. 3

2.4 Liquidity risk ....................................................................................................................................... 3

2.5 Interest rate risk ................................................................................................................................ 3

2.6 Foreign exchange risk ........................................................................................................................ 4

2.7 Regulatory risk ................................................................................................................................... 4

3. Board and Committee structure.............................................................................................................. 4

4. Capital resources ..................................................................................................................................... 6

4.1 Adequacy of capital ............................................................................................................................ 7

4.2 Capital adequacy assessment process ............................................................................................... 7

4.3 Leverage Ratio .................................................................................................................................... 7

5. Risk weighted exposure amounts & minimum capital requirement ...................................................... 8

5.1 Credit risk and provisions ................................................................................................................... 9

5.2 Operational risk ................................................................................................................................ 11

5.3 Interest rate risk ............................................................................................................................... 12

6. Remuneration policy and practices ....................................................................................................... 12

7. Article 89 disclosure .............................................................................................................................. 14


1

1. Introduction

Purpose

This document provides background information on the approach used by R. Raphael & Sons Plc (‘the

Bank’) to manage risk and maintain its capital resources. As such, it includes details of:

• the approach to risk management, its policies and objectives;

• the governance structure of the Bank, including Board and Committees;

• asset information and capital resources; and

• compliance with the EU Capital Requirements Regulation.

Disclosures are for the Bank at the Accounting Reference Date (ARD) 28th February 2015. The document

is updated at least annually and will be published as soon as practicable after the ARD.

Legislative framework

The Capital Requirements Directive IV (CRD IV, 2013/36/EU) and the Capital Requirements Regulation

(CRR, 575/2013/EU), usually jointly referred to as CRD IV, came into force on 1 January 2014 and set out

the capital requirements for banks, building societies and related institutions across Europe. It is the

European implementation of Basel III, which sets out global standards for capital and liquidity adequacy,

and is now overseen by the Prudential Regulatory Authority (PRA) for banks and building societies in the

UK.

The Bank aims to ensure that it protects depositors’ funds by having sufficient capital even during a

significant economic downturn.

As well as setting out capital requirements, the CRD IV framework also requires various disclosures to be

made covering key aspects of the Bank’s risk management policies and procedures, including the main

risks faced by the Bank and the governance thereof.

CRD IV is split into 3 parts, known as Pillars:

Pillar 1 - Minimum capital requirements, on a risk based approach

Pillar 2 - Assessment of capital requirements by the Bank and the PRA

Pillar 3 - Disclosure

This disclosure document deals with the requirements laid down in Pillar 3 and the information provided

is in accordance with the rules laid out in the Part 8 of CRR.

R. Raphael & Sons approach

Under Pillar 1 the Bank has followed the Standardised Approach when calculating its minimum capital

requirements. This uses prescribed formulae for calculating the amount of capital to be held in respect

of credit, operational and market risks.

As required by Pillar 2, the Bank’s Board has performed a detailed assessment of the risks facing the

Bank and has calculated the amount of capital that it considers necessary to cover these risks. This

includes detailed stress tests of risks and financial forecasts to determine whether additional capital is

required to mitigate these risks, including in a severe economic downturn.


2

The process of determining the total capital requirements is called the Internal Capital Adequacy

Assessment Process (ICAAP) and this is reviewed by the PRA through a Supervisory Review and

Evaluation Process (SREP). See section 4 for further details.

Verification

The Pillar 3 disclosures are subject to internal review procedures broadly consistent with those

undertaken for unaudited information published in the Bank’s Annual Report. The information

contained in this document therefore has not been audited by the Bank’s external auditors, except to

the extent it is deemed to be equivalent to those made under accounting requirements.

The disclosures have been prepared purely for explaining the basis on which the Bank has prepared and

disclosed 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 judgment on the Bank.

Media and location

This document will be published on the Bank’s website, www.raphaelsbank.com.

2. Risk management objectives and policies The Bank operates in an environment that exposes it to a wide range of risks. To mitigate these risks,

the Board has continued to develop and refine its Enterprise Risk Management (‘ERM’) framework over

the past year, which is used to identify the types and quantum of risks to which the Bank is prepared to

be exposed and how those risks are to be mitigated and managed.

Some of the key elements of the Bank’s ERM framework are:

The use of risk appetite and tolerance statements throughout the business;

The use of risk registers to identify key risks and ensure they are actively monitored and

managed;

The maintenance of up to date policies and procedures, including fully tested Business

Continuity Plans; and

The delegation to various committees of the oversight of how well the Bank manages risk. The

main committees in this respect are the Audit and Risk Committee, the Executive Committee

(EXCO) and the Asset & Liability Committee (ALCO).

Ultimate responsibility for the overall framework and the risk management strategy continues to reside

with the Board and all aspects of the ERM framework are reviewed, amended where appropriate and

approved at least annually by the Board to ensure they remain in line with best practice and are

consistent with the Bank’s strategic objectives.

2.1 Principal risks and uncertainties The principal risks to which the Bank is exposed and an outline of the primary means by which those

risks are managed are set out below.

2.2 Credit risk Credit risk is the risk that a loss will be incurred if a customer or counterparty fails to meet its

obligations.


3

Credit risk arises principally from the Bank’s hire purchase facilities and other loans and advances to

customers and group companies, the investment of liquid assets with treasury counterparties or in

short-term securities, and amounts due to the Bank in the settlement of ATM disbursements. In the

case of sports season ticket loans, student support loans, medical loans, professional firms short-term

funding and credit cards, an important mitigant of the credit risk is the fact that the Bank has an

arrangement whereby a third party will buy back outstanding balances that are more than three months

in arrears. In the event of any failure of these third parties, the Bank would take over administration of

the loans directly. All activities that give rise to credit risk are undertaken in accordance with the

Board’s approved policies, and the risk is actively monitored by the EXCO and/or the ALCO.

2.3 Operational risk Operational risk is the risk of direct or indirect loss resulting from inadequate or failed internal

processes, people and systems or from external events arising from day-to-day operating activities.

The Bank seeks to mitigate this risk through a variety of measures including maintaining up-to-date

policies and procedures for all key internal processes, ensuring its staff receive ongoing training,

investing in appropriate systems, having documented and tested business continuity plans and,

wherever possible, ensuring that it has a diversified spread of counterparties, business partners and

suppliers. The EXCO is the Bank’s principal forum for monitoring operational risk which it does through

a variety of means including the use of risk registers, operational loss databases, control self

assessments and regular reviews of operational divisions and functional areas by Compliance and

Internal Audit.

The Bank recognises conduct risk as a specific sub-set of operational risk. Raphaels defines conduct risk

as ‘’the risk that, through Raphaels’ actions or inactions, one or more of its products and services fail to

deliver fair outcomes to its customers’’. The conduct risk governance framework mirrors other aspects

of the Bank’s ERM framework and is being actively managed at all levels within the Bank through

training, the establishment of risk appetite and tolerances and the use of appropriate Key Risk Indicators

(‘’KRI’’) and other management information.

2.4 Liquidity risk Liquidity risk is the risk that the Bank either does not have available cash or cannot obtain sufficient

financial resources to enable it to meet its obligations as they fall due, or only secure such resources at

an excessive cost.

The Bank’s policy is to maintain liquid assets at all times which are adequate, both as to amount and

quality, to ensure that there is no significant risk that its liabilities cannot be met as they fall due both in

business-as-usual and stressed scenarios. The Liquidity Policy details liquidity risk limits set by the Board

and day-to-day responsibility for ensuring these are adhered to rests with the ALCO. The Bank

completes an Individual Liquidity Adequacy Assessment (‘ILAA’) at least annually to assess its

compliance with the liquidity systems and controls requirements as detailed in the PRA Handbook. The

availability of funds to the Bank on the retail deposit market is supported by the Financial Services

Compensation Scheme’s coverage of the Bank’s deposit liabilities to retail customers and could be

jeopardised if this coverage was in question, but this risk is regarded by the Board as remote.

2.5 Interest rate risk Interest rate risk is the risk of reductions in income arising from unfavourable movements in interest

rates and/or reductions in the fair value of financial instruments.

This risk is managed within approved limits set by the Board and is monitored by the ALCO.


4

2.6 Foreign exchange risk Foreign exchange risk is the risk of loss arising from unfavourable movements in currency exchange

rates.

The principal area of the Bank’s business where foreign exchange risk arises is within the ATM Division,

where Euro and US Dollar notes are held in ATMs prior to them being dispensed. Additionally the Bank

is exposed to foreign exchange risk when ATM transactions are settled in a different currency to the

original transaction. This risk is managed within approved limits set by the Board and is monitored and

managed by the ALCO. While a large proportion of card services cardholder liabilities are in currencies

other than sterling, the equivalent bank balance or investment is held in the same currency to ensure a

matched position and to mitigate any foreign exchange risk.

2.7 Regulatory risk Regulatory risk is the risk that the Bank does not adhere to the changing regulatory environment in

which it operates thereby threatening the achievement of the firm’s goals and objectives, possibly

damaging its reputation and, in extreme cases, giving rise to it being censured or fined by a regulator.

The Bank seeks to mitigate such risks by ensuring there are a suitable level of expertise within each of its

operating divisions which is then supported by a strong central compliance team and the use of risk-

based compliance monitoring plans to monitor and ensure the Bank’s ongoing adherence to relevant

laws and regulations. Finally and reflecting the three lines of defence model employed by the Bank, at

least annually, Internal Audit also undertakes a review of the Bank’s overall management of regulatory

risk.

3. Board and Committee structure The Bank’s Board is ultimately responsible for the strategy of the Bank, its risk management and its

compliance with all laws and regulations. In particular this includes maintaining adequate levels of

capital and liquidity. The Board meets at least ten times a year and comprises five executive Directors

and four non-executive Directors.

The Board has delegated a range of activities to each of the EXCO, the ALCO, the Audit and Risk

Committee, the Remuneration Committee and the Performance Committee. The Board and each of the

committees have their own Terms of Reference which are reviewed and if necessary updated at least

annually.


5

The committee structure is illustrated below.

Audit and Risk Committee

The Committee’s duties include, among other things:

reviewing the effectiveness of the Bank’s policies and procedures for the identification,

assessment and reporting of risks;

setting the terms of reference and activities of the internal audit function;

reviewing the relationship with the external auditors; and

reviewing consistency of accounting policies from year to year and across the Bank.

The Committee is made up of three Non-executive Directors. Permanent invitees to each meeting of

the Committee are the Bank’s Chairman, the Executive Directors and the Head of Internal Audit.

Periodically members of the central compliance team and other members of staff will be invited to

attend meetings. The Committee also has private meetings with both internal and external audit

without the Bank’s executive management being present.

Remuneration Committee

The Remuneration Committee is appointed by the Board. It reviews and sets the remuneration for all

Bank staff. It comprises the Bank Chairman, the Chairman of the Audit and Risk Committee and the

CEO.

Executive Committee

The Bank’s EXCO is chaired by the CEO. Its members comprise the Executive Directors, and the Heads of

each division as well as key support function heads. The Committee meets at least 10 times per annum

and its responsibilities include agreeing budgets and considering proposals for introducing new products

for the Bank to offer to clients.

Asset and Liability Committee

The ALCO acts as a sub-committee of the EXCO and is primarily responsible, under delegated authority

from the Board, for the day-to-day management of the Bank’s liquidity and for ensuring that it operates

within capital adequacy limits established by the Board.

Board

Remuneration Committee

EXCO

Asset and Liability

Committee

Performance Committee

Audit and Risk Committee


6

The ALCO normally meets each week although generally no separate meeting of the Committee will take

place in weeks when there is a meeting of either the EXCO or the Board. The Committee is made up of

the Executive Directors.

Performance Committee

The Performance Committee comprises the Executive Directors. It meets quarterly and its primary role

is to undertake detailed analysis of each of the Bank’s operating divisions including looking at actual

performance against budget, the adequacy of the resources available to each division and the likely

future performance taking in to account all relevant external and internal factors.

Board responsibility for risk management

A core objective for the Bank is the effective management of risk. The responsibility for identifying and

managing the principal risks ultimately rests with the Bank’s Board of Directors. The Board has ultimate

responsibility for setting the Bank’s strategy, risk appetite and control framework.

The Board considers that, at 28 February 2015, it had in place adequate systems and controls with

regard to the Bank’s profile and strategy.

4. Capital resources The Capital Resources of the Bank are calculated in accordance with Part 2 of CRR.

The capital resources at 28th February 2015 totalled £23,396k, made up of £23,346k tier 1 and £50k

tier 2. This is analysed as follows:

Capital resources

£k

Share capital 13,600

Share premium 900

Profit and loss account 9,210

23,710

Deductions:

Investments (227)

Deferred taxation (137)

Total tier 1 23,346

General provisions 50

Total tier 2 50

Total capital resources 23,396


7

4.1 Adequacy of capital The Bank is required to maintain capital resources above the minimum required by the PRA, together

with a further internal buffer. In order to do this, the Bank needs to generate sufficient levels of profits

that will be retained and add to reserves.

4.2 Capital adequacy assessment process Complementing the Business Plan and as already referred to, the Bank undertakes an ICAAP, which aims

to ensure that the Bank’s capital resources are sufficient to deliver the Plan’s objectives, both in normal

and stressed conditions. The ICAAP is formally reviewed and updated at least annually.

This process involves reviewing all risks to which the Bank is exposed or potentially could be exposed

and making an assessment of capital required to mitigate the potential impact of those risks. Included

in this process is a detailed assessment of the results of the Bank’s stress models based on a number of

stressed economic scenarios. The key risk areas are detailed in section 2.

To help assess the ongoing adequacy of capital, the Bank has established an overall appetite for each of

the main risks to which it is exposed and established tolerances for each such risk, within which the

Bank is expected to operate. Furthermore each operating division of the Bank has its own more detailed

risk tolerances that are consistent with those established for the Bank overall. The use of divisional

tolerances is one of the important means by which risk is controlled throughout the Bank. The Bank’s

performance against these tolerances is monitored regularly at divisional level and reviewed at least

monthly by the EXCO and the Board.

4.3 Leverage Ratio The leverage ratio is defined as the ratio between the Tier 1 capital and the total on and off balance-

sheet exposure, without taking into account any risk weighting. Its objective is to reduce the risk of

excessive leverage.

The Bank calculates its Tier 1 Capital on the basis that will apply once CRD IV has been fully phased in. In

addition to the on-balance sheet assets, the leverage ratio also takes off balance-sheet exposure into

account. At 28 February 2015, the Bank reports a leverage ratio of 6.76%, as shown below.

£k

Capital:

Tier 1 Capital (fully phased in definition) 23,346

Exposure values:

Balance sheet assets 344,118

Off balance sheet assets 1,347

Regulatory adjustments – tier 1 fully phased in definition (364)

Total exposures 345,101

Leverage ratio 6.76%


8

5. Risk weighted exposure amounts & minimum capital requirement The assets of the Bank are analysed by risk category and assigned weightings according to the level of

risk entailed. Credit risk weightings are determined by the ’Standardised Approach’ within the CRR with

the minimum capital required being 8% of the risk weighted amount. The following table shows the

minimum capital requirements at 28th February 2015.

Exposure

£k

Risk weight

%

Risk

weighted

assets

£k

Minimum

capital

required

£k

Government or central banks 114,544 0% 0 0

Other short-term securities 8,860 20% 1,772 142

Loans and advances to banks 133,074 20% 26,615 2,129

Loans and advances to customers 24,476 35%/75%/100% 18,326 1,466

Net amounts receivable under hire

purchase agreements and

finance leases

42,603 75% 31,952 2,556

- Exposures in default 57 100% 57 5

Fixed and other assets 20,504 0%/20%/100% 11,425 914

Off balance sheet exposures 1,347 100% 1,347 108

Total credit risk requirement 345,465 91,494 7,320

Operational risk capital requirement 1,855

Market risk capital requirement – foreign currency PRR 201

Total Pillar I capital requirement 9,376


9

5.1 Credit risk and provisions The following table shows the residual maturities of all credit risk exposures at 28th February 2015.

Not more

than 3

months

£k

>3 months

and up to 1

year

£k

>1 year and

up to 5

years

£k

>5 years

£k

Total

£k

Government, central

banks, securities 81,606 41,798 - - 123,404

Loans and advances to

banks 133,074 - - - 133,074

Loans and advances to

customers 8,925 7,014 8,445 92 24,476

Net amounts receivable

under hire purchase

agreements and

finance leases

4,249 11,538 26,873 - 42,660

Other items 17,023 - 2,695 3,481 23,199

Total 244,877 60,350 38,013 3,573 346,813

Credit risk by geographical area is detailed below.

UK

£k

Other

£k

Total

£k

Government, central banks, securities 63,219 60,185 123,404

Loans and advances to banks 62,184 70,890 133,074

Loans and advances to customers 24,476 - 24,476

Net amounts receivable under hire purchase

agreements and finance leases 42,660 - 42,660

Other items 23,199 - 23,199

Total 215,738 131,075 346,813


10

The table below provides analysis of the performing and past due loan exposures for loans and advances

to customers and net amounts receivable under hire purchase agreements and finance leases. Amounts

shown relate to the overall loan balance, not the amount of arrears.

Loans and

advances to

customers

£k

Hire purchase

agreements

and finance

leases

£k

Specific

provisions

£k

Performing loans 24,476 41,734 -

1 to 3 months past due - 1,142 274

3 to 6 months past due - 248 191

6 months + past due - 406 405

At 28 February 2015 24,476 43,530 870

Provisions

The Bank will make specific and general provisions for losses based on an appraisal of the expected

recoveries on loans and other advances. Specific provisions are made in respect of loans and other

assets that are in arrears, together with the Directors’ appraisal of individual loans where appropriate.

General provisions are made where it is considered that there is impairment in the value of assets at the

year-end that is not already covered by specific provisions.

Loans, advances and other receivables are written down to estimated realisable value when there is no

realistic prospect of recovery.

Amounts charged in the profit and loss account represent losses written off in the accounting year,

together with the net change in provisions. Interest in respect of all loans is credited to the income and

expenditure account as it becomes receivable. Irrecoverable interest is written off against interest

receivable.

Further details relating to the above can be found in the 2015 Annual Report and Financial Statements.

The table below summarises movements in provisions in the financial year.

General

£k

Specific

£k

Total

£k

At 28 February 2014 50 1,131 1,181

Charge for the period - 248 248

Utilised in the period - (509) (509)

At 28 February 2015 50 870 920


11

Counterparty credit risk

The selection of counterparties and the approval of limits involve consideration of ratings assigned by

the major Credit Rating Agencies and any other background information or other market intelligence

available. The ALCO reviews counterparty limits quarterly and recommends changes to such limits as

necessary. At least annually, the Audit and Risk Committee review and approve the counterparty credit

limits. The overall Policy governing the limit structure for counterparties is set out in the Large Exposure

Policy and Liquidity Policy, both of which are reviewed and approved annually by the Board.

In order to qualify as an acceptable counterparty, the institution or sovereign risk must have a minimum

Tier 1 capital of £500 million (or equivalent in currency) and must have a rating from one or more of the

rating agencies listed below. Other unrated counterparties may be added if specific approval is granted

by ALCO.

Short-Term Rating Required

Moody’s P1, P2 or P3

Standard & Poors A1+, A1, A2 or A3

Fitch F1+, F1, F2 or F3

Limits may be temporarily suspended by ALCO in the event of adverse market intelligence. No

transactions can be undertaken with counterparties which do not have a pre-approved limit. Where

appropriate, exposure to counterparties is also monitored on a consolidated basis. The maximum

exposure to any individual counterparty is limited to the Bank’s total capital.

The table below shows the breakdown of counterparty exposures, credit assessments and risk weights

at 28th February 2015. Ratings quoted are according to Moody’s.

Exposure

£k

Credit

quality

assessment

step

Risk weight

for short

term

exposures

Government and central bank 114,544 1 0%

Short term securities 8,860 1 20%

Institutions (Aaa to Aa3) 30,385 1 20%

Institutions (A1 to A3) 90,785 2 20%

Institutions (Baa1 to Baa3) 11,904 3 20%

Total credit risk requirement 256,478

5.2 Operational risk Operational risk is calculated under the ‘Basic Indicator Approach’ as set out in the CRR and is therefore

calculated as 15% of the Bank’s average net income over the previous three years as detailed in the

table below.


12

2013

£k

2014

£k

2015

£k

Interest receivable and similar income 5,169 7,074 8,789

Interest payable and similar charges (1,611) (1,759) (2,231)

Commissions and fees receivable 6,900 7,652 11,715

Commissions and fees payable (9,448) (11,253) (12,158)

Other operating income 8,498 9,405 10,360

Total 9,508 11,118 16,475

Basic Indicator (3 year average) 12,367

Capital Requirement (15%) 1,855

5.3 Interest rate risk The interest rate gap report covers all assets and liability interest rate mismatches, including a sensitivity

scenario showing the impact of a 2% parallel shift of interest rates on the net present value of the net

gap between asset and liability cash flows, as detailed below.

NPV

Change to

interest rate

Net gap 23,724

NPV sensitivity to + 2% interest rate shift 22,570 (1,154)

NPV sensitivity to - 2% interest rate shift 24,978 1,254

6. Remuneration policy and practices The policy and level of remuneration is determined by the Bank’s Remuneration Committee noted in

Section 3 above.

Non-executive Directors’ remuneration

The CEO recommends the level of remuneration paid to Non-executive Directors based on external data

from financial institutions of a similar size and complexity. Non-executive Directors are only entitled to

fees and do not receive salary, bonus incentives, pensions or other taxable benefits.

Executive Directors’ remuneration

The level of Executive Directors remuneration is comparable within the industry taking account of the

specific role performed. The remuneration is made up of basic salary, discretionary bonus, pension

contributions and private health care.


13

Basic salary

The basic salary for Executive Directors takes into account market forces, responsibility and individual

performance.

Discretionary bonus All bonuses are paid on a discretionary basis and are subject to the approval of the Remuneration

Committee.

Pension benefit

A money purchase scheme is operated by the Bank and contributions are made for all qualifying staff.

There is also a death in service scheme which pays a lump sum equal to twice basic salary.

Other benefits

The Bank provided healthcare cover for Executive Directors and all managers during the year.

Contracts of employment

No Executive Director or member of the senior management team has an employment contract with a

notice period longer than one year in line with recommendations made in the UK Corporate Governance

Code.

Board diversity

The Bank is committed to diversity and works hard to ensure that all staff are offered equal

opportunities throughout their career with the Bank. The organisation is determined that nobody is

discriminated against, directly or indirectly, on the basis of age, ethnic or national origin, religion or

beliefs, sexual orientation, gender, marital status or disability. This commitment applies equally to

members of the Board. All Board appointments are made on merit, in the context of the skills,

experience, independence and knowledge which the Board as a whole requires to be effective.

Code staff

Code staff are defined by the Regulators as “staff that have a material impact on the firm’s risk profile”;

this includes staff that perform significant influence functions, senior managers and risk takers.

The table below sets out the aggregate quantitative remuneration for code staff in relation to their

services for the Bank for the year ended 28th February 2015:

Fixed

remuneration

£

Variable

remuneration

£

Total

remuneration

£

Deferred

variable

remuneration

£

Senior Management 884,203 445,640 1,329,843 322,430

Other Staff 160,847 20,000 180,847 -

Non-executive Directors 83,000 - 83,000 -


14

7. Article 89 disclosure Article 89 of CRD IV requires credit institutions and investment firms in the EU to disclose annually,

specifying by Member State and by third country in which it has an establishment, the following

information for the year ended 28 February 2015:

R. Raphael & Sons Plc:

Type of Entity Nature of

activity Location

Turnover

(£k)

Profit or

loss before

tax (£k)

Corporation

tax paid (£k) Number of

employees

Credit

Institution

Financial

Services

United

Kingdom

22,552 2,039 299 100

Documents

Pillar 3 Disclosure 2013 - Raphaels Bankcompliance with all laws and regulations. In particular this includes maintaining adequate levels of capital and liquidity. The Board meets