Charles Schwab, U.K., Limited

Charles Schwab, U.K., Limited
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Pillar 3 Disclosures

Charles Schwab UK Limited Pillar 3 and remuneration disclosures


The Pillar 3 disclosure of Charles Schwab UK Limited (‘the Firm’) is set out below in accordance with the Capital Requirements Directive (‘CRD’) (Directive 2013/36 EU) and the Capital Requirements Regulation (‘CRR’)(Regulation (EU) no 575/2013/EU and Alternative Investment Fund Management Directive (‘AIFMD’) (Directive 2011/61/EU) of the European Union establish the regulatory capital framework across Europe governing the amount and nature of capital credit institutions and investment firms must maintain.

In the United Kingdom, the CRD and AIFMD have been implemented by the Financial Conduct Authority (‘FCA’) in its rules through the Prudential Sourcebook for Investment Firms (‘IFPRU’) and The Interim Prudential Sourcebook for Investment Business (“IPRU (INV)”).

The CRD consists of three “Pillars”:

  • Pillar 1 sets out the minimum capital amount that meets the firms’ credit, market and operational risk capital requirement;
  • Pillar 2 requires the firm to assess whether its capital reserves , processes, strategies and systems are adequate to meet Pillar 1 requirements and further determine whether it should apply additional capital, processes, strategies or systems to cover any other risks that it should be exposed to; and
  • Pillar 3 requires disclosure of specified information about the underlying risk management controls and capital position to encourage market discipline.

The AIFMD adds further capital requirements based on the Alternative Investment Fund (‘AIF’) assets under management and professional liability risks.

The CRR set out in the provisions for Pillar 3 disclosure. This document is designed to meet the Firms’ Pillar 3 obligations under Part Eight of the CRR articles (articles 431 – 455).

The Pillar 3 disclosure document has been prepared by Charles Schwab UK Limited (‘the Firm’) and is verified by Senior Management. Unless otherwise stated, all figures are as at the 2017 end. Pillar 3 disclosures will be issued on an annual basis after the year end and published as soon as practical when the audited accounts are finalized.

The Firm is permitted to omit required disclosures if it believes that the information is immaterial such that omission would be unlikely to change or influence the decision of a reader relying on that information for the purpose of making economic decisions about the firm. In addition, the Firm may omit required disclosures where it believes that the information is regarded as proprietary or confidential. For these purposes proprietary information is that which, if it were shared, would undermine the Firms’ competitive position. Information is considered to be confidential where there are obligations binding us to confidentiality with our customers, suppliers and counterparties. The Firm has only omitted quantitative information relating to its Remuneration disclosure on the grounds that it is confidential (relating to an individuals’ privacy) and disproportionate.

Group Structure and Regulatory jurisdictions

The Firm is authorized and regulated as a fully operational broker-dealer by the FCA and as such is subject to minimum regulatory capital requirements. The Firm is categorized as an ‘IFPRU 125k Limited License Firm’ Collective Portfolio Management Investment Firm (‘CPMI’) by the FCA for capital purposes. It is an investment management firm and as such has no trading book exposures.

The Firm is a wholly owned subsidiary of Schwab International Holdings, Inc. (“SIH”). SIH is part of The Charles Schwab Corporation (“Schwab”), a U.S. publicly traded financial services company, listed on the NYSE under ticker symbol “SCHW” and supervised by the Federal Reserve Bank. As a U.S.-listed company Schwab must adhere to the Sarbanes Oxley legislation.

The Firm’s material risks identified derive primarily from the ability of Charles Schwab & Co, Inc. (“CS&Co.”), a U.S. broker dealer registered with the Securities and Exchange Commission (“SEC”) and member of the self-regulatory organisation the Financial Industry Regulatory Authority (“FINRA”), to continue to meet the requirements under the Inter-Company Services Agreement. All risks identified are within the Firms’ risk appetite.

Although part of a group, the Firm is managed on a “stand alone” for liquidity purposes and management do not foresee any impediments to the prompt transfer of capital between group entities should the need arise. There are no differences in the basis of consolidation for accounting and prudential purposes.

Governance arrangements, the management body and competence

The Senior Management Team meet on a regular basis. The meetings demonstrate how the Senior Management team oversees and is accountable for the implementation of governance arrangements and initials the effective and prudent management of the Firm.

Initial ongoing assessments of the competence of staff are conducted. All members of the Senior Management Team and other FCA approved persons are required to attest to their ongoing compliance with the fitness and properness obligations of the FCA approved persons’ process. On an ongoing basis all staff including the Senior Management Team undergo training on a variety of regulatory topics on an annual basis.

Risk Management Framework

The Firms’ Board is represented by local and CS&Co employees and as such they are directly connected. The Firm has established a risk management process in order to ensure that it has effective systems and controls in place to identify, monitor and manage risks arising in the business. The risk management process is overseen by the Firm’s Chief Executive Officer with the Senior Management Team taking overall responsibility for this process and the fundamental risk appetite of the Firm. The Compliance Officer has responsibility for the implementation and enforcement of the Firms’ risk principles.

Senior Management discuss current projections for profitability, cash flow, regulatory capital management, business planning and risk management. Senior Management engage in the Firms’ risks through a framework of policy and procedures having regard to the relevant laws, standards, principles and rules (including FCA principles and rules) with the aim to operate a defined and transparent risk management framework. These policies and procedures are updated as required and reviewed periodically.

Operational matters are reviewed on basis by the Senior Management Team on a regular basis. Management accounts demonstrate continued adequacy of the Firm’s regulatory capital are reviewed regularly. Appropriate action is taken where risks are identified which fall outside of the Firm’s tolerance levels or without the need for remedial action is required in respect of identified weaknesses in the Firm’s mitigating controls.

In addition, other actions are taken to mitigate risks that still remain at the Firm. These include a robust oversight model. The Firm operates as closely as possible to U.S. branch processes with additional procedures, controls, and corporate governance steps to cover for UK legislation and specific risks. The firm also benefits from back up and assistance from specialist business areas such as the Anti-Money Laundering (AML) department and International Supervision & Control.

Being part of the “SIH” the Firm’s risks are escalated, business projections are prepared and capital is managed by specialist departments who support the International business. All work is reviewed by the Firms’ Compliance Officer and Chief Executive Officer (who is also the Vice President of SIH). Further, the Firm is subject to CS & Co, Intelligent Advisory Supervisor Procedures, where it undergoes routine supervision and control assurances.

The process of review of capital adequacy is an ongoing process each month. Additionally, the ICAAP is reviewed and updated annually. The UK Compliance Officer is responsible for the annual process of review and will update the ICAAP accordingly. It is reviewed and challenged by a third party vendor accountant and Schwab area experts and finally by the Firms’ Board (“the Board”). The final discussion and approval is given by the Board at the Board meeting.

Mitigation of the firms’ risks

The Firm sets an annual frequency of review of the ICAAP by its Board unless events dictate that an evaluation is necessary more often.

The Firm has adopted the standardised approach to credit and market risk and the calculations below have been made on that basis. How each material risk is controlled and mitigated is set out in the Specific Risks Considered section below.

The Senior Management Team note that market, credit, operational, liquidity, insurance and business are the main areas of risk to which the Firm is currently exposed. Annually, the Senior Management team formally review their risks, controls and other risk mitigation arrangements and assess their effectiveness.

Market risk

Since the Firm takes no trading book positions on its balance sheet and is not directly responsible for managing assets, it has only indirect market risk exposure via the wider group. The Firm does not deal on its own account, therefore the trading book and other securities firm risks set out in IFPRU 6 are borne by its parent company.

Further exchange rate risk exists because there are discretionary payments (e.g. Key Contributor Grants) that are granted in USD, but if the deferred payment is made it is denominated in GBP. To mitigate currency risk these grants are included in Pillar 2 market risk and amortized. The change in the value of expenses due to foreign exchange fluctuations have not been material to the Firm in the past. The settlement of debtor balances takes place without undue delay, the timing of the amount becoming payable and subsequently being paid is such that it is not considered to present a material risk to the Firm. The Firm calculates its foreign exchange Risk by reference to the rooms in Article 92 (3) of the CRR and apply is an 8% risk factor to its foreign exchange exposure.

Credit Risks

The number of credit exposures related to the Firms’ investment management/broker clients is limited. Management fees are drawn monthly from the funds managed and performance fees are drawn annually where applicable. Commissions are settled promptly at the conclusion of the transaction. Since the debtors investment fees are primarily inter-group this is not considered to be a significant risk. The Firm considers that there is little risk of default by its sole clients and all bank accounts are held with large international credit institutions.

There have not been a history of bad debts and as such the amount that the Firm is required to hold under counterparty risk in respect of the monthly income due is considered to be more than adequate to cover for such an eventuality. Given the nature of the Firm’s exposures no specific policy for hedging and mitigating credit risk is in place. The Firm uses the standardized approach detailed in IFPRU 4.2 of the FCA Handbook when calculating risk weighted exposures.

Title II of the Capital Requirements Regulation (“CRR”) when calculating risk weighted exposures in respect of its debtors. The credit risk amounts to 8% of the total risk weighted exposure. All balances are weighted according to their category and credit rating.

Operational Risk

The Firm is not subject to an operational risk requirement and no waiver has been sought to enable the firm to use such a requirement in place of the Fixed Overheads Requirement (“FOR”) as there is no perceived benefit from so doing. That said, set out below is tan outline of the Firm’s controls and mitigation for Operational risk.

The Firm has no significant history of operational failures which have resulted in unintended costs being incurred. The Firm analyses its operational risk within the context of its risk management framework. This brings together an analysis of all possible risks that can have an effect on the business and considers the interconnectivity of those risks. Specifically, Charles Schwab UK Limited is part of the Schwab Business Continuity Plan which considers people risk, business process and technology risk in the event of an incident. Also there is a separate risk assessment for data management risk. The firm manages these Operational risks in line with industry best practice. Most of the standard stockbroker operational tasks are undertaken by the Parent staff and as a result, staff and the risks are borne by the parent company.

Liquidity risk

The Firm has always had sufficient liquidity within the business to meet its obligations as they fall due and there are no perceived threats to this situation. The Firm stands alone on an unconsolidated basis. The sole source of business and income is from the parent company in the form of monthly payment for accounts introduced as per the Inter Company Services Agreement. This works on budgeted cost plus a tiered percentage basis. The cash position of the firm is closely monitored by the Firms’ Compliance Officer and members of the Parent company’s Treasury Corporate Finance team as required by the Firms’ Capital and Liquidity Policy. Accordingly, if the need arose, necessary steps could be taken with permission sought from the Board either to reduce the level of drawings or provide further capital infusions as per the Firms’ Contingency Funding Plan. The Firm has elected to adopt the material holdings approach when calculating its capital resources and as such illiquid assets have not been deducted.

Insurance risk

There is no Professional Indemnity Insurance in place. However, group insurance is held in respect of office contents, business records, business interruptions, public liability, employers’ liability and legal expenses. The hardware that is part of the firm’s fixed assets is insured and provided for in depreciation. The risk from travel involved in the business is covered by a detailed travel insurance policy. There are no perceived issues with the credit worthiness of the insurer.

Unencumbered assets

In accordance with Article 443 of the CRR, the below table provide details of encumbered and unencumbered assets. As asset is considered encumbered if it;
  • has been pledged, or
  • is subject to any form of arrangement to secure, collateralise or credit-enhance any on-balance-sheet or off-balance-sheet transaction from which it cannot be freely withdrawn.


  Carrying amount of encumbered assets Fair value of encumbered assets Carrying amount of unencumbered assets Fair value of unencumbered assets
Assets 229677   2054961  
Equity instruments        
Debt securities        
Other assets 229677   2054961  

The Firm confirms its Capital Adequacy

As a result of its ICAAP review, it is considered that the Firm holds adequate Pillar 1 and Pillar 2 capital for the size and complexity of business. At year end, the firm held £1.4 million in capital, well in excess of the regulatory requirement.

The Firm has established a policy of maintaining capital resources in excess of its capital resources requirement. This is considered to provide more than sufficient working capital for the purposes of meeting the needs of the business.

The firm expects to continue to have adequate capital over the next 1-2 years for the following reasons:
  • No significant unplanned capital expenditure is anticipated.
  • The Firm anticipates controlled growth over that period, with any uplift in expenditure being more than matched by a lift in income. To the extent that there may be a time lag between incurring increased costs in order to generate further revenue, this would be covered by the excess capital currently held or alternatively extra capital could be infused as per the Firms’ “Capital and Liquidity Policy”.
  • The Firm is remunerated on a revenue sharing basis as per the Inter Company Services Account Agreement.
As at 31 December 2017 Actual
Capital resources 548 588 656 1,417
Capital requirement – regulatory pillar 1 (100%) 298 298 382 534
Capital requirement – incl. buffer pillar 2 (130%) 387 387 497 695
Surplus – regulatory pillar 1 (100%) 250 290 274 883
Surplus – incl. buffer pillar 2 (130%) 161 201 159 722
*Solvency ratio (%) regulatory pillar 1 (100%) 184% 197% 172% 265%
*Solvency ratio (%) incl. buffer pillar 2 (130%) 142% 152% 132% 204%
* Solvency ratio is capital resources divided by capital requirement expressed as a percentage for both the regulatory requirement under pillar 1 and with an internal capital guideline minimum of 130%.

†The figures for 2017 and 2018 are based upon the new IFPRU €125K classification for CSUK effective from being operational in mid-June 2017.

No estimates of appropriations of profit have been included in the budgeted figures; the firm intends to retain a healthy surplus of capital resources in line with current levels.

CS current Disclosure on Remuneration

Decisions made regarding remuneration all made by the Compensation Committee at a Group Level. For more information about the compensation committee please see

The “Total Rewards” compensation methodology includes basic pay bonuses and benefits. it is designed to support achievement of business goals now and in the future to reward, attract and retain great employees; to provide fair, competitive pay that rewards both Firm and individual employee performance; to create a culture of meritocracy and ownership with employees are rewarded for their contributions and have the opportunity to participate in its success.

Code staff performance is assessed annually by line managers and then compared with peers that the manager of a manager level to ensure consistency a reward for good performance.

The variable component of pay such as a bonus awards are totally discretionary; if the Group does not meet targeted earnings bonuses are not paid funding is determined each year based on a percentage of the SCWH earnings per share.

Code staff performance is assessed annually as detailed above. Variable components are paid only if both Group targets and individual objectives are met.

Quantitative information is not given on the grounds of individual privacy. The Firm considers that this approach takes into account the remuneration principles proportionality rule.