Pillar 3 Disclosures
The company's principal activity is to provide research, investor access and consultancy services to companies.
Capital adequacy and Liquidity Planning
Equity Development’s capital resources requirement will normally be the greater of its Base Capital Requirement (set out above) and it's Variable Capital Requirement.
The Base Capital Requirement for a BIPRU limited license firm is €50,000
Equity Development's authorisation is limited to corporate finance business in an advisory capacity and therefore will never have position or counterparty exposure (market or credit risk).
Therefore the Variable Capital Requirement is equal to the Fixed Overheads Requirement.
However, it is important to understand the impact of market and credit exposures on the firm, in the event that our business model changes in the future.
The Fixed Overheads Requirement is equal to 13/52 of its Relevant Fixed Expenditure (from ED's most recent audited annual financial statements submitted to the FSA) calculated as follows:
Total Revenue; plus any Loss before Taxation;
less the aggregate of the following items:
- Profit before Taxation;
- Bonuses paid out of the relevant year's profits and not guaranteed;
- Profit shares and other apportionments of profit, except for fixed or guaranteed remuneration which is payable even if the firm makes a loss for the year;
- Paid commission's shared, other than to employees, directors etc.
- Fees, brokerage and other charges paid to clearing houses, clearing firms, exchanges, and intermediate brokers for the purpose of executing, registering or clearing transactions;
- Interest payable to counterparties;
- Interest payable on borrowings to finance the firm's investment business and associated business;
- Exceptional items, provided that the firm first notifies the FSA in writing of the nature and amount of the exceptional items; and
- Losses arising on the translation of foreign currency balances.
This has and continues to be consistently less than the Base Capital Requirement for Equity Development, therefore we require liquid capital of a minimum of €50,000 at all times.
Over the last year this Base Capital Requirement was £109,000 in sterling terms.
Our Current Assets are in excess of this requirement by a considerable degree.
Equity Development's entire equity is owned by ADVFN plc, listed on the London Stock Exchange, £29m market cap with cash of over £1m as at last published results.
Due to the nature of the firm's business and regulatory permissions the following are considered low risk factors for ED and its business:
- Credit Risk – No counterparty exposure as ED is a paid research firm.
- Market Risk – No market exposure as ED is a paid research firm
- Liquidity Risk – Only if revenues drop and we are unable to meet our liabilities.
- Insurance Risk – None.
- Concentration Risk – None. ED does not lend money to other institutions.
- Residual Risk – as ED is a paid research firm
- Securitisation Risk – None.
- Operational Risk – Short of reputational damage caused as a result of Equity Development publishing a poor report, operational risk is minimised by Professional Indemnity insurance. In the event of a systems failure based at our office 65 London Wall (the principle place of business) staff and management can work remotely from home for a temporary period of time.
- Interest Rate Risk - None
- Pension Obligation Risk – None
The main risks facing the firm include:
The management of the business and the nature of the Company's strategy are most notably subject to the following risks:
The success of the world's economies could affect the business because of influence upon stock markets – both their direction and investors' interest therein. Additionally recessions can affect consumer spending power and the desire to invest in new businesses. In response to this risk, senior management keeps abreast of economic conditions around the world and tries to plan accordingly. Indeed our clients also benefit from the very deep management experience here.
Stock markets tend to anticipate economic recovery, but as growth slows management will seek to preserve cash resources by avoiding unnecessary expenditure, restricting marketing budgets, focusing on preserving existing client relationships, and if necessary lowering fees paid out to consultants and reviewing the salaried cost base.
High proportion of fixed overheads and variable revenues
A reasonably large proportion of the Company's overheads are fixed. There is the risk that any fundamental increase in an area of these fixed costs or significant reductions in revenue may lead to the inability to cover such costs.
Management closely monitors fixed overheads against budget on a monthly basis and cost-saving exercises are implemented when there is an anticipated decline in revenues.
In the technological era some products can become rapidly outdated due to development.
Clients are paying us for analytical skill and a recognizable brand – ie: these accrue with time.
RESEARCH PUBLICATIONS: CONFLICT POLICY
Equity Development Limited ('ED') is a company authorised and regulated by the Financial Conduct Authority ('FCA').
Research on its client companies produced and distributed by ED is normally commissioned and paid for by those companies themselves ('issuer financed research') and as such is not deemed to be independent, as defined by the FSA, but is 'objective' in that the authors are stating their own opinions. Our internal rules are designed to ensure that the research is indeed objective:
- 1. Any research issued by ED is approved and checked by a Director prior to distribution.
- 2. The analyst has sole responsibility for compiling forecasts and valuations.
- 3. ED does not make investment recommendations.
- 4. ED believes that analysts should be free as possible from conflicts of interest that could improperly influence the content of their work, and impair their ability to produce objective research. ED formally seeks to identify any conflicts which might or do arise.
- 5. All research on stocks where ED or its contracted analysts are involved in an advisory relationship (other than for the production, distribution and marketing of research) will be labelled as non-objective.
- 6. When ED issues research reports, it ensures that all recipients are treated fairly and that all interests are safeguarded by ensuring that the research note contains suitable information and is sent out promptly.
Stock market trading and research
Restrictions on trading, affecting members of the ED group and its employees and analysts working under contract, are applied to ensure that conflicts of interest are avoided, and that recipients are not disadvantaged by any front running.
Analysts' compensation and reward structures
ED follows a policy of outsourcing the majority of its research work to experienced investment analysts, who are retained on a contract basis.
All analysts writing research for ED are assessed prior to engagement as competent to do so and capable of matching the obligations ED has as a regulated entity.
Analysts are remunerated solely by way of cash fees specifically related to coverage of individual client companies.
Exposure to company pressure
In accordance with general principle of good practice, employees should not offer or accept an inducement to provide favourable investment research.
No person (such as a relevant issuer), other than the analyst and the appropriate Director is allowed to approve the content of investment research before publication. ED's contracts with its client companies specify that a draft research document sent to the client company prior to its issue is sent to ensure that all facts are correct.
Analysts' involvement in investment banking
As a matter of course, analysts contracted to write research on an ED client are not permitted to pitch for investment banking work with that client. Any analyst that is contracted to do investment banking related work will be deemed unavailable for research work on that client and any report written by another ED analyst on that client will be labelled as non objective.