1. Introduction
The Capital Requirements Directive IV (CRD IV) was a package of major reforms to the European Union’s capital requirements regime for banks and investment firms, which included the Directive and also the Capital Requirements Regulation (CRR). They established a framework governing the quality and quantity of capital that banks and investment firms must maintain.
CRD IV has been implemented in the UK by the Financial Conduct Authority (FCA), through amendments to its Handbook, including the General Prudential Sourcebook (GENPRU), the Prudential Sourcebook for Banks, Building Societies and Investment Firms (BIPRU) and the Prudential Sourcebook for Investment Firms (IFPRU) and the Senior Management Arrangements, Systems and Controls Sourcebook (SYSC).
The capital framework consists of three ‘Pillars’:
- Pillar 1 - Specifies the minimum capital requirements that firms are required to meet for credit, market and operational risk;
- Pillar 2 - Sets out a supervisory review process that requires a firm to carry out an overall assessment of the capital that is required to meet all of the risks to which a firm is exposed and whether any additional capital is required for risks that are not adequately covered by Pillar 1 (which is undertaken through the Internal Capital Adequacy Assessment Process (ICAAP));
- Pillar 3 - Introduces public disclosure of qualitative and quantitative information and is designed to promote market discipline by providing market participants with information on a firm’s capital, risk exposures and risk management processes and also requires certain disclosures on remuneration.
2. Basis of Disclosures
Kroll Issuer Services Limited (KIS) is authorised and regulated by the FCA. This document is designed to meet Kroll's Pillar 3 disclosure obligations in accordance with Chapter 11 of BIPRU, which deals with Pillar 3 disclosure.
Firms are permitted to omit required disclosures if it is believed that the information is immaterial such that the omission would not change or influence the decision of a reader relying on that information. In addition, firms are permitted to omit required disclosures where it is believed that the information is regarded as proprietary or confidential. In our view, proprietary information is that which, if it were shared, would undermine our competitive position. Information is considered to be confidential where there are obligations binding us to confidentiality with our customers, suppliers, or counterparties.
3. Frequency of Publication
This document will be reviewed and published on an annual basis. However, it will be published more frequently in the event of a material change to the business (for example, in respect of the scale of its operations or the range of its activities).
4. Verification, Media and Location of Publication
This document has been reviewed by the Board and will be published on Kroll’s website (https://www.kroll.com) under the www.kroll.com/issuer-services section. The information contained in this document is not subject to external audit and does not constitute any form of financial statement.
5. Governance
Kroll Issuer Services Ltd is headquartered in the UK and has a subsidiary in France.
Senior management consists of:
- Two managing directors and the compliance officer.
The board of directors makes all decisions and determines Kroll’s risk appetite and business strategy in line with the Firm’s regulatory permissions. No external providers are part of this process.
6. Risk Management
KIS is a service provider and charges fees and expenses as agreed in an engagement letter either upon completion of its work or in installments during the life of the project.
KIS is not involved in any broking activities or investment business and never takes positions in the securities of its clients.
6.1. Credit Risk
Credit risk is the risk of financial loss arising from the default of customers failing to pay their invoices.
KIS provides its clients with a clear overview of its fees before work starts on a project. The Firm may request clients to pay upfront, in instalments upon completion of certain milestones or upon completion of the project. KIS occasionally acts for clients in financial distress and writing off invoices is a real risk for the business. Selling a service limits the impact of such write-offs because the Firm incurs very few external costs in connection with its operations. Consequently, unpaid bills are not an immediate threat to the business.
6.2. Market Risk
Market risk is the risk that the values of assets or positions are adversely affected by fluctuations arising from changes in market prices, interest or exchange rates.
The Firm does not invest in securities and is largely unaffected by market risk.
6.3. Systems and Controls Risk
KIS has invested heavily in its IT infrastructure and has developed effective disaster prevention and recovery systems. All critical data is stored on various secure servers in different locations and can be accessed offsite at any time by any of the employees.
Kroll has stringent control mechanisms in place to verify and reconcile any information it receives, processes and transmits to its clients. Any data delivered to its clients is controlled by at least one of the directors.
KIS is continuously monitoring and improving its systems and control procedures.
6.4. Compliance Risk
Compliance risk is the risk that a breach of a regulation to which KIS is subject could lead to action being taken against the Firm by a regulator. The ultimate outcome of a significant breach of an FCA rule could range from public censure and/or fine, through to the restriction of the Firm’s activities, to the closure of the business. Every project serviced by the Firm is handled by an associate and supervised by at least one director. Internal compliance rules are constantly monitored and revised as and when necessary. All of KIS’s associates have considerable experience in debt capital markets.
6.5. Legal Risk
The Firm is at risk of being drawn into a legal dispute between dissatisfied investor(s) and one of its clients. KIS does not provide financial advice to its clients or to investors and it is unlikely that it would be the target itself.
The Firm’s standard engagement letters contain an on-demand indemnity clause covering any legal costs associated with a possible legal dispute.
6.6. Risks Affecting Assets Held in Client Accounts
KIS manages client accounts operated by BNP Paribas London Branch, Banque Internationale à Luxembourg and Piraeus Bank and reviews these relationships once a year (or more often, if required) to minimise risks affecting the relevant assets held in escrow in these accounts. The books detailing all movements on client accounts are kept up to date and positions are reconciled daily.
Should KIS decide to resign as a client’s escrow agent for whatever reason, it can only do so once a suitable replacement has been found to take over the duties and responsibilities of the relevant roles, thereby ensuring that any assets held in client accounts will be transferred to the new agent and remain unaffected by the resignation. All escrow agency agreements contain a clause governing the resignation and appointment of any successor agent.
7. Capital Resources
KIS is subject to minimum capital requirements and is categorized as an IFPRU firm. The calculation of capital requirements is derived from the aforementioned risks. As such Kroll’s minimum capital requirement is the higher of:
- The base capital requirement of €125,000; and
- The sum of its market and credit risk requirements.
Kroll’s capital resources consist of Tier 1 capital reserves. There are no Tier 2 or Tier 3 deductions.
KIS’s capital position as at 31 December 2021 is as follows:
