MIFIDPRU Disclosure Document

Year ending 31 March 2023

Fundsmith LLP (the “Firm” or “Fundsmith”) is authorised and regulated by the FCA.  This disclosure document sets out the information that the Firm is required to disclose annually under chapter 8 of the FCA’s MIFIDPRU sourcebook. 

Governance Arrangements

The Management Committee is the ultimate governing body of the Firm and is responsible for all aspects of the Firm's business.

The Management Committee exercises oversight of the activities of the Firm.  The intended outcome is to ensure that the Firm is being run in compliance with applicable regulatory rules, that it is acting in the best interests of investors in its funds, and that it operates an appropriate risk management framework with an effective control environment to determine whether the Firm is operating within its risk appetite.  The Management Committee receives reports from the senior management functions of the Firm in support of its oversight.

Amongst other matters, the Management Committee approves the Firm’s:

• Governance Framework, including the terms of reference of the sub-committees,
• Enterprise Risk Management Framework, including top-down risk identification and assessment, and risk appetite,
• Product Governance policy (including the process for Assessment of Value),
• Assessment of Value and Product Governance reviews and reports, incorporating review of the obligations under the Consumer Duty
• Conflicts of interest policy, statement and register
• Code of Ethics (covering conduct rules including PA dealing, gifts & entertainment, outside business interests)

Amongst other matters, the independent, non-executive members of the Management Committee approve the Firm’s Remuneration Policy.

The Firm qualifies for the exemption in MIFIDPRU 7.1.4 and the requirements in MIFIDPRU 7.3 “Risk, remuneration and nomination committees” do not apply to the Firm.

The Firm considers that appropriate policies are in place to ensure all staff, including the members of the Management Committee are 'fit and proper'. All senior personnel are experienced industry professionals, and any senior appointments are subject to the Executive Committee's approval, with due consideration to the reputation, fitness and experience of the candidate as well as the long-term strategic goals of the business.

Initial and ongoing assessments of the competence of staff are conducted, and all staff holding Senior Manager Functions and other SMCR Certificated persons are formally assessed on an annual basis to ensure that they remain competent to fulfil their job functions and prescribed responsibilities. All staff, including the executive and independent non-executive members of the Management Committee, undergo training on a variety of regulatory topics each year.

The members of the Management Committee during the year to 31 March 2023 are set out in the table below, together with the number of additional directorships held by each member, excluding directorships held: (i) in organisations which do not pursue predominantly commercial objectives; (ii) in entities within the legal group and related parties; and (iii) in entities whose primary purpose is to hold personal investments.  Non-executive directorships held within the same group are counted as a single directorship.

On 22 May 2023, after the end of the reporting period, the Firm appointed Victoria Muir as the independent Chair of the Management Committee.  The Firm applied for and has received a waiver of SYSC 4.3A.6 with respect to the number of additional non-executive directorships Victoria Muir may hold.

The Firm is committed to promoting diversity and equal opportunities for staff throughout the Firm, including the Management Committee, and this informs the Firm's recruitment and retention strategies across the organisation.  The Management Committee approves the Firm’s Diversity & Inclusion policy.

Risk Management Objectives and policies

1. Potential for harm associated with the business strategy

   The Firm considers that the potential for harm associated with its business strategy is low.  The Firm does not engage in proprietary trading, underwriting, placing, clearing or settlement activities, have tied agents or provide custody services.  Furthermore, the investment strategies pursued by the Firm on behalf of clients are relatively simple long-equity strategies and which do not employ the use of leverage or derivatives.

   The Firm has established an Enterprise Risk Management Framework (‘ERMF’) to identify, measure, manage and monitor the risks faced by the Firm, and the risks faced by the funds and the investors in them. This includes the risk the Firm’s conduct may pose to the achievement of fair outcomes for investors or to the sound, stable, resilient and transparent operation of the financial markets. The development and ongoing review of this framework seeks to ensure that the risks faced by the Firm and the investors in its funds are understood and are managed in accordance with agreed appetite and tolerance levels. The ERMF provides the basis for enabling the Firm’s ongoing assessment, control, monitoring and reporting of risk management.

   The ERMF is overseen by the Firm’s Management Committee which is responsible for the determination of the risk appetite of the Firm.  The ERMF is reviewed and approved by the Management Committee on an annual basis (or more frequently as required).

2. Strategies and processes used to manage risks addressed by own funds and liquid assets requirements

   Own Funds

   The Firm is a Limited Liability Partnership and its capital arrangements are established in its Partnership Agreement.  The Firm’s regulatory capital resources comprise the aggregate balance of the Members’ capital accounts.  The nature and terms of the Members’ capital accounts allow these balances to be treated as tier one capital.

   At 31 March 2023 the Firm’s regulatory capital resources totalled £8,236,000.  As there are no adjustments required to determine the Firm’s regulatory capital resources from the amount shown on the face of the balance sheet, the template set out in MIFIDPRU 8 Annex 1R has not been deployed.

   Basic Own Funds Requirement and Basic Liquid Assets Requirement

   The Firm is subject to a Basic Own Funds Requirement and a Basic Liquid Assets Requirement.

   The Firm's Basic Own Funds Requirement is the higher of:

   • Its Permanent Minimum Requirement (£75,000);
   • Its Fixed Overheads Requirement, equating to one quarter of its preceding year's fixed overheads (£4,933,000); and
   • a 'K-factor' requirement ("KFR"), comprising a percentage scalar applied to its investment management activities (£138,000).

   
   The Firm’s Basic Own Funds Requirement at 31 March 2023 was £4,933,000.

   The Firm’s Basic Liquid Assets Requirement equates to one third of its Fixed Overhead Requirement.

   Overall Financial Adequacy Rule

   The Firm must at all times comply with the Overall Financial Adequacy Rule (“OFAR”).  This requirement supplements the Basic Own Funds Requirement and the Basic Liquid Assets Requirement and requires the Firm to hold sufficient own funds and liquid assets to ensure that:

   (a)       The Firm remains financially viable throughout an economic cycle, with the ability to address potential harms from its ongoing operations; and

   (b)       Its business can be wound down in an orderly manner, minimising harm to consumers or other market participants.

   Internal Capital Adequacy and Risk Assessment

   The Firm uses an internal capital adequacy and risk assessment (“ICARA”) process to assess whether it is complying with the OFAR and, if it is not, to identify what steps it should take to ensure compliance.  The focus of this process is on identifying and managing risks associated with the Firm’s business that may result in material harms to consumers, financial markets and the Firm itself, measuring the effectiveness of the Firm's strategies to monitor and mitigate those harms and determining whether additional own funds and/or liquid assets are required to mitigate any residual risks.

   The FCA recognises that the risk of some material harms can be reduced through proportionate measures other than holding additional financial resources, for example implementing additional internal systems and controls or strengthening governance and oversight processes. Where this is not considered to be an appropriate mitigant to comply with the Overall Financial Adequacy Rule, the Firm will hold additional own funds and/or additional liquid assets above its Basic Own Funds Requirement and Basic Liquid Assets Requirement.

   The Firm has therefore formed a judgement about what is appropriate and proportionate in its particular circumstances and informed by its risk appetite.

   Based on its modelling, the Firm has concluded that it holds sufficient own funds and liquid assets to meet the OFAR.

   The Firm's ICARA document is updated annually (or more frequently, as required). The document and the key assumptions underlying it are reviewed and approved by the Firm’s Management Committee.

   Responsibilities of Senior Management Function holders

   The Firm has allocated to certain Senior Managers the responsibility for the assessment of harms arising from the Firm’s operations and the adequacy of the regulatory and liquid capital held by the Firm and for ensuring that the Firm’s financial resources comply with the OFAR.

   The Firm’s Senior Management Function holders recognise that the ICARA process is a key requirement of the regulatory system and is an essential part of the Firm's internal systems and procedures for ensuring that the Firm's business is run in a manner consistent with its regulatory obligations.

3. Concentration Risk

   Concentration risk refers to the risks arising from the extent of the Firm's relationships with, or direct exposure to, a single client or group of connected clients. The Firm has identified the following concentration risks and has put in place the following control strategies:

   Earnings

   This is the risk that the Firm has a significant amount of its revenue concentrated in a small number of clients, leaving it exposed if it loses one or more of those clients.

   The Firm's revenue is derived from the funds it manages and a small number of segregated mandates.  The funds have a diverse investor base which the Firm considers reduces its risk to any one client or small number of clients to an acceptable level.

   Cash deposits

   This is the risk that the Firm's cash deposits are held with a narrow range of credit institutions, leaving it exposed if one or more of them becomes insolvent.

   The Firm maintains an instant-access current account with The Royal Bank of Scotland which has a satisfactory credit rating which the Firm considers reduces its cash deposit risk to an acceptable level. The Firm keeps this under review.

Remuneration

The Firm’s Management Committee is the ultimate governing body of the Firm and is responsible for all aspects of the Firm’s business.  The purpose of the Management Committee is to ensure that the Firm is being run in compliance with applicable legal and regulatory requirements and regulatory guidance, that it is acting in the best interests of investors in its funds and clients for whom it manages accounts, and that it operates an appropriate risk management framework with an effective control environment so that the Firm operates within its risk appetite.

The independent, non-executive members of the Management Committee are responsible for the annual review and approval of the Firm’s Remuneration Policy and Remuneration Policy Statement, and for approval of the annual “independent internal” review of the implementation of the Firm’s Remuneration Policy.

The Firm’s internal audit function undertakes the annual “independent internal” review of the implementation of the Remuneration Policy and reports on this review to the Management Committee. 

The Firm’s Remuneration Policy applies to all partners and staff of Fundsmith LLP, staff of its subsidiary Fundsmith Partners US LLC, and staff of Fundsmith Investment Services Limited which is related to Fundsmith LLP due to common control.

1. Remuneration Objectives

   Fundsmith LLP was founded in 2010 with the stated aim “to run the best fund there has ever been, and to provide the best fund a retail investor has ever owned”.  The definition of the “best fund” is the one with the highest return over a long period of time, adjusted for risk. Fundsmith LLP’s purpose is to improve investor outcomes, which are notoriously poor. The objectives of the Firm’s approach to remuneration is to incentivise partners and staff to focus on achieving the Firm’s aim, and improve investor outcomes. The Firm has no outside shareholders or financing that can lead to a prioritisation of short-term outcomes over long-term customer-oriented objectives.

   Fundsmith seeks to ensure that its remuneration policies and practices:

   • are consistent with and promote sound and effective risk management;
   • do not encourage risk taking which is inconsistent with the risk profiles and constitutions and governing documents of the funds and accounts which it manages;
   • include measures to avoid conflicts of interest;
   • are gender neutral; and
   • are in line with the business strategies, objectives, values and long-term interests of the funds and accounts which it manages.
     
     

   The Firm seeks to ensure that its remuneration practices, structures and incentives do not encourage any behaviour or activity which could be detrimental to, or conflict with, the long-term interest of the funds, the investors in the funds and other clients.

   Fundsmith's structure and business model creates a strong, natural alignment of interests between its partners and staff, the Firm, the funds, the investors in the funds and other clients.

   The partners (the members of the LLP) are the sole owners of Fundsmith LLP.  All of the partners have invested their own money into the business and the Firm's capital is derived entirely from the partners’ contributions of capital.

2. Approach to Remuneration

   Founding Members

   Founding Members do not receive fixed or variable remuneration for the purposes of the applicable remuneration codes.

   Executive Members

   Executive Members receive a fixed amount (fixed profit share) and are eligible for an annual discretionary amount of profit (which is based on performance). For the purposes of the applicable remuneration codes these are treated as fixed and variable remuneration respectively.

   Capital Members

   Capital Members receive a salary (fixed remuneration) and are eligible for an award of an annual discretionary bonus (variable remuneration based on performance). 

   Independent, non-executive Members of the Management Committee

   The independent non-executive members of the Management Committee receive a fixed fee for their services (fixed remuneration) and are not eligible to receive any variable remuneration.

   Other staff

   Employees of Fundsmith LLP and Fundsmith Partners US LLC receive a salary (fixed remuneration) and are eligible for an award of a discretionary bonus (variable remuneration based on performance).

3. Material Risk Takers

    The Management Committee considers which staff are material risk takers.

   The Management Committee has determined that those individuals undertaking Senior Manager Functions (with the exception of the SMF9), the lead portfolio manager of the global equity funds and of the small and mid-cap equity funds, and the Head of Research, are material risk takers. This numbered six persons in total for the Firm's financial year to 31 March 2023.

4. Key Characteristics of Remuneration Policies and Practices

    The award of an annual discretionary performance-based bonus is at the Executive Committee’s discretion and will depend on both the financial position of the Firm and the outcome of the individual's performance review which is undertaken at the end of each financial year.  The performance review process takes into account a range of factors including the individual's performance and their broader contribution to the business.  Those employees working in control functions such as risk management or compliance have their personal objectives set by reference to their specific functions and will be rewarded according to the achievement of those objectives, rather than the performance of the business more generally.

   The level of discretionary performance-based bonus for the head of the Firm’s second line of defence is recommended to the Management Committee for approval.

   Annual discretionary performance-based bonuses awarded to material risk takers are subject to deferral, vesting over the following three years.

   Material risk takers are required to invest at least 50% of any non-deferred discretionary performance-based bonus in one of the funds managed by the LLP, and the shares acquired are not permitted to be sold or transferred for a period of at least six months from the date of purchase.

   At least 50% of deferred discretionary performance-based bonuses awarded to material risk takers are held as an investment in one of the funds managed by the Firm.

   The Firm has the right to cancel or reduce any deferred bonus award in its absolute discretion.  Any decision to cancel or reduce a bonus award will be made by the Management Committee. 

   If any material risk takers are guilty of fraud, negligence or gross misconduct, the Firm has the right to require that person to repay any bonus award paid out in cash or to sell any shares in a fund acquired using the cash proceeds of the bonus award.

   Fundsmith does not guarantee any annual bonus award, except where this is absolutely necessary in the context of hiring a new member of staff in the first year of their employment.

   Fundsmith’s policy is that any buy-out award or compensation for a material risk taker’s contract in previous employment is aligned with the long-term interests of the Firm and contains appropriate provisions so that the terms are no less strict than those originally applied.

   Fundsmith's policy is not to pay partners or staff leaving the Firm any early termination payments.

   Fundsmith's policy is not to pay any material risk taker a retention award.

   Staff are not permitted to undermine the principles of the applicable remuneration codes by using personal hedging strategies, remuneration-related insurance or liability-related insurance.

5. Risk Management

   Fundsmith is required to ensure that remuneration practices are consistent with, and promote, sound and effective risk management. The remuneration policy should not encourage risk taking which is inconsistent with the risk profiles of the funds and accounts managed by the Firm.

   The Management Committee has identified two primary types of risk which could arise within a typical asset management business from inappropriate remuneration structures:

   • incentives related to investment performance, which could give rise to a focus on short term investment performance and potentially increase the risks for the investors; and
   • incentives related to sales, which could encourage staff to inappropriately sell a fund to investors for whom it is unsuitable.

   The nature of Fundsmith’s business, the nature of the funds which it manages and the nature of its remuneration practices adequately mitigate these risks. 

   Sound and effective risk management is a key element of Fundsmith's investment strategy.  The same fundamental strategy is adopted for all of the funds and segregated accounts. The investment process is adhered to at all times.  All portfolios are constructed with a long term "buy and hold" philosophy and it is therefore unusual for there to be significant changes to stock selection within a portfolio. Fundsmith does not have any practice of remunerating its investment personnel for generating high returns in the short term. Performance fees are not charged. There is no financial incentive to take risks which are not consistent with the risk profiles of the funds or segregated accounts. 

   From a sales perspective, given the clear and simple nature of the investment strategies, the funds are generally suitable for the majority of investor types, including retail investors. Fundsmith emphasises the long-term nature of the investment proposition in all fund literature and other documentation and seeks to ensure that investors understand that the strategy is not appropriate for those seeking short term returns.  The sales team’s performance is considered in the light of the net sales of the relevant funds and will therefore be negatively affected if investors sell their investment. Any concerns raised in relation to the sales process such as investor complaints, intermediary feedback or issues identified in compliance monitoring are properly taken into account in the performance assessment process.

6. Quantitative Disclosures

   The financial year of Fundsmith LLP runs from 1 April to 31 March. The latest financial year is the year to 31 March 2023 and the remuneration figures below relate to that period. The Fundsmith LLP Report and Accounts for the year to 31 March 2023 have been independently audited and filed with Companies House.

   The Firm had an average of 44 staff (excluding Founding and Executive Members) in the year. Those staff received total remuneration of £15.2 million, comprising fixed remuneration (salaries and pension contributions) of £5.5 million and variable remuneration of £9.7 million.

   The Firm has determined, in accordance with MIFIDPRU 8.6.8(7)(a), that it is exempt from disclosing the split of fixed and variable remuneration between senior management, other material risk takers and other staff and, in accordance with MIFIDPRU 8.6.8(7)(b), the Firm is permitted not to disclose aggregated information for senior management and other material risk takers. The discretionary amount of profit and the fixed profit share awarded to the one Executive Member of the Firm, which are treated as variable and fixed remuneration respectively for the purposes of the applicable remuneration codes, are not included in the quantitative disclosures above. The quantitative remuneration disclosures have been provided in this manner for individual privacy reasons.

   The Firm awarded no guaranteed variable remuneration to material risk takers.

   The Firm awarded no severance payments to material risk takers.