Risk and disclosure report
Scope
MLP Finanzdienstleistungen AG is the holding institution
The disclosure pursuant to Article 144 of the Banking Directive (DI 2006/48/EC) is executed in line with § 2a (6) of the German Banking Act (KWG) on a consolidated basis. MLP Finanzdienstleitungen AG, as the depository institution and higher-ranking company of the supervisory Financial Holding Group as per § 10a (3) of the German Banking Act (KWG), hereby implements the supervisory disclosure requirements by December 31, 2010 in accordance with § 26a of the German Banking Act (KWG) in connection with §§ 319-337 of the Solvency Ordinance (SolvV).
MLP applies the waiver rule according to § 2a of the German Banking Act (KWG) for the Financial Holding Group in line with § 10 of the German Banking Act (KWG). MLP Finanzdienstleistungen AG has demonstrated that it has fulfilled the conditions stipulated by § 2a (6) no. 1 and no. 2 of the German Banking Act (KWG) of the Deutsche Bundesbank and the Federal Financial Supervisory Authority (BaFin) in accordance with § 2a (2) sentence 1 of the German Banking Act (KWG).
The supervisory scope of consolidation of the MLP Financial Holding Group as per § 10a of the German Banking Act (KWG) consists of MLP AG, Wiesloch, MLP Finanzdienstleistungen AG, Wiesloch, Feri Finance AG, Bad Homburg v. d. Höhe, Feri Family Trust GmbH, Bad Homburg v. d. Höhe, Feri Institutional Advisors GmbH, Bad Homburg v. d. Höhe, and also ZSH GmbH Finanzdienstleistungen, Heidelberg.
Within the scope of risk management, Feri EuroRating Services AG, Bad Homburg v. d. Höhe, the subsidiaries Feri Family Trust GmbH and Feri Institutional Advisors GmbH, both based in Luxembourg and Munich respectively, and TPC THE PENSION CONSULTANCY GmbH, Hamburg, are also included in the supervisory scope of consolidation pursuant to § 25a (1a) of the German Banking Act (KWG).
The relevant supervisory disclosures as per § 26a of the German Banking Act (KWG) made within the scope of the risk reporting of the MLP Group are designated as such.
Risk management
Objective
Aims of the risk management
Entrepreneurial activity invariably involves taking risks. For MLP, “risk” means the danger of possible losses or lost profits. This danger can be attributable to internal or external factors. Since it is never possible to eliminate all risks, the objective must be a risk that is commensurate with the expected return. The aim is to identify risks as early as possible in order to react to them quickly and appropriately. In addition to this, this framework allows business opportunities to be detected early on and followed up. Particularly in Product Management and Purchasing, business opportunities in the market are identified in a targeted process for the individual product segments. Implementation for MLP is then tested and initiated, taking into account the chances of success and the associated risks.
MLP's Group-wide early risk detection and monitoring system is used as the basis for active risk management throughout the Group. This system ensures appropriate identification, assessment, controlling, monitoring and communication of the major risks. Risk management is a key component of MLP's value-driven management and planning system here. Moreover, the Group's risk culture is continuously consolidated and efforts are made to communicate information relevant to risk across all business segments.
Risk policies
The Executive Board defines the business and risk strategy. The readiness to take risks at Group level is then determined on the basis of this, taking the Group's risk-bearing ability into consideration. Framework conditions for risk management at MLP are then derived from this. The readiness to take risks is regularly checked and adjusted as necessary.
The following basic principles are consistent with the business strategy and describe the central framework conditions for the risk management at MLP.
The Executive Board is responsible for proper organisation of the business and its further development.
This responsibility includes defining appropriate strategies and setting up appropriate internal control procedures in particular - thereby assuming responsibility for all significant elements of the risk management. Specification of the business and risk strategy cannot be delegated here. It is the responsibility of the Executive Board to implement the strategies, assess the risks associated with them and also implement and monitor measures to ensure that the risks are limited.
The Executive Board bears responsibility for the risk strategy.
The Executive Board defines the risk strategy for MLP. The risk strategy reflects the risk propensity or "risk tolerance" based on the targeted risk/performance ratio. The Executive Board ensures that a comprehensive approach, incorporating all key risk types, is integrated in the company and that suitable steps are taken to implement the risk strategy.
MLP promotes a strong awareness of risks and lives a pronounced risk culture.
A strong awareness of risks across all divisions and a corresponding risk culture are encouraged through appropriate organisational structures. Risk awareness that goes beyond each department's or person's own field of responsibility is essential. The effectiveness of the risk management system is continuously monitored and any adjustments that become necessary are implemented as quickly as possible. Appropriate data security and quality standards are established and subjected to continuous checks.
MLP pursues a strategy of comprehensive risk communication and risk reporting.
Detected risks are reported to the responsible management level openly and without restriction. The Executive Board is informed in a comprehensive and timely manner (if necessary ad hoc) of the risk profile of the relevant risks, and profit and losses at MLP. The Supervisory Board receives the information required to perform its legal obligations. Internal risk communication and risk reporting is supplemented by comprehensive, external publications that cater to the interests of MLP shareholders and the capital market and also comply with the supervisory requirements.
Risk capital management and stress tests
Risk bearing ability
Risk capital management is an integral part of corporate management at MLP. Active control of the economic capital adequacy based on the results of risk assessments and in compliance with the supervisory requirements ensures that risk-taking is always in line with capital backing.
Risks are only accepted within limits derived from aspects of the risk-bearing ability to achieve returns, taking into account risk/return factors. This in particular prevents risks that could threaten the continuity of the business model.
The Executive Board defines the equity capital backing
The Executive Board defines the equity capital backing based on business policy targets and controls the risk profile in an appropriate ratio to the risk coverage fund. The focus is on the key risks for MLP, which are identified at least once a year within the scope of a risk inventory (risk profile) performed throughout the Group. Here, the key risk indicators determined using standardised procedures are compared against threshold values applied throughout the Group. The Group-wide risk profile represents the basis for both risk capital management and the risk management and controlling processes.
In controlling the financial risk capital, the regulatory requirements of capital adequacy (regulatory capital adequacy in line with the German Banking Act (KWG), Solvency Ordinance and Large Exposure and Million Loans Regulation) are additional conditions that are to be strictly complied with.
Stress tests
Stress tests at different levels
Regular stress tests are also performed for special analysis of the effects of unusual yet still plausible events. Comprehensive analyses have therefore been implemented, both at the level of the individual risk types and across all risk types. The effects of potential concentrations of risks are also taken into particular account here.
When performing the standardised stress tests, the key risk drivers are scaled in such a way that they reflect disproportionately negative economic situations. The implemented stress tests can then be used to check whether MLP's risk-bearing ability can still be secured even under unfavourable economic framework conditions. The market value effects on the financial situation, the liquidity situation and the results of operations are investigated here.
Organisation
Functional separation
Our risk management concept follows clearly defined basic principles that are applied as binding throughout the entire Group and whose compliance is continuously checked. A clear organisational and operational distinction is made between the individual functions and activities of risk management.
We have defined and documented the organisation of risk management and the associated tasks and responsibilities in accordance with supervisory requirements, both at Group level and at the level of the Group companies. For risk management at Group level, appropriate organisational precautions which also define the framework for risk management design at the level of the individual Group companies are taken by MLP Finanzdienstleistungen AG as a higher-level entity. The operational and organisational structure is regularly checked and assessed through internal audits and adapted to internal and external developments as they happen.
Group Risk Manager
The Group Risk Manager is responsible for the risk monitoring and control activities in the MLP Group. He is kept continuously informed of the risk situation in the Group and gives regular reports on this to the entire Executive Board and Supervisory Board.
Risk management and controlling processes
Risk management at MLP and its local operative implementation in the business units is performed on the basis of the risk strategy. The units responsible for risk management reach decisions for conscious acceptance, reduction, transfer or avoidance of risks, observing the framework conditions specified centrally.
Risk controlling is responsible for the identification and assessment of risks, as well as for monitoring upper loss limits. This is accompanied by reporting the risks to the Executive Board and the business units that control the risks. Suitable early detection systems support risk monitoring, identify potential problems early on and thereby enable prompt planning of measures.
Appropriate guidelines and an efficient monitoring process also ensure that the regulatory requirements for risk management and controlling are met by the Group companies.
The methods used at MLP to assess risks are in line with the current level of knowledge and are aligned with practices in the banking sector as well as recommendations of the Federal Financial Supervisory Authority. The results determined with the risk models are suitable for controlling the risks without restrictions. The measurement concepts are subject to regular checks by risk controlling, as well as internal and external audits. However, despite careful model development and regular checks, it is conceivable for circumstances to occur that lead to greater losses than those forecast by the risk models.
Controlling monitors earnings risks
Controlling is responsible for continuously monitoring earnings risks. This involves comparing revenue and profit levels with the corresponding planned figures and deriving controlling measure proposals for the Executive Board from this.
The analysis time line of strategic controlling covers the next three to five years. In this connection revenue and profit trends are analysed (in particular taking into account changes in economic or legal framework conditions) and transformed into target figures for the individual business segments. Corresponding simulations make potential revenue and earnings risks transparent for the Executive Board in the key strategic business segments.
Internal controlling system in the accounting process
Group accounting is the central contact for all accounting questions, both at individual company and Group level. Financial accounting acts as the central processing point for all accounting-related information. Job descriptions, substitution plans and work instructions are all in place to support the correct procedure. Process descriptions and various checklists are also available for further support. All regulations and instructions are published in the organisation manual, which is continuously updated and can be accessed by all employees. Functional separations, as well as ongoing and subsequent checks based on the "four-eyes principle", are in place to prevent any misuse or fraud. Continuous further training of employees ensures that all accounting is performed in line with current legislation.
Internal audits
Internal audits, which assume monitoring and control tasks throughout the Group, are an important element of the internal monitoring system. The internal audit department performs regular, systematic risk-oriented inspections with regard to compliance with legal, supervisory and internal specifications. The department also monitors the functional separation and effectiveness of the risk management system, and performs follow-up procedures on audit recommendations. The minimum requirements for risk management governing the internal audit function are complied with throughout the Group.
The internal audit department operates in an independent capacity throughout the Group on behalf of the Executive Board.
Risk reporting
A substantial risk reporting scheme forms the basis for appropriate and successful corporate management. To this end, we have instituted a comprehensive internal reporting system, which ensures that the decision-makers are promptly informed of the current risk situation. Risk reports are generated at fixed intervals or, if necessary, produced ad-hoc. In addition, planning, simulation and control instruments show possible positive and negative developments to the most important value and controlling parameters of the business model and their effect on the net assets, financial position and results of operations.
Risk reports are submitted to the controlling units, the Executive Board and the Supervisory Board. Those receiving the reports are informed promptly and comprehensively of changes to relevant influential factors.
Statement of risks
Financial risks
Counterparty default risks
The counterparty default risk is the risk of a loss or lost profit due to the defaulting of or deterioration in creditworthiness of a business partner. The credit risk includes the contracting party risk (risk arising from the typical credit business, re-covering risk and advance performance and counterparty settlement risk), as well as the risks related to specific countries which, however, are only of secondary importance to MLP.
On the reporting date on December 31, 2010, gross loans of the MLP Financial Holding Group were € 1,601.1 million. In this connection, gross loans are defined as the exposure value before the recognition of collateral (in the credit risk standardised approach incl. allowances for losses on individual accounts) in accordance with the Solvency Ordinance (SolvV).
MLP's counterparty default risks are essentially made up of the client credit business under the company's own liability, the company's own business and the commission receivables against our product partners. There are no significant risks related to specific countries as per § 327 (2) no. 2 of the Solvency Ordinance (SolvV), as lending is mainly limited to borrowers domiciled in the Federal Republic of Germany, which make up 97.35 %. The other regions (2.65 %) are situated exclusively in the Eurozone.
Concentration of risk
Identification of potential concentrations of risk was another key component of credit risk management. Those risks which come about due to an uneven distribution of business partners in credit relations or other business relations or which are caused by sectoral/geographical business focuses and are capable of generating such great losses that the solvency of an institute may be threatened are classed as concentrations of risk in the credit portfolio. To be able to identify concentrations of risk in the lending business early on, the portfolio is analysed using various approaches, such as investigations based on sector, size and risk classes or security categories. Concentrations of risk are also given special consideration in the stress tests specific to the risk types.
To minimise potential concentrations of risk before they can even occur, MLP follows a strategy of diversification and risk avoidance here. As such, investments are diversified into bonds, debentures and other financial instruments across various sectors. We have defined binding upper investment limits for the individual sectors and issuers in our capital investment directive.
In the retail business, any potential concentrations in ratings classes with high loss rates are avoided by focussing on commission-based products and the retail products of credit cards and accounts in connection with the client segment being targeted. In addition to this, avoidance of major individual risks is a further central component of MLP's credit policy. Focussing on the target group of academics and other discerning private clients allows an attractive profit margin to be achieved.
The allocation to sectors in accordance with § 327 (2) no. 3 of the Solvency Ordinance (SolvV) is shown in the following table:
Main sectors
| All figures in € million | Loans, commitments and other non-derivative off-balance-sheet assets | Securities | Derivative financial instruments |
| Domestic banks | 644.8 | 77.7 | – |
| Deutsche Bundesbank | 23.7 | – | – |
| Foreign banks | 0.5 | 15.3 | – |
| Insurance companies | 10.0 | – | – |
| Other financing institutions | 5.9 | 5.0 | – |
| Other companies | 556.0 | 9.7 | – |
| Self-employed persons | 150.2 | – | – |
| Employees | 45.6 | – | – |
| Other private individuals | 29.5 | – | – |
| Foreign companies and private individuals | 10.4 | 16.8 | – |
| Total | 1,476.6 | 124.5 | – |
| [Table 20] |
The contractually fixed terms to maturity in accordance with § 327 (2) no. 4 of the Solvency Ordinance (SolvV) are listed in the following overview:
Residual terms
| All figures in € million | Loans, commitments and other non-derivative off-balance-sheet assets | Securities | Derivative financial instruments |
| < 1 year | 979.5 | 38.2 | – |
| 1 year – 5 years | 214.3 | 63.2 | – |
| > 5 years to open-ended | 282.9 | 23.1 | – |
| Total | 1,476.6 | 124.5 | – |
| [Table 21] |
The responsibilities in the credit business, from application, through authorisation, to completion and including consistent monitoring with regular creditworthiness analyses, have been defined and documented in the organisation manual. Decision-making authority is laid down in the authority regulations, which themselves are based on the risk content of the transactions.
We also monitor and control any potential default risks from advances paid to consultants and branch managers via a layered warning system, in which any incidents are quickly detected and active receivables management is guaranteed.
Loan approval, in particular in the client credit business, takes the form of credit limits being granted for the individual borrower or borrower unit. Individual credit decisions are reached by specialised employees that follow clearly defined guidelines based on the size, creditworthiness and collateral of the respective borrower. A special scoring process allows fast decisions to be made, in particular for credit cards and accounts in the retail lending business, while also securing consistently high quality.
The basis of our credit decisions is always the creditworthiness of the borrower. Collateral does not have any influence on the borrower's rating. Depending on the structure of a transaction, collateral can, however, be of significance for the risk assessment of a commitment.
All forms of traditional loan collateral are essentially used throughout. This specifically includes mortgages on residential and commercial property, warranties, sureties, life insurances, financial collateral, as well as assigned receivables. Privileged mortgages, warranties and financial collateral are used for supervisory recognition under the Solvency Ordinance. Receivables and physical collateral are currently not taken into account.
The financial collateral of the MLP Financial Holding Group to be taken into account within the scope of volume transactions pursuant to § 336 in connection with § 154 (1) no. 1 of the Solvency Ordinance (SolvV) is included in the risk assessment as per the Solvency Ordinance (SolvV) at a marginal level.
As a whole, the potential credit loss risks are continuously determined and evaluated by simulating the allowances for bad debt as a percentage of the credit volume that carries risks. For accounts that are regarded as carrying acute risk, we build up appropriate allowances for bad debt. Loans that are recognised as being problematic are transferred to certain specialist departments at MLP and managed by experts.
The non-performing and defaulted receivables in accordance with § 327 (2) no. 5 of the Solvency Ordinance (SolvV) are divided into main industries or groups of debtors. MLP defines the transactions of a client as non-performing if a default incident occurs in accordance with § 125 of the Solvency Ordinance (SolvV), irrespective of whether any allowances for losses have been formed.
Non-performing and defaulted loans
Main sectors All figures in € million | Total availment of non-performing and defaulted loans (including impairment) | Specific allowance for doubtful accounts | General allowance for doubtful accounts | Provision allowance | Net allocation / reversals for specific and general allowance for doubtful accounts / provisions | Direct write-offs | Income from receivables which have already been written off | Defaulted loans (excluding impairment) |
| Self-employed persons | 30.1 | 14.5 | – | 1.2 | 2.7 | – | – | |
| Employees and other individuals | 19.9 | 14.5 | 1.6 | 1.0 | 1.3 | 0.2 | – | |
| Total | 1.2 | |||||||
| [Table 22] |
The non-performing and defaulted loans are exclusively in the Federal Republic of Germany.
The development of the allowances for losses is as follows in accordance with § 327 (2) no. 6 of the Solvency Ordinance (SolvV):
Development of the allowances for losses
| Amount in € million | Opening balance | Allocations | Reversals | Utilisation | Exchange rate movements and other changes | Closing balance |
| Specific allowance for doubtful accounts | 26.7 | 7.0 | –2.7 | –2.7 | 0.7 | 29.0 |
| General allowance for doubtful accounts | 1.2 | 0.1 | – | – | –0.1 | 1.2 |
| Provisions | 1.9 | 0.7 | – | –0.2 | –0.8 | 1.6 |
| Total | 29.9 | 7.8 | –2.7 | –2.9 | –0.3 | 31.8 |
| [Table 23] |
In addition to the above-described risks, there is an issuer’s risk from the bonds, debentures and other financial instruments acquired. We reduce the risk of default among issuers, whose securities we have acquired within the scope of capital investment management – also in light of current market trends – through the specified creditworthiness requirements of our capital investment directive.
Where available, MLP also bases its decisions in the field of financial investments on external ratings. Within the scope of internal risk management, MLP uses the state, bank and company ratings of the agencies Moody’s, Fitch and Standard & Poor’s for the relevant receivables classes.
The individual receivables classes are assigned a risk weighting in line with the Solvency Ordinance. This process is illustrated below in accordance with § 328 of the Solvency Ordinance (SolvV):
Risk weighting per receivable class
| Risk weighting in % | Total outstanding receivables in accordance with standard approach | |
| before credit risk reduction Amount in € million | after credit risk reduction Amount in € million | |
| 0 | 66.6 | 66.6 |
| 10 | 14.9 | 14.9 |
| 20 | 697.6 | 697.6 |
| 35 | 25.9 | 25.9 |
| 50 | 0.2 | 0.2 |
| 70 | – | – |
| 75 | 249.5 | 228.5 |
| 90 | – | – |
| 100 | 506.8 | 498.5 |
| 115 | – | – |
| 150 | 35.2 | 32.3 |
| 190 | – | – |
| 250 | – | – |
| 290 | – | – |
| 350 | – | – |
| 370 | – | – |
| 1,250 | – | – |
| Alienation of capital | 1,596.7 | 1,564.5 |
| [Table 24] | ||
The MLP Financial Holding Group also records investments in the asset ledger in line with § 332 no. 2 a – b of the Solvency Ordinance (SolvV). The investments in the asset ledger include investment instruments of affiliated companies amounting to € 186.4 million and listed securities of € 10.6 million. The investments and the shares in affiliated companies are not listed on the stock exchange. The investments in the asset ledger are therefore disclosed according to the principle of lower of cost or market applicable to fixed assets.
Realised and unrealised gains and losses from investments in line with § 332 no. 2 c-d of the Solvency Ordinance (SolvV) break down as follows:
Realised and unrealised gains and losses from instruments
| All figures in € million | Latent revaluation gains (losses) | ||
Realised gains/losses from sales/liquidations | in total | amounts thereof included in Tier 2 capital | |
| Total | –10.9 | –0.4 | 0.0 |
| [Table 25] | |||
The MLP Financial Holding Group has derivative counterparty default risk and off-setting items as per § 326 of the Solvency Ordinance (SolvV) (interest rate swap). The face value of these swaps is € 105 million. The negative replacement value is € 1.0 million.
In our view, the counterparty default risks at MLP are being allowed for appropriately.
Market price risks
MLP understands market price risks as the uncertainty regarding changes in market prices and rates (including interest, share prices, exchange rates and raw material prices), the correlations between them and their volatility. The market price risks are made up of the market price risk in the narrow sense and the market liquidity risk.
Market risks essentially come about from incomplete congruency of interest rate agreements between the loans granted and their refinancing. Market price risks are also caused by internal business activities. There are currently only very minor open risk items in foreign currency.
Possible effects of different interest development scenarios are portrayed via planning and simulation calculations. The basis for this is our interest management application, which makes the risks and their effects transparent in complex interest scenarios.
In this context, cash value changes of all items in the asset ledger are shown in relation to the equity, with the application of the changes in interest rates prescribed by the Federal Financial Supervisory Authority. The simulation is performed by automated means for all the interest-bearing and interest-sensitive items. It is in this manner that the controlling of the interest risk is ensured. Here, the determined change in value in the reporting period was always significantly below the supervisory reporting threshold of 20 %.
In accordance with § 333 of the Solvency Ordinance (SolvV), the interest risks in the asset ledger of the MLP Financial Holding Group are as follows:
Interest rate risk
| Interest rate shock/parallel shift | ||
| Amount in € million | Change in value +130 BP | Change in value –190 BP |
| Total | –5.8 | 11.4 |
| [Table 26] | ||
Shares, bonds, promissory note bonds and funds held can be subject to an exchange risk due to fluctuations in the market interest rate or changes in creditworthiness. Through constant monitoring and evaluation of our portfolio, possible effects on results caused by strong exchange rate fluctuations can be addressed early on. We thereby ensure a prompt reaction to market changes.
In order to reduce the cash flow-relevant interest risk, we use interest rate swaps on a small scale. In order to fix the interest flows for the financing of individual construction phases of the Wiesloch building project completed in 2004, two payer interest rate swaps were performed in 1999. After the premature redemption of the loans, the open interest position resulting from the purchase of two reverse swaps with identical amounts and terms was closed. In addition to this, three interest rate swaps are in place to hedge interest risks.
The recognition of equity requirements for market risks in accordance with § 330 of the Solvency Ordinance (SolvV) is not relevant to the MLP Financial Holding Group. There are minor risks relating to foreign currency or commodities.
The speculative use of financial instruments with a view to making profits in the short term was not conducted in the year under review, nor is it envisaged for the future. MLP continues to hold the status of a non-trading book institute.
Liquidity risks
We understand liquidity risks to mean uncertainty in terms of the availability of funds to meet payment obligations or reduce risk items which is either insufficient or which can only be secured by accepting unfavourable terms. Liquidity risks can result from both internal and external risk factors.
In controlling the liquidity risk, we employ two different approaches, operational and structural.
Operational liquidity control
The central instruments and control variables of operational liquidity control at MLP include itemisation of financial investments and re-financing sources in the company's own business as per the reporting date within the scope of cash management, but also the liquidity and observation ratios of the liquidity regulation. In addition to this, the volume of net cash inflows and outflows is monitored within the scope of liquidity control and included in the risk
assessment.
Structural liquidity control
The funding matrix is the central instrument of structural liquidity control at MLP and also a preliminary step towards economic analysis of additional refinancing costs. The funding matrix indicates for each time frame whether there is a surplus or shortfall of financing means and thereby allows open liquidity items to be controlled. The liquidity value at risk, which indicates the additional re-financing costs required to close open liquidity items, is another key instrument of structural liquidity control and is also used in risk capital management.
Alongside the assumed development in standard scenarios, we have also defined stress scenarios to simulate potential increases in liquidity requirements as a result of negative changes in the market environment. These enable us to introduce any counter-measures deemed necessary in good time.
The fundamental principles of liquidity control and planning are defined in the internal guidelines. Appropriate short and medium-term credit lines have also been agreed with a number of financial institutions to safeguard against a possible short-term liquidity shortfall.
Operational risks
Operational risk is the risk of losses caused by inadequacy or failure of internal procedures and systems, people or by external events. This definition includes legal risks.
Operational risks are identified and assessed locally throughout the Group in the individual organisational units. To this end, a risk inventory is performed at least once a year, the scope of which includes analysis of the main operational risks throughout the Group. Within this framework, experts from all departments examine and assess the operational risk within the scope of self-assessments that are broken down into an assessment of risk potential for identification and evaluation of the main risks and into suggested measures derived from this. In addition to this, any loss/damage occurring at MLP is continuously recorded and analysed. Collecting all loss/damage data allows loss events to be identified and evaluated as a way of detecting trends and any concentration of operational risks. The results are collated and checked for feasibility by risk controlling and then made available to the Executive Board and the controlling units.
Capital charge according to the basic indicator approach
MLP currently uses the basic indicator approach in line with §§ 270 et seq. of the Solvency Ordinance (SolvV) to quantify operational risks. As per § 331 of the Solvency Ordinance (SolvV), the procedure used to determine the equity subject to operational risks is explained in the following. Within the scope of the basic indicator approach, the supervisory capital charge for the operational risk is determined using a fixed calculation scheme. On this basis the capital charge is 15 % of the average gross proceeds of the last three financial years, whereby only positive gross proceeds are taken into account.
Risks from internal procedures
The operational and organisational structure at MLP is described comprehensively and laid down in the organisation manual.
Reduction of the operational risks from internal procedures along with the reduction in the frequency and level of losses is primarily achieved through continuous improvement of business processes. Further safeguarding measures include risk transfer through conclusion of insurance policies and consciously avoiding risky products. Comprehensive emergency and business continuity plans are also in place for the most important areas and processes to secure the continuation of operations.
Here, our Business Continuity Management (BCM) system identifies potentially critical business processes which could have a major effect on MLP's business in the event of malfunction or failure. Suitable measures are defined for this in order to safeguard regular business operations within set standards. This also includes a written emergency plan which reduces losses to a minimum in the event of severe disruptions to operations and safeguards the ongoing business. The critical processes and the effectiveness of the defined measures are subject to constant monitoring and development. A BCM manual is available for all business units and employees.
Human resources risks
MLP places great value on having qualified employees and managers, particularly in the back-office areas. Staff resources and sufficient qualification/training of employees are secured by the responsible specialist departments. With comprehensive personnel planning and targeted personnel marketing measures, we reduce the risk of staff shortages.
Employees working with confidential information undertake to observe the respective regulations and handle the information responsibly. A clear separation of management and control functions restricts the risk of breaching internal and external regulations. Defined substitute and successor regulations guarantee that the necessary procedures are still securely maintained, even when employees are unexpectedly unavailable for work.
A possible error in client consulting, investment and acquisition brokerage or finance portfolio management and associated claims for damages can present a consulting and liability risk. We minimise potential consulting risks by maintaining consistently high-quality consulting which we ensure, for example, through IT-supported consulting tools. Consultations with our clients and the resulting outcomes are comprehensively documented. A high standard of training is guaranteed by our own Corporate University, at which each of our consultants initially attends extra-occupational training to become a Senior Financial Consultant. Our Corporate University has been awarded the seal of approval by the European Foundation for Management Development.
IT risks
To effectively minimise possible risks in the IT area, MLP pursues a standardised IT strategy. When selecting our IT systems, we generally opt for industry-specific standard software from reputable providers. If necessary, business-specific proprietary IT applications are developed by qualified internal and external specialists. The comprehensive system tests and pilots performed prior to going live ensure that our IT systems work properly and reliably. Our data processing centre is outsourced to leading service providers with various sites, back-up systems and mirror databases. This, and a defined contingency plan, secure our data against possible loss, thereby ensuring consistent availability. We protect our IT systems against unauthorised access through our access and authorisation concept, extensive virus protection, as well as other comprehensive security concepts.
Risks from external events
As our business processes focus on the broker and banking business, on cost optimisation and on scalability, MLP makes use of external partners for standard services. However, all key outsourcing activities of MLP are coupled with risk management. The outsourcing activities are therefore integrated into the risk management and controlling processes. MLP has clearly defined responsibility for the outsourced processes here. This ensures that any potential organisational, structural or process-based risks that may occur due to outsourced business activities can be closely managed.
In addition to this, corresponding insurance policies have been concluded where appropriate to minimise risks from external events such as fraud, burglary, theft or damage due to force majeure.
Internal security measures are also set up in such a way that any attempts at fraud, burglary or theft are thwarted before they begin.
To ensure maintenance of critical processes in all cases, the potential consequences of external events are examined within the scope of the Business Continuity Management (BCM) system and corresponding plans of action drawn up. Selected scenarios are examined and analysed at least once a year within the scope of stress tests.
Legal risks
Our legal department controls legal risks. In addition to consulting on corporate decisions and designing business processes, its tasks include following and assessing current legal disputes. Possible legal risks are detected at an early stage and possible solutions for minimising, limiting or preventing such risks are shown. The legal department coordinates the commissioning and integration of external lawyers. Within the scope of risk mitigation, the legal department checks and monitors the existing insurance coverage and initiates any adjustments which may be necessary.
According to our audit, the pending or threatening legal proceedings against MLP do not represent risks which could endanger the company's continued existence. The Executive Board at MLP AG is convinced that the legal claims filed since August 2007 with virtually the same wording and originating from a single firm of lawyers will not be successful. These claims have been filed for 32 clients for damages due to the issuing of allegedly erroneous capital market information between 2000 and 2002. Two of them have already been withdrawn.
Taxation risks
Changes that emerge in tax law are continually checked and examined with regard to any effects they may have on MLP. The company's compliance with fiscal requirements is checked by internal and external experts in accordance with the tax regulations and the documents pertaining to these issued by the tax authority.
General business risks
Overall economic risks
Changes in economic and political factors can affect the business model and the development of MLP. We therefore constantly monitor national and international developments in the political, economic and regulatory arenas as well as business developments and requirements on the financial services market.
Economic development in Germany – in which MLP generates virtually 100 % of its revenue – recovered amazingly quickly in 2010 from the economic slump of the previous year. After suffering a 4.7 % drop in GDP in 2009, the German economy grew by 3.6 % in the last financial year. The sound economic activity had a positive effect on the employment market. The net income of households also enjoyed an increase over 2009. However, these positive developments have caused the ever present risks to overall economic development to be swept somewhat under the carpet. The financing problems of several EU states, together with world trade imbalances and potential currency issues, could well slow down the dynamic development in Germany.
Yet overall we expect to see positive effects on the business development of MLP from the good overall economic climate, although continuing reservations on the part of clients can still clearly be felt when it comes to signing long-term provision contracts and making investment decisions. In our opinion, these reservations are largely being caused by uncertainty regarding further economic developments, especially in light of the problems currently being faced throughout the EU.
Business environment and sector-related risks
The financial and economic crisis has further intensified competition in the sale of financial services in Germany and accelerated consolidation of the heavily fragmented market. Since the draft of the law on investor protection was passed in September 2010, further regulation of the sector is starting to take shape. Small and medium-sized financial services providers in particular are facing the challenge of implementing the new requirements in an appropriate framework while remaining profitable. Yet we still expect the intensity of competition for qualified financial consultants to increase further.
MLP is well prepared for the changes that lie ahead. The quality of our consulting, our focus on selected client groups and our independence give us a strong market position. Thanks to our financial strength, we can also continue to play an active role in the consolidation of the market.
In its business activities, MLP concentrates on the areas of old-age and health provision, as well as wealth management. It is particularly important for clients to make long-term investment decisions in the area of old-age provision. Private clients in particular remain very cautious and are therefore continuing to display reservations in making long-term investment decisions.
Corporate strategy risks
Corporate strategy risks largely consist in the erroneous assessment of market trends and, in consequence, the erroneous alignment of business activities. Strategic risks also emanate from unexpected changes in market and environmental conditions with negative effects on the results of operations.
Corporate strategy control is primarily the responsibility of the MLP Executive Board. Changes and developments on the national and international markets and the business environment are analysed on the basis of continual observation of the competitive environment and decisions are derived with a view to securing and building on the Group's corporate success in the long term.
Target values are laid down based on a projected assessment of success factors. The achievement of these values is constantly monitored. In this way, the Group’s strategic positioning regularly undergoes critical scrutiny through comparison of target and actual values.
With the concentration on broker business and, in particular, on the core competencies of old-age provision, health insurance and wealth management for academics and other discerning clients, MLP is well positioned on the market. The productivity of the MLP consultant in particular is a central value driver of MLP's business model. We determine this productivity using various indicators, such as the revenue per consultant. Positive or negative trends in new business and the productivity of MLP consultants with existing clients are constantly analysed and evaluated, and form the basis of sales measures which may need to be introduced. The volume of new business generated with existing and new clients and the development of contract inventories in the different segments are the object of periodic reporting and form the basis for a timely and precise evaluation of the business development by the management.
Linking a sufficient number of competent consultants to the company over the long term and ensuring low consultant turnover are important prerequisites for the future growth of MLP. The development of the consultant base with regard to the time consultants have been with MLP, the number of applications, employment contracts signed and terminations issued is therefore also the object of periodic reporting and forms the basis for a timely and precise evaluation by management.
We subject the entry of new competitors into the market and possible fluctuation trends in this connection to intensive observation and analysis. This allows appropriate measures to be introduced promptly. We aim to continuously expand our consultant base by means of attractive job entry models and career models for graduates and professionals, and by using our remuneration model.
Winning new clients and ensuring long-term client loyalty are also key values in the MLP business model. The development of the client base, split into existing and new clients, its age structure and analyses of potentials at consultant and level are the object of periodic reporting. The effects of possible positive or negative trends in client development on the company's overall success are constantly analysed and evaluated.
The strong market position at universities and the many years of close business relations with our clients ensure that MLP's client base undergoes continuous expansion.
Commission forms the core component of MLP's total and cash flow. Using our planning and simulation tools, we analyse the effects of potential changes to commission models, possible regulatory intervention in the cost calculation of the products brokered by MLP or the tax treatment of our sales concept.
Other risks
Reputation risks
Reputation risks are defined as risks that occur due to a loss of image by MLP, either as a whole or by a single or several operating units, among eligible parties, shareholders, clients, employees, business partners or the general public. MLP is in particular subjected to the risk that public trust in our Group may be negatively influenced through public reporting of a transaction, a business partner or a business practice in which a client is involved. We minimise potential consulting risks by maintaining consistently high-quality consulting which we ensure, for example, through IT-supported consulting tools. Consultations with our clients and the results arising from these are also comprehensively documented.
Supervisory risks/solvency
The MLP Financial Holding Group is obliged to back its weighted risk assets with at least 8 % equity (equity ratio). The backing of risk assets with core capital (tier 1 capital) generally requires a minimum ratio of 4 %. These requirements have not changed in the financial year 2010. The same applies for MLP's internal processes, objectives and measures for investment control.
Pursuant to § 31 (3) sentence 1 and 2 of the German Banking Act (KWG), the companies listed in the following were not included in the summary as per §§ 10 a (6) – (12), 12 a (1) sentence 1 and 13 b (3) and (4) of the German Banking Act (KWG) in the sense of §§ 10 a (1) – (5) and 13 b (2) of the German Banking Act (KWG) or included in the condensed monthly financial statement pursuant to § 25 (2) of the German Banking Act (KWG) (RS 06/2008 BA). The Federal Financial Supervisory Authority was informed accordingly.
- Family Private Fund Management S. à. r. l., Luxembourg
- Ferrum Fund Management Company S. à. r. l., Luxembourg
- Ferrum Pension Management S. à. r. l., Luxembourg
- Feri Beteiligungsgesellschaft mbH, Germany
- Feri Private Equity GmbH & Co. KG, Germany
- Feri Private Equity Nr. 2 GmbH & Co. KG, Germany
- Feri Trust AG (Schweiz), Switzerland
- FPE Direct Coordination GmbH, Germany
- FPE Private Equity Beteiligungs Treuhand GmbH, Germany
- FPE Private Equity Koordinations GmbH, Germany
- Institutional Trust Management Company S. à. r. l., Luxembourg
- Private Trust Management Company S. à. r. l., Luxembourg
- TPC THE PENSION CONSULTANCY GmbH, Germany
The equity structure of MLP is as follows in accordance with § 324 of the Solvency Ordinance (SolvV):
Equity components
| All figures in € million | |
| Paid-in capital (business capital, share capital, capital stock, endowment capital and business assets) excluding cumulative preference shares | 140.5 |
| General reserves | 361.7 |
| Net accumulated losses from investments | – |
| Unappropriated profit, interim profit | – |
| Carrying amounts for Group companies | –180.7 |
| Investments of silent partners | – |
| Special items for general bank risks in line with § 340g of the German Commercial Code (HGB) | – |
| Unblocked assets recognised by the Federal Financial Supervisory Authority (BaFin) | – |
| Deductible items according to § 10 (2a) sentence 2 of the German Banking Act (KWG) | –22.6 |
| Remaining goodwill according to § 10a (6) sentence 9 of the German Banking Act (KWG) | 42.6 |
| Thereof Impairment shortfalls and anticipated losses according to § 10 (6a) no. 1 and 2 of the German Banking Act (KWG) | – |
| Total core capital according to § 10 (2a) of the German Banking Act (KWG) | 341.5 |
| Total tier 2 capital according to § 10 (2b) of the German Banking Act (KWG) after deduction of deductible items in line with § 10 (2b) sentence 2 of the German Banking Act (KWG) and tier 3 capital in line with § 10 (2c) of the German Banking Act (KWG) | 2.0 |
| for informative purposes: Total of deductible items in line with § 10 (2b) sentence 2 of the German Banking Act (KWG) | – |
| Total modified disposable shareholders' equity according to § 10 (1d) sentence 1 of the German Banking Act (KWG) and the eligible tier 3 capital in line with § 10 (2c) of the German Banking Act (KWG) | 343.5 |
| [Table 27] |
The tier 2 capital solely consists of the contingency reserves according to § 340 f of the German Commercial Code.
On the basis of the Basle II implementation strategy for the calculation of shareholders’ equity requirements (Basle Pillar 1), MLP Financial Holding Group employs the credit risk standardised approach (KSA) for the credit risk and the basis indicator approach (BIA) for the operational risk in accordance with the German Banking Act (KWG) and the Solvency Ordinance.
MLP fulfilled all legal requirements relating to shareholders’ equity backing in line with § 325 of the Solvency Ordinance (SolvV) throughout the entire financial year 2010. The capital backing of the most important companies of MLP are as follows:
Capital backing of the most important companies
| Consolidated group of banks | Total capital ratio in % | Core capital ratio in % |
| MLP AG | 90.8 | 90.8 |
| MLP Finanzdienstleistungen AG* | 4.7 | 4.6 |
| FERI Finance AG | 15.8 | 15.8 |
| FERI Family Trust GmbH | 8.4 | 8.4 |
| FERI Institutional Advisors GmbH | 2.8 | 2.8 |
| ZSH GmbH Finanzdienstleistungen | 7.3 | 7.3 |
| [Table 28] |
Equity requirements derived from the application of the credit risk standardised approach are made up as follows:
Credit risk standard approach
| Equity requirements in € million | |
| Central governments | – |
| Regional governments and local government bodies | – |
| Other authorities | – |
| Multi-lateral development banks | – |
| International organisations | – |
| Institutions | 11.4 |
| Backed debentures emitted by financial institutions | 0.1 |
| Companies | 19.2 |
| Volume transactions | 14.8 |
| Items collateralised by property | 0.7 |
| Fund shares | 2.7 |
| Other items | 12.0 |
| Overdue items | 3.9 |
| Risks from book values of investments in companies | |
| Book values of investments in the standard approach | 5.4 |
| Operational risks | |
| Operational risks according to the basic indicator approach | 56.0 |
| Total | 126.2 |
| [Table 29] |
No other risks are known at MLP which could have a significant influence on the Group's continued existence.
Summary
MLP's business development is essentially influenced by financial, operational and general business risks. We use our risk management system for the identification, assessment, control, monitoring and communication of our key risks in terms of both current and future developments. The information provided ensured prompt introduction and prioritisation of risk management measures without exception.
Both the MLP Group as a whole and the Group companies always acted within the scope of their financial risk-bearing ability in 2010. In addition, the supervisory requirements were met in full at all times. There are currently no discernible risks that could threaten MLP's continued existence, neither do we expect to see any negative development in the coming year.
Our Business Continuity Management also ensures regulated business operations in the event of any disruptions. Our risk monitoring and control systems and the consistent alignment of our business model to our risk-bearing ability enable us to ensure that the risks taken in our business activities are backed with adequate risk capital.
The risk management system is subject to continuous further development, in particular with regard to developing the volume and complexity of our business. The effectiveness of our risk management system and its supervisory implementation are also checked cyclically by both external and internal auditors.
The above-mentioned risks, and such risks which are not yet known to us or are currently considered insignificant, could have a negative impact on our forecasts detailed in the outlook.
