A Beginner’s Guide to the ANLA Calculation

Introduction

The JFSC has started to give more attention to the financial resources of regulated businesses and has established a team to focus on prudential matters.

As relatively little attention has been given to financial resources in past years, there isn’t much guidance or feedback from the JFSC on what it expects to see in this area, so I thought it might be helpful to set out my own thoughts and experience.

When I was the JFSC's Financial Analyst many moons ago, we thought of financial resources as comprising three elements which combined (like three sides of a triangle) to give some financial protection to a regulated business's stakeholders and to the business itself. 

Share capital is straightforward and the JFSC has issued some useful guidance and feedback on PII so this article will focus on the ANLA calculation as it applies to businesses registered under the Financial Services (Jersey) Law 1998.

Production and Oversight of the Calculation

The purpose of the ANLA calculation is to assess whether the regulated business has adequate net liquid assets in order to meet its expenditure for three months. The methodology of the calculation is set out in the relevant Code of Practice along with the 110% requirement and the 130% “early-warning” notification requirement and the JFSC has produced a guidance note which is published on its website at ANLA calculations — Jersey Financial Services Commission.

Most financial services businesses produce an ANLA calculation each month (quarterly is typically not sufficiently frequent to monitor a business’s financial resources and daily calculations are only required for investment businesses with a position / counterparty / foreign currency risk exposure).

Calculations are typically produced by the business’s Finance Team and the resulting percentage presented to the board but, in our experience, boards seldom do little more than check that the percentage is greater than 130% before moving on. The directors seem to rely on the Finance Team, the Compliance Function and the auditors to ensure that the calculation is correct. However, in our experience:

• Many Finance Teams don’t really understand the ANLA calculation (particularly if they are part of a Group Finance Team who are based elsewhere) and simply plug the numbers into a spreadsheet calculation that their predecessors used without considering whether there have been any changes within the business that should impact on the calculation methodology. It is best practice to ensure that the Finance Team receive training on the ANLA calculation from an expert.

• Compliance personnel are often rather nervous of the ANLA calculation, assuming that they are incapable of understanding or checking the methodology, and so will perform only superficial CMP testing (e.g. that calculations were produced and reported every month, not that the calculation methodology was in accordance with the Codes). Common sense goes a long way with the calculation methodology but some training from an expert and assistance with a review checklist can give the Compliance Function the confidence they need to undertake robust testing;

• Auditors do not always review the ANLA calculation as part of their audit of the financial statements. Businesses relying on auditors for assurance over the methodology should check that the ANLA calculation forms part of their scope of work or instruct them separately.

Of course, a regulated business should have a policy and procedure detailing how the ANLA calculation is produced, reviewed, approved, presented to the board and then detailing what records are retained.

Tips on Methodology

Whilst it’s impossible to run through every detail of the ANLA methodology, key points to remember when reviewing an ANLA calculation include:

• Many of the figures in the calculation should be lifted directly from the business’s management accounts - total assets before adjustments are made for illiquid assets and total liabilities before adjustments are made;

• When considering adjustments for illiquid assets, bear in mind the principle that the only element of an asset that should remain as liquid is the element which the business will turn into cash or otherwise draw economic benefit from within 90 days of the date of calculation;

• Loans payable can only be adjusted out as liabilities if they are due after more than one year and payable to a third party or formally subordinated with the JFSC’s consent;

• An adjustment which often gets missed is to include an additional liability for the amount of the business’s PII excess;

• The expenditure requirement figure should include all expenses incurred by the business in providing services to its clients, meeting its legal and regulatory responsibilities and generally operating, whether the expenses are paid by the business or by a related party on behalf of the business;

• The expenditure requirement should be based on the higher of total expenditure for the prior year and total budgeted expenditure for the current year. If expenditure during the year materially exceeds budget, the figure should be revised accordingly.

Final Thought

No-one should be intimidated by the ANLA calculation, it’s really quite straightforward and focusing on the fundamental principle that the purpose of the calculation is to assess whether the business will have liquid assets to cover its expenses over the next 90 days, should help you stay on the right lines.

If you have any queries over your business’s ANLA calculation, or if Cyan can be of any other assistance, please don’t hesitate to get in touch.